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Basic Econometrics

- Introduction
- What is Econometrics?

Introduction What is Econometrics?

- Definition 1 Economic Measurement
- Definition 2 Application of the mathematical

statistics to economic data in order to lend

empirical support to the economic mathematical

models and obtain numerical results (Gerhard

Tintner, 1968)

Introduction What is Econometrics?

- Definition 3 The quantitative analysis of

actual economic phenomena based on concurrent

development of theory and observation, related by

appropriate methods of inference - (P.A.Samuelson, T.C.Koopmans and J.R.N.Stone,

1954)

Economic Theory

Mathematical Economics

Econometrics

Economic Statistics

Mathematic Statistics

Introduction Why a separate discipline?

- Economic theory makes statements that are mostly

qualitative in nature, while econometrics gives

empirical content to most economic theory - Mathematical economics is to express economic

theory in mathematical form without empirical

verification of the theory, while econometrics is

mainly interested in the later

Introduction Why a separate discipline?

- Economic Statistics is mainly concerned with

collecting, processing and presenting economic

data. It does not being concerned with using the

collected data to test economic theories - Mathematical statistics provides many of tools

for economic studies, but econometrics supplies

the later with many special methods of

quantitative analysis based on economic data

Economic Theory

Mathematical Economics

Econometrics

Economic Statistics

Mathematic Statistics

Introduction Methodology of Econometrics

- Statement of theory or hypothesis
- Keynes stated Consumption increases as income

increases, but not as much as the increase in

income. It means that The marginal propensity

to consume (MPC) for a unit change in income is

grater than zero but less than unit

Introduction Methodology of Econometrics

- (2) Specification of the mathematical model of

the theory - Y ß1 ß2X 0 lt ß2lt 1
- Y consumption expenditure
- X income
- ß1 and ß2 are parameters ß1 is
- intercept, and ß2 is slope coefficients

Introduction Methodology of Econometrics

- (3) Specification of the econometric model of the

theory - Y ß1 ß2X u 0 lt ß2lt 1
- Y consumption expenditure
- X income
- ß1 and ß2 are parameters ß1is intercept and ß2

is slope coefficients u is disturbance term or

error term. It is a random or stochastic variable

Introduction Methodology of Econometrics

- (4) Obtaining Data
- (See Table 1.1, page 6)
- Y Personal consumption
- expenditure
- X Gross Domestic Product
- all in Billion US Dollars

Introduction Methodology of Econometrics

- (4) Obtaining Data

Year X Y

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 2447.1 2476.9 2503.7 2619.4 2746.1 2865.8 2969.1 3052.2 3162.4 3223.3 3260.4 3240.8 3776.3 3843.1 3760.3 3906.6 4148.5 4279.8 4404.5 4539.9 4718.6 4838.0 4877.5 4821.0

Introduction Methodology of Econometrics

- (5) Estimating the Econometric Model
- Y - 231.8 0.7194 X (1.3.3)
- MPC was about 0.72 and it means that for the

sample period when real income increases 1 USD,

led (on average) real consumption expenditure

increases of about 72 cents - Note A hat symbol () above one variable

will signify an estimator of the relevant

population value

Introduction Methodology of Econometrics

- (6) Hypothesis Testing
- Are the estimates accord with the
- expectations of the theory that is being
- tested? Is MPC lt 1 statistically? If so,
- it may support Keynes theory.
- Confirmation or refutation of
- economic theories based on
- sample evidence is object of Statistical
- Inference (hypothesis testing)

Introduction Methodology of Econometrics

- (7) Forecasting or Prediction
- With given future value(s) of X, what is the

future value(s) of Y? - GDP6000Bill in 1994, what is the forecast

consumption expenditure? - Y - 231.80.7196(6000) 4084.6
- Income Multiplier M 1/(1 MPC) (3.57).

decrease (increase) of 1 in investment will

eventually lead to 3.57 decrease (increase) in

income

Introduction Methodology of Econometrics

- (8) Using model for control or
- policy purposes
- Y4000 -231.80.7194 X ? X ? 5882
- MPC 0.72, an income of 5882 Bill
- will produce an expenditure of 4000
- Bill. By fiscal and monetary policy,
- Government can manipulate the
- control variable X to get the desired
- level of target variable Y

Introduction Methodology of Econometrics

- Figure 1.4 Anatomy of economic modelling
- 1) Economic Theory
- 2) Mathematical Model of Theory
- 3) Econometric Model of Theory
- 4) Data
- 5) Estimation of Econometric Model
- 6) Hypothesis Testing
- 7) Forecasting or Prediction
- 8) Using the Model for control or policy purposes

Economic Theory

Mathematic Model

Econometric Model

Data Collection

Estimation

Hypothesis Testing

Application in control or policy studies

Forecasting

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