# Question: Consider the fitting of the following model Y 0

Consider the fitting of the following model:

Y = β0 + β1X1 + β2X2 + β3X3 + ε

where

Y = tax revenues as a percentage of gross national product in a country

X1 = exports as a percentage of gross national product in the country

X2 = income per capita in the country

X3 = dummy variable taking the value 1 if the country participates in some form of

economic integration, 0 otherwise

This provides a means of allowing for the effects on tax revenue of participation in some form of economic integration. Another possibility would be to estimate the regression

Y = β0 + β1X1 + β2X2 + ε

separately for countries that did and did not participate in some form of economic integration. Explain how these approaches to the problem differ.

Y = β0 + β1X1 + β2X2 + β3X3 + ε

where

Y = tax revenues as a percentage of gross national product in a country

X1 = exports as a percentage of gross national product in the country

X2 = income per capita in the country

X3 = dummy variable taking the value 1 if the country participates in some form of

economic integration, 0 otherwise

This provides a means of allowing for the effects on tax revenue of participation in some form of economic integration. Another possibility would be to estimate the regression

Y = β0 + β1X1 + β2X2 + ε

separately for countries that did and did not participate in some form of economic integration. Explain how these approaches to the problem differ.

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