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By Patrick Kent Watson, Sonja Sabita Teelucksingh

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These errors may be highly correlated 3. Sampling variances will tend to be very high. For any of the above reasons, investigators may sometimes be led to drop variables from the regression. The T-tests may, for example, show them to be insignificant. But the true situation may be, not that an explanatory variable has no effect, but rather that the sample data set has not allowed us to pick up the actual effect. Multicollinearity therefore is indicative of a problem in the data being used in the regression, and does not necessarily negate the underlying economic theory.

645. SIGNIFICANCE TESTS OF COEFFICIENTS To some extent, when an economist includes a particular variable among the exogenous variable list, he or she is not always certain that this variable can be used to explain the dependent or endogenous variable. In the import function, for instance, it is a matter for empirical verification that either the income variable or the relative price variable truly helps to explain imports. Suppose one of them, income, for example, was wrongly included, then we would expect that β2 = 0.

2 The null hypothesis is rejected in favour of the alternative if this value is less than the corresponding value read from the Student distribution for 22 degrees of freedom at the chosen significance level. 725. The null hypothesis that the marginal propensity to import is 40% cannot be rejected at the 5% level of significance. TESTING THE SIMULTANEOUS NULLITY OF THE SLOPE COEFFICIENTS It is important to test the nullity of a given coefficient because, as economists, we want to know whether the associated variable intervenes in the explanation of the dependent 34 A Practical Introduction to Econometric Methods: Classical and Modern variable.

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