Book: Basic Econometrics-D. N. Gujarati and D. C.

Porter
Lecture#01

What Is Econometrics?

In narrow sense Econometrics means Economic Measurement.

In Broader sense

Econometrics may be defined as the social science in which the tools of

economic theory, mathematics and statistical inference are applied to the

analysis of economic phenomena. (Economic Theory by Arthur S. Goldberger)

Methodology of Econometrics?

1. Statement of theory or hypothesis

2. Specification of the mathematical model of the theory

3. Specification of the Statistical or Econometric model

4. Obtaining Data

5. Estimation of the parameters of the Econometric Model

6. Hypothesis testing

7. Forecasting or Prediction

8. Using the model for control or policy purpose

(Example: Is there any a relation between inflation/trade and Economic Growth

of a country?)

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Book: Basic Econometrics-D. N. Gujarati and D. C. Porter

Types of Econometrics

Econometrics

Theoretical

Classical

Bayesian

Theoretical Econometrics is concerned with the development of

appropriate methods for measuring economic relationships specified by

econometric models. For example one of the methods is Least squares.

Applied

Classical

Bayesian

In applied econometrics, we use the tools of theoretical econometrics to

study some special fields of economics and business, such as production

function, investment function, demand and supply function.

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Book: Basic Econometrics-D. N. Gujarati and D. C. Porter

Historical Origin of the Term Regression

The term Regression was introduced by Francis Galton in 1886. He found

that the height of children of unusually tall or unusually short parents tends

to move toward the average height of the population. Galton’s law of

universal regression was confirmed by his friend Karl Pearson in 1903,

who collected more than a thousand records of heights of members of

family groups.

Examples of Regression

A monopolist who can fix the price or output but not both, may want to

find out the response of the demand for a product to change in price. Such

an experiment may enable the estimation of the price elasticity i.e. price

responsiveness of the demand for the product and may help determine the

most profitable price.

An Economist may be interested in studying the dependence of personal

consumption expenditure on after-tax of disposable real personal income.

Such an analysis may be helpful in estimating the marginal propensity to

consume (MPC), that is, average change in consumption expenditure for,

say, a kroner of change in real income.

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Book: Basic Econometrics-D. N. Gujarati and D. C. Porter
Regression versus Correlation:

Correlation coefficient measures the strength of linear association between

two variables but Regression analysis try to estimate or predict the average

value of one variable on the basis of the fixed values of other variables. In

regression analysis there is an asymmetry in the way the dependent and

explanatory variables are treated. The dependent variable is assumed to be

statistical, random or stochastic, that is, to have a probability distribution

and the explanatory variables are assumed to have fixed values. On the

other hand in correlation analysis we treat any two variables symmetrically;

there is no distinction between the dependent and explanatory variables.

Terminology

Dependent Variable Independent Variable

Explained Variable Explanatory Variable

Predictand Predictor

Regressand Regressor

Endogenous Exogenous

Response Stimulus

Outcome Covariate

Controlled Variable Control Variable

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Book: Basic Econometrics-D. N. Gujarati and D. C. Porter

Types of Data

Time Series Data

Cross Sectional Data

Pooled Data

Time Series Data

Time series is a sequence of data points, measured typically at

successive time instants spaced at uniform time intervals. Time series

data have a natural temporal ordering.

Daily- Weather, Stock Price

Monthly- Unemployment rate

Quarterly- GDP

Yearly- National Budgets

Decennially- Population Census

Cross Sectional Data

Cross-sectional data or cross section is a type of one-dimensional data

set. It refers to data collected by observing many subjects such as

individuals, firms or countries/regions at the same point of time, or

without regard to differences in time.

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Book: Basic Econometrics-D. N. Gujarati and D. C. Porter

For example, we want to measure the mobile uses for a particular brand

in this campus. We could draw a sample of 100 students randomly from

the population, measure their mobile use, and calculate what percentage

of that sample is used of that brand. For example, 60% of our samples

were used that particular branded mobile. This cross-sectional sample

provides us with a snapshot of that population, at that one point in time.

Note that we do not know based on one cross-sectional sample if the

uses of this brand are increasing or decreasing; we can only describe the

current proportion.

Pooled Data

In Pooled or combined data are the element of both time series and

cross-sectional data.

Types of quantitative variable:

1.Discrete: Some variable can take only integral values, known as discrete

variable. Family member, number of students in a class. Etc

2.Continuous : A variable which can assume any value integral or

fractional within specified limits, is called continuous variable.

Example: Height of a student, length of a fish, weight of an animal etc.

Scale of measurement: In Statistics, measurement has a special meaning. A

measurement is obtained when a variable is measured on experimental unit.

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Book: Basic Econometrics-D. N. Gujarati and D. C. Porter
Types of scale of measurement:

1. Nominal scale : A qualitative measurements are called nominal, regardless

of whether the categories are designed by names or numbers. In nominal data,

the categories of variables differ from one another in name only. One category

of variable is not necessarily higher or lower or greater or smaller then other

category.

Example: Gender of a student (male, female) , religion, marital status, place of

birth, Holding number

2. Ordinal scale: When there is an ordered relation among the categories, the

variable is said to be an ordinal variable. The categories of the ordinal variable

may have the typical relations as higher, greater, more desired, less difficult

and so on.

Example : Level of knowledge (good, average, poor), Grade Points

(A,B.C.D, E, F), Socioeconomic status( High , middle , low), Degree obtained (

Undergraduate, Graduate, Ph.D)

3. Interval scale: Data generated through the measurement of an interval

variable are called interval data. The level of measurement is called interval

scale when a quantitative variable is measured in natural numerical scale in the

experimental unit but no absolute zero as origin. Zero point may be arbitrarily

defined.

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Book: Basic Econometrics-D. N. Gujarati and D. C. Porter
Example: Body temperature of a patient, Room temperature of a house.

Calendar time , Intelligence quotient (IQ) etc.

4. Ratio scale: A Level of measurement is called ratio scale when a

quantitative variable is measured numerically on experimental unit with

absolute zero as origin.

Example : Age, income Height , Weight, Family size- A family with six

members is twice as large as of a family with 3 members.

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