Consider the following estimated relationship.
Est Pricei = 38.22 + 1.43GDPNi - .6CVNi + 7.31PPi - 15.63DPCi – 11.38PCi
(0.21) (0.22) (6.12) (6.93) (7.16)
N = 32 Adj R^2 = .775
Where:
Pi = The pharmaceutical price level in the ith country divided by that of the United States
GDPNi = per capita domestic product in the ith country divided by the United States
CVNi = per capita volume of consumption of pharmaceuticals in the ith country divided by the United States
CVi = per capita consumption of pharmaceuticals in the ith country.
Ni = Population of the ith country.
PPi = a dummy variable (1 if patents for pharmaceutical products are recognized in the ith country).
DPCi = A dummy variable (1 if the ith country has price controls)
PCi = a dummy variable (1 if the ith country encouraged price competition).
Using Eviews (or other), and the datafile DRUGS5 (from textbook website) re-estimate the above equation adding CV and then again adding N (but not CV)
Were CV or N omitted variables? (How do you know)
What problem might we create if we added both CV and N?
If we were writing up our results, why might we include explanations of all 3 estimated relationships?
