Refer: Basic Econometrics, Gujarati

Variable that take a value of 0 or 1 Shows presence or absence of an attribute Shows effect on the dependent variable of other factors that are not quantifiable Eg. Wages vs race, or male/female See example in xerox

dummy variables.xlsx
Yi = 26158 -1734 D2i 3264 D3i t = (23.1759) (-1.2078) (-2.1776) p (0.000) ( 0.2330) (0.0349) Y is salary of public school teacher in state i D2i = 1 if state is Northeast or North Central = 0 otherwise D3i = 1 if state is in the South = 0 otherwise

If a qualitative variable has m categories, introduce only m-1 dummy variables, to avoid perfect collinearity or exact linear relationship amongst variables. Category for which no dummy is assigned is a base or benchmark category to which others are compared The intercept value represents the mean value of the benchmark category Coefficients of the dummy variable categories are differential intercept coefficients, and show how much each mean value differs from the intercept If each category is assigned a dummy variable, then co effs give the mean values and we need to run a no intercept regression.

Hourly wages in relation to marital status and region of residence From a sample of 528 persons, in May 1985 the following equation was obtained: Yi = 8.8148 + 1.0997D2i -1.6729 D3i se = (0.4015) (0.4642) (0.4854) t = (21.9528) (2.3688) (- 3.4462) p = (0.0000) (0.0182) (0.0006) R2 = 0.0322 Y is hourly wage rate D2 is marital status, 1= married, 0 = otherwise D3 is region of residence, 1= South, 0 = otherwise

Contain both qualitative, or dummy and quantitative regressors. Yi = 13269 -1673D2i -1144D3i + 3.2889 Xi se = (1395) (801) (861) (0.3176) p = <0.05 <0.05 >0.05 <0.05 R^2 = 0.7266

D1 males D2 post graduates D1 D2 males who are post graduates

Note: deseasonalising
dummy variables.xlsx