Question

One measure of institution is openness to international trade. The authors find that one standard deviation increase in educational quality increases economic growth (measured by GDP per capita growth rate) by 0.9 percentage points in closed economies (economies with 0 international trade), but this number is increased to 2.5 percentage points in open economies (economies with free trade). The above result suggests the estimated coefficients for β_1 and β_2 are positive or negative in the following regression, and why? GDP per capita growth rate =β_1*educational quality+β_2*educational quality*openness to trade+other controls

Answer 1

B1 shows increase in GDP per capita when eduational quality increases by one unit keeping other things constant. B1 will be positive since the author finds there is a direct relationship between GDP per capita and educational quality.

Similarly, there there is a positive relationship between educational qualty* openness to trade and GDP per capita. This can be seen since the increase in qualty education in open economy increases the GDP per capita more than in closed economy. Also B2 shows the effect on GDP per capita when there is one unit increse in educational qualti*openness to trade, which in this case will be positive due to direct relationship between the two variables keeping other factors constant.