Question

1. Consider the following output from a regression using data from 100 countries.

Variables	Coefficients	Standard Errors
constant	0.55	0.1
X	1.5	.5
D	5	1.5
X*D	-0.25	0.1

Where y = CO₂ emission of country i

X = Foreign direct investment in country i

D = Dummy variable that is 1 if i is a developed country and zero otherwise.

X*D=an interaction variable between X and D.

a. Provide a detailed interpretation of the coefficients on each of the independent variables. Remember D is a qualitative variable

Answer 1

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a.

Ans:

We have regression equation:

Y = 0.55 +1.5 X + 5 D - 0.25 X*D

Interpretation of coefficients:

• Constant: For a non-developed country (D = 0) having zero FDI (X = 0), average CO2 emissions are 0.55.
• Coefficient of X: Rise of 1 unit in FDI causes rise in CO2 emissions by 1.5 units on an average.
• Coefficient of D: CO2 emissions for a developed country are 5 units higher than that of non-developed one on an average.
• Coefficient of X*D: 1 unit rise in FDI causes less rise in CO2 emissions in developed countries by 0.25 units than in non-developed ones.

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