# Ch7-2 - Using Dummy Variables Chapter 7 Specification...

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Using Dummy Variables Chapter 7 Specification: Choosing a Functional Form Lecture 2 Masao Ogaki Department of Economics, Ohio State University November 13, 2007 Masao Ogaki Department of Economics, Ohio State University Chapter 7 Specification: Choosing a Functional Form Lecture 2

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Using Dummy Variables Using Dummy Variables numerical or quantitative explanatory variables qualitative explanatory variables. Examples: education (college graduates, high school graduates, and non-high school graduates, etc.) sex, race, religion, and nationality are qualitative variables. These qualitative variables are represented by dummy variables . A dummy variable takes on the value of 0 or 1, depending on a qualitative attribute such as gender. Masao Ogaki Department of Economics, Ohio State University Chapter 7 Specification: Choosing a Functional Form Lecture 2
Using Dummy Variables Consider the following example, in which the only explanatory variable in the two-variable regression is a dummy variable: Y i = β 0 + β 1 D i + i (1) Y i : the annual starting salary D i = 1 if college graduate 0 otherwise (i.e., noncollege graduate) Masao Ogaki Department of Economics, Ohio State University Chapter 7 Specification: Choosing a Functional Form Lecture 2

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Using Dummy Variables We obtain from Regression (1) the following for the mean
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