Table 8-7 on the textbook's Web site gives data on imports, GDP, and the Consumer Price Index (CPI) for the United States over the period 1975-2005.
You are asked to consider the following model:
In Imports t = β1 + β2 In GDP t + β3 In CPI t + ut
a. Estimate the parameters of this model using the data given in the table.
b. Do you suspect that there is multicollinearity in the data?
c. Regress:
(1) In Importst = A1 + A2 In GDPt
(2) In Importst = B1 + B2 In CPIt
(3) In GDPt = C1 + C2 In CPIt
On the basis of these regressions, what can you say about the nature of multicollinearity in the data?
d. Suppose there is multicollinearity in the data but (2 and 3 are individually significant at the 5% level and the overall F test is also significant. In this case, should we worry about the collinearity problem?