In regressing GDP on openness,a potential solution to the simultaneity problem is to
A) use geographical proximity to foreign markets to predict trade flows
B) use tariffs as an inverse measure of openness
C) run a limited-dependent variables regression
D) exclude financial reform as an independent variable
E) lag the dependent variable

Question

Quizplus · Accepted Answer

Using geographical proximity to foreign markets can help predict trade flows and account for the endogeneity/simultaneity issue between GDP and openness. This is because countries that are closer to each other are more likely to trade with each other, independent of their level of economic development. By incorporating this into the regression model, we can separate out the effect of openness on GDP from the reverse causality where higher GDP leads to more openness.

In Regressing GDP on Openness,a Potential Solution to the Simultaneity