1. Variable Specification

2. Suppose …
You want to look at the impact of alcohol and tobacco use on per capita health expenditures.
You want to look at a cross section of countries.
You can’t just do:
Per capita Exp = a + b*alcohol + c*tobacco
Why not.

3. BECAUSE
We all know that the biggest cause of the variation in expenditures is per capita income.
At a given level of income, different levels of alcohol or substance use may shift line up or down.
Per capita exp
Per capita income

4. So …
Even if you are not particularly interested in a certain variable …
You have to include it if you think it might be important.
Proper regression would be:
Per capita Exp = a + b*alcohol + c*tobacco + d* per capita Income