Tools of:

1
Tools of Economic theory Mathematics Statistical
inference
Analysis of economic data
applied to
2
Create hypothesis

• from economic theory

Number of UPS shipments demanded is negatively
related to the price of ________ and positively
related to the price of ___________.
Collect data

• across time (time series)
• across units (cross-sectional)

Price and quantity data for UPS and FedEx
shipments across ______ or across ________.
3
Specify the mathematical model

• from theory and mathematical economics

QUPS B0 - B1 PUPS B2 PFEDX
Intercept
Coefficients
Specify the econometric model

• recognizing uncertainty and the impact of other
  factors

QUPS B0 - B1 PUPS B2 PFEDX u
Error term
4
Estimate the parameters of the model

• ordinary least squares (OLS)

Test the model specification

• determine if the right explanatory variables have
  been included
• cant include everything in the model

Test the hypothesis

• are the parameters the right sign and
  significantly different from zero

5
Use the model for prediction

• based on the estimated parameters

Perhaps we could predict what impact a change in
prices at UPS would have.