introduction to eco no metrics (1)

8/7/2019 Introduction to Eco No Metrics (1)

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Econometrics meansEconometrics meanseconomiceconomicmeasurementmeasurement

Econometrics may be defined asEconometrics may be defined as thethesocial science in which the tools ofsocial science in which the tools ofeconomic theory, mathematics &economic theory, mathematics &statistical inference are applied tostatistical inference are applied tothe analysis of economicthe analysis of economicphenomenaphenomena

What is Econometrics?


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Econometrics attemptsEconometrics attempts

to quantify economic reality &to quantify economic reality &

to bridge the gap betweento bridge the gap betweeneconomic theory & the realeconomic theory & the realworld.world.


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Methodology of EconometricsMethodology of Econometrics

1. Statement of theory or hypothesis

2. Specification of the mathematicalmodel of the theory

3. Specification of the statistical, oreconometric model

4. Obtaining the data


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ContinuedContinued

5. Estimation of the parameters of theeconometric model

6. Hypothesis Testing

7. Forecasting or prediction

8. Using the model for control or policypurpose


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1. Statement of theory or hypothesis

Example: Keynesian ConsumptionExample: Keynesian ConsumptionTheoryTheory

When disposable income increase,When disposable income increase,consumption will also increase andconsumption will also increase and

vice versavice versa

Rate of change of consumption > 0Rate of change of consumption > 0

and


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2. Specification of the mathematical

model of the theory

C =C = EE ++FFYYdd 0


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F

E

Income

Consumption

expenditure

Y

X

Keynesian consumption function


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The above model is aThe above model is a singlesingleequation modelequation model as it has only oneas it has only oneequation.equation.

If a model has more than oneIf a model has more than one

equation and will be known asequation and will be known asmultiple-equation model.


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Continued.Continued.

The variable on the left side of equalThe variable on the left side of equalto sign is called the dependentto sign is called the dependent

variablevariable

The variable on the right side is calledThe variable on the right side is calledthe independent or explanatorythe independent or explanatoryvariable.variable.


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3. Specification of the statistical,

or econometric model

C = E +FYd + u

where u, known as disturbance,error term is a random variable.

u represents all those factors thataffect consumption but are nottaken into account.


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4. Obtaining data4. Obtaining dataYear C Yd

1982 3081.5 4620.3

1983 3240.6 4803.7

1984 3407.6 5140.1

1985 3566.5 5323.5

1986 3708.7 5487.7

1987 3822.3 5649.5

1988 3972.7 5865.2


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YearC

Yd

1989 4064.6 6062.0

1990 4132.2 6136.3

1991 4105.8 6079.4

1992 4219.8 6244.4

1993 4343.6 6389.6

1994 4486.0 6610.7

1995 4595.3 6742.1

1996 4714.1 6928.4

CONTINUED.


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5. Estimation of the parameters

of the econometric model

The numerical estimates of the

parameters give experimentalcontent

Is this model valid or correct?


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6. Hypothesis Testing

Confirmation orConfirmation or

refutation/negation ofrefutation/negation ofeconomic theories on theeconomic theories on thebasis of sample evidencebasis of sample evidence


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7. Forecasting or Prediction

If the chosen model does not refuteIf the chosen model does not refutethe hypothesis or theory, we may usethe hypothesis or theory, we may use

it to predict the value(s) of theit to predict the value(s) of thedependent variabledependent variable


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8. Use of the Model forControl or

Policy Purposes

By appropriate fiscal and monetaryBy appropriate fiscal and monetarypolicy mix, the government canpolicy mix, the government canmanipulate the control variable Ymanipulate the control variable Ydd totoproduce the desired level of the targetproduce the desired level of the targetvariable Cvariable C


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Anatomy of Econometric ModelingAnatomy of Econometric Modeling

Economic theory

Mathematical model of theory

Econometric model of theory

Forecasting or prediction

Hypothesis testing

Estimation of econometric model

Data

Using the model for

control or policy purposes


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Types of econometricsTypes of econometrics

1.1. Theoretical econometricsTheoretical econometrics

2.2. Applied econometricsApplied econometrics


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Theoretical econometrics is concernedTheoretical econometrics is concerned

with the development of appropriatewith the development of appropriatemethods for measuring economicmethods for measuring economic

relationships specified by econometricrelationships specified by econometric

models.models.

Theoretical econometricsTheoretical econometrics


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