# 4.3 — Categorical Data & Interactions — Class Content

## Overview

This week, we look at how to use data that is categorical (i.e. variables that indicate an observation’s membership in a particular group or category). We introduce them into regression models as **dummy variables** that can equal 0 or 1: where 1 indicates membership in a category, and 0 indicates non-membership.

We also look at what happens when categorical variables have more than two values: for regression, we introduce a dummy variable for each possible category - but be sure to leave out one reference category to avoid the dummy variable trap.

We then continue by examining how to use categorical data in regression, particularly focusing on *interactions* between variables. We look at three types of interaction effects: 1. Interaction between a continuous variable & a dummy variable 2. Interaction between two dummy variables 3. Interaction between two continuous variables

We will also be working on practice problems in `R`

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## Readings

- Ch. 6.1—6.2 in Bailey,
*Real Econometrics*

## R Practice

This week you will be working on R practice problems on categorical data. Answers will be posted later on that page.

## Assignments

### Problem Set 4 Due Fri Nov 11

Problem Set 4 is due by the end of the day on Friday, November 11.

## Slides

Below, you can find the slides in two formats. Clicking the image will bring you to the html version of the slides in a new tab. The lower button will allow you to download a PDF version of the slides.

I suggest printing the slides beforehand and using them to take additional notes in class (*not everything* is in the slides)!