In Chapter 1 we discussed briefly the four types of variables that one generally encountersin empirical analysis:These are:ratio scale,interval scale,ordinal scale,and nominalscale.The types of variables that we have encountered in the preceding chapters wereessentially ratio scale.But this should not give the impression that regression models c/mdeal only with ratio scale variables.Regression models can also handle other types ofvariables mentioned previously.In this chapter,we consider models that may involvenot only ratio scale variables but also nominal scale variables.Such variables are alsoknown as indicator variables,categorical variables,qualitative variables,or dummyvariables.In regression analysis the dependent vailable.or regressand,iS frequently influenced not only by ratio scale variables(eg income,output,prices,costs,height,temperature)butalso by variables that are essentially qualitative,or nominal scale,in nature,such as sex,race,color,religion,nationality,geographical region,political upheavals,and party affilia-tion.For example.holding all 0ther factors constant,female W 2lrkers are found to earn lessthan their male counterpas or nonwhite workers are found to earn less than whites.