ABSTRACT
Econometric models are derived on the basis of deductive reasoning, which identifies inter-relationships among a number of variables. These variables are measured by conventional time series or cross-section data. However, qualitative variables, those variables which cannot be measured by quantitative data, can also have a significant impact on the dependent variable under consideration. For example, in cross-sectional analysis of household consumption expenditure, qualitative variables, such as location, the level of education of household members, and the gender mix of the household, can influence the household consumption. Dummy variables are introduced into regression models to capture the impact of these qualitative variables on household consumption expenditure.
