Question

How do i create a dummy variable, for example, i have 1 policy, under this policy, there are 4 index. Each index using a scale of 0 to 4. My model is as follow: Export= β + β1 Αdoption rate + β2 policy

Answer 1

Solution: I assume there are 5 levels for the variable policy. The levels are:

The variable with 5 levels needs to have 4 dummy variables. We need to one base category and let's keep the level = 0 as the base category.

The data for the model will be like below mentioned:

Assumed data:

Export	Adoption	D1	D2	D3	D4
56	2.9	0	0	0	0
86	6.2	1	0	0	0
53	2.8	0	1	0	0
66	3.3	0	0	1	0
72	5.2	0	0	0	1

All D1, D2, D3 and D4 equal to zero means the policy is at base level 0

D1 = 1, D2=D3=D4 = 0 indicates the policy is at level 1

D2=1, D1=D3=D4=0 indicates the policy is at level 2

D3 = 1, D1=D2=D4 = 0 indicates the policy is at level 3

D4 = 1, D1=D2=D3 = 0 indicates the policy is at level 4