Gross domestic product, Because the coefficient of

Gross domestic product

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Reference no: EM131111223

Because the coefficient of determination R² always increases when a new independent variable is added to the model, it is tempting to include many variables in a model to force R² to be near 1. However, doing so reduces the degrees of freedom available for estimating σ², which adversely affects our ability to make reliable inferences. Suppose you want to use 18 economic indicators to predict next year's Gross Domestic Product (GDP). You fit the model

where y = GDP and x₁, x₂, . . ., X₁₈ are the economic indicators. Only 20 years of data (n = 20) are used to fit the model, and you obtain R² = .95. Test to see whether this impressive-looking R² is large enough for you to infer that the model is useful, that is, that at least one term in the model is important for predicting GDP. Use α = .05.

Reference no: EM131111223

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