Answer Happy

D Part 5. Questions 23-25. Trade, growth and development with panel data. You have a panel with 185 countries and 10 years (from 1996 to 2005), and you want to estimate the following econometric model GROWTH-a +A+3₁ TRADE+t- where the variable GROWTH is the rate of growth of per-capita GDP for country i at time t. TRADE denotes the ratio of exports plus imports to GDP for country i at time t. We also observe dummy variables DEV, EM and POOR,, which indicate a country's level of development: DEV, takes the value of 1 if country i is developed (0 otherwise). EM, is 1 if country is an emerging economy (0 otherwise), and POOR, is 1 if country i is classified as poor (0 otherwise). Each country must be classified into one of the 3 categories (hence DEV+EM, POOR-1 always holds). The parameters o, and A denote entity and time fixed effects, respectively. Question 23 3 pts Note that the panel data specification does not include the development dummies DEV, EM,, and POOR,. Should they be included? O a) Yes, because we know that they affect growth and may also be related to trade, so we may be subject to omitted variable bias b) No, because the model already includes entity fixed effects, which control for all those variables that change across entities but not over time (such as the development dummies). O c) No, because the model includes time fixed effects, which control for the level of development dummies. O Yes, because these variables change across both entities and time.