Assignment Econometrics week 6 - Benefits of EU accession

- READ CAREFULLY and WORK PRECISELY!

- Justify all your answers with concrete and explicit evidence. Show all Stata output.
- If you interpret a regression result, then you – if not otherwise stated – are expected to explicitly
interpret the meaning and the implications of the magnitudes, measurement units, signs and
significances of all estimated parameters. Also give a clear economic interpretation of your statistical
results. - For each statistical test you carry out, provide H0, H1, the test-statistic vs. the critical value or,
alternatively, the p-value. Then, draw the statistical conclusion and write down the economic
interpretation of this statistical result. Unless stated differently test at α=0.05.

In 2004 ten countries joined the European Union. In this assignment we will analyze whether they
benefitted from this in terms of increased GDP per capita after accession. The dataset EUexpansion.dta,
obtained from Feenstra et al. (2015)1 contains the following variables:

Variable Description
countryname Country name (string variable)
countrynum Number for each country
year Year of observation (=1994 or 2014)
gdpcapit Real GDP per capita in constant USD of 2017 of country i in year t
EUmemberit Dummy, 1= if country i is EU member in year t, = 0 if not

Annerijn leegte & Jantien de Groot

a. The ten countries joined the EU in 2004. Yet, only data from 1994 and 2014 is available. Why isn’t
data from e.g. 2003-2005 used, so directly before and after accession?

The economy of the country changes drastically by joining the EU, so they need to adjust and the GDP can
not change so much within 2 years. It will take time for companies to adjust and to make trading partners
within the EU to grow their GDP.

c1 Open the STATA datafile EUexpansion.dta. Estimate the equation gdpcapit = β1 + β2EUmemberit + uit
but using only observations from 2014 (you can use an “if” statement for that, see example from class).

1Feenstra, R.C., Inklaar, R., Timmer, M.P. (2015), The Next Generation of the Penn World Table. American Economic Review,
105(10), 3150-3182. Available for download at www.ggdc.net/pwt and https://www.rug.nl/ggdc/productivity/pwt/?lang=en
b. Explain why this is not a good estimate of the effect of joining the EU for the 10 countries.

There are 24 observations witch include the 10 countries who joined the EU in 2004 and 14 other
countries that are not in the EU. We only use the data measured at one time in 2014 so you cannot
see the change of the GDP over time, so you cannot say anything about the effect of joining.

c2 Estimate the equation gdpcapit = β1 + β2EUmemberit + uit again but now using all observations (from
both years)

c. Again, explain why this is not a good estimate of the effect of joining the EU for the 10 countries.

This is not a good estimate because it still does not show what the change of GDP over time is. The
regression shows the GDP in 1994 and 2014 but with this estimate we cannot see the effect of joining the
EU.
 c3 To account for general differences in gdpcap in 1994 and 2014 we can add a dummy variable d2014.
Generate this dummy in Stata and add it to the equation. In other words estimate using all observations:
gdpcapit = β1 + β2EUmemberit + β3d2014t + uit

d. Try to explain why the estimated coefficient for EUmember is the same as in c1, but why the
standard error is different.

We see that the standard error increases from 1971.274 to 2103.169 the standard error is calculated
by the standard deviation divided by the squared root of the number of observations. In our
regression the number of observations increases do you would think that the standard error would
decrease but that is not the case. This means that the standard deviation or variance increased more
than the increase of observations

e. Explain again why this is not a good estimate of the effect of joining the EU for the 10 countries.
There still is no interaction term between both, so it does not cover the ´treatment effect´ for the
10 countries that joined the EU. So we can still not see the effect on the GDP for joining the EU.

c4 Finally, we will do a diff-in-diff analysis to obtain a more correct estimate of the effect of joining the EU.
First, instruct Stata that there are two obs. for each country using the tsset command. Second, create a
variable treated that separates the two groups countries in both years (hint1: see example from class; hint
2: the command only works with numeric values). Third, create summary statistics for gdpcap for both
groups and both years, so four different mean values. Use these four mean values to calculate the diff-
indiff effect of joining the EU in 2004 by the 10 accession countries on gdpcap.
 c5 Finally, calculate the diff-in-diff effect using regression analysis. Make sure you first create the
necessary terms.

difference in differences:
DD=(26794,37-14202,08)-(14493,24-6857,248)=12592,29-7635,992=4956,294
the difference is |-4956.294| which confirms our calculations.

f. Interpret all four estimated coefficients, and use appropriate statistical tests to test whether the
estimated coefficients are statistically different from zero.
Dummy2014 = 14493.24 – 6857.25 = 7635.99
(mean year=2014, treated=0) - (mean year=1994, treated=0) = 7635.99
D2014 is the difference between the mean real GDP per capita in constant USD of 2017, of 1994
and 2014, of the countries that did not become a member of the EU. The p-value = 0,000, (with
a=0,05) it has been shown that d2014 is significantly different from zero.

DD = 26794.37 - 14202.08 - 14493.24 - 6857.25 = 4956.294

((mean year=2014, treated=1) - (mean year = 1994, treated=1)) - ((mean year=2014, treated=0) -
(mean year = 1994, treated=0)) = 4956.294
The DD treatment effect is 4956,294 that is not significantly different from zero (p-value=0,06 >
than a=0,05). The standard error is big so there probably is too much variation in the effect of
whether the country is a EU member or not on the treated.

Treated = 14202.08 – 6857.25 = 7344.83

(mean year = 1994, treated=1) - (mean year = 1994, treated=0) = 4956,294
Treated is the difference between the mean real GDP per capita in constant USD of 2017 of non-
EU members and countries that have joined the EU in 2004 in 1994.
p-value = 0,000, it has been shown that treated is significantly different from zero

_cons = 6857,248
This is the intercept, this is the real GDP per capita in constant USD of 2017, of the control group
that are the countries that did not become a member of the EU in 2004 with data from 1994. The
p-value = 0,000, it has been shown that the intercept is significantly different from zero
g. Three countries that are missing in the dataset are Bulgaria, Croatia, and Romania, despite being in
the same region as many of the countries that joined in 2004. Discuss why they are excluded from the
analysis. How would inclusion complicate the diff-in-diff analysis.

Bulgaria, Croatia and Romania are excluded from the dataset because there might be
multicollinearity between these countries and some countries that did join the EU in 2004.
because countries are likely to be more economically dependent on their neighbouring countries
because of trade. This could mean that if the economy of the countries that join the EU changes,
the economy of Bulgaria, Croatia and Romania change too because of the multicollinearity
between these countries. This could change the 2014 non-treated mean, and complicates the diff-
in-diff analysis.

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