The Organization for Economic Cooperation and Development (OECD) tracks summary statistics of the member economies. The countries are located in Europe, parts of Asia, and North America. Two variables of interest are GDP (gross domestic product per capita, a measure of the overall production in an economy per citizen) and trade balance (measured as a percentage of GDP). Exporting countries have positive trade balances; importers have negative trade balances. These data are from the 2005 report of the OECD. Formulate the SRM with GDP as the response and Trade Balance as the explanatory variable.
(a) In 2005, Luxembourg reported the highest positive balance of trade, 21.5% of GDP and per capita GDP equal to $70,000. Fit the least squares equation both with and without Luxembourg and compare the results. Does the fitted slope change by very much?
(b) Explain any differences between r2 and se for the two fits considered in part (a).
(c) Luxembourg also has the second smallest population among the countries. Does this explain the size of the difference between the two equations in part (a)? Explain.