We are interested in investigating the relationship between income among countries in trade liberalization period and not in trade liberalization period. This equation 1 accommodates different intercepts and slopes for years after and before trade liberalization. Sigma, is the standard deviation of the natural logarithm of real per worker income and t for year. Dr is dummy-variable regressor or an indicator variable, is coded 1 for all years after the trade liberalization and 0 for all years before the trade liberalization. In this equation, represent intercept and the value of sigma when year (t) is zero. The coefficient, represent the difference when the year is before and after the trade liberalization. The coefficient measure the change in sigma given one unit change in year, holding all other factors constant. The third coefficient measure the interaction term between Dr and t. Thus, for countries before trade liberalization (D=0) the model become
The coefficients and represent the intercept and the slope for the regression of income on countries in year before trade liberalization (The baseline), respectively.is the initial income of the countries when year is equated as zero. measures the change in sigma ( given one unit change in year (t), holding all other factors constant. Thus, for countries after trade liberalization (D=1) the model become
The coefficient () is the intercept for the regression of income among countries after trade liberalization or the initial income of the countries when year is equated as zero. The coefficient for the dummy regressor gives the difference in intercept for the two regression lines (Equation1 and 2). Since the within-year regressions are not parallel, it is not possible to interpret as the unqualified partial effect of year (It is only the effect when t=0). The coefficient is the slope for the regression of income among countries...
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