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Lecture #1

1. Econometrics is the application of statistical methods to economic data in order to give empirical content to economic theory and to help evaluate and predict economic phenomena. 2. Regression analysis is used in econometrics to study the dependence of one variable on one or more other variables in order to estimate or predict the average value of the dependent variable. 3. Econometric analysis relies on different types of data including time series data, cross-sectional data, and pooled data from various sources that may have inaccuracies.

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141 views

Lecture #1

1. Econometrics is the application of statistical methods to economic data in order to give empirical content to economic theory and to help evaluate and predict economic phenomena. 2. Regression analysis is used in econometrics to study the dependence of one variable on one or more other variables in order to estimate or predict the average value of the dependent variable. 3. Econometric analysis relies on different types of data including time series data, cross-sectional data, and pooled data from various sources that may have inaccuracies.

Uploaded by

Muhammad Waqas
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© Attribution Non-Commercial (BY-NC)
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WHAT IS ECONOMETRICS?

Definition 1 :Economic Measurement



Definition2 :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) 1:2: Tintner

Definition3 :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) 3:

Why a separate discipline?

Economic theory makes statements that makes are mostly
qualitative in nature, while econometrics gives empirical
content to most economic theory

Mathematical economics to express is economic theory in
mathematical form without empirical verification of the
theory, while econometrics is mainly interested in the later
with many special methods of quantitative analysis based on
economic data


Basic Econometrics
Historical origin of the term Regression
The term REGRESSION was introduced by Francis Galton

Tendency for tall parents to have tall children and for short
parents to have short children, but the average height of
children born from parents of a given height tended to move
(or regress) toward the average height in the population as a
whole (F. Galton , Family Likeness in Stature ) Galton,
Stature



Basic Econometrics

Modern Interpretation of Regression Analysis
The modern way in interpretation of Regression: Regression
Analysis is concerned with the study of the dependence of
one variable (The Dependent Variable) , on one or more other
variable(s) (The Explanatory Variable) , with a view to
estimating and/or predicting the (population) mean or
average value of the former in term of the known or fixed (in
repeated sampling) values of the latter.



Regression vs. Correlation
Correlation Analysis: the primary objective is to measure the
strength or degree of linear association between two
variables (both are assumed to be random)
Regression Analysis: we try to estimate or predict the average
value of one variable (dependent)on the basis of the fixed
values of other variables (Independent)

Terminology and Notation

Dependent Variable Explanatory Variable(s)

Explained Variable Independent Variable(s)

Predictand Predictor(s)

Regressand Regressor(s )

Response Stimulus or control variable(s)

Endogenous Exogenous(es )

The Nature and Sources
of Data for Econometric
Analysis
1) Types of Data :
Time series data;
Cross Cross-sectional data;
Pooled data
2) The Sources of Data
3) The Accuracy of Data
Time Series Data
A time series is a set of observations on the values that a
variable takes at different times. Such data may be collected
at regular time intervals, such as daily (e.g., stock prices,
weather reports), weekly (e.g., money supply figures),
monthly [e.g., the unemployment rate, the Consumer Price
Index (CPI)], quarterly (e.g., GDP), Although time series data
are used heavily in econometric studies.
Cross-Section Data
Cross-section data are data on one or more variables collected
at the same point in time, such as the census of population
conducted by the Census Bureau every 10 years.
Pooled Data
In pooled, or combined, data are elements of both time series
and cross-section data.
The data in that the Consumer Price Index (CPI) for each
country for 19731997 is time series data, whereas the data
on the CPI for the seven countries for a single year are cross-
sectional data.
The Sources of Data
The data used in empirical analysis may be collected by a
governmental agency (e.g., the Department of Commerce), an
international agency (e.g., the International Monetary Fund
(IMF) or the World Bank), a private organization (e.g., the
Standard Poor's Corporation), or an individual. Literally, there
are thousands of such agencies collecting data for one
purpose or another.
The Accuracy of Data
Although plenty of data are available for economic research,
the quality of the data is often not that good. There are
several reasons for that. First, as noted, most social science
data are non-experimental in nature. Therefore, there is the
possibility of observational errors, either of omission or
commission. Second, even in experimentally collected data
errors of measurement arise from approximations and
roundoffs. Third, in questionnaire-type surveys, the problem
of non-response can be serious; a researcher is lucky to get a
40 percent response to a questionnaire.

Summary and
Conclusions
1) The key idea behind regression analysis is the statistic
dependence of one variable on one or more other variable(s)

2) The objective of regression analysis is to estimate and/or
predict the mean or average value of the dependent variable
on
3) The success of regression depends on the available and
appropriate data
4) The researcher should clearly state the sources of the data
used in the analysis, their definitions, their methods of
collection, any gaps or omissions and any revisions in the data
I
Model
II
Equation
III
Slope=

Elasticity=
1 Linear Y=
1
+
2
x

2
.
2 Log Linear Log(y)=
1
+
2
log(

x)

2
.

2

3 Log-in Log(Y)=
1
+
2
X

2
.(Y)

2
.(X)
4 Lin log y=
1
+
2
log(

x)

2

5 Reciprocal Y=
1
+
2

-
2

2


Assumptions of Standard, or classical linear
regression Model

1. The regression model is linear in the parameters. Y=+X+u
2. X values are fixed in repeated sampling
3. Zero mean value of disturbance U
i
i.e E(U
i
) =0
4. Homoscadasticity or equal variance of u
i
Var(u
i
)=
2

5. No autocorrelation between the disturbances, the
correlation between any two u
i
and u
j
ij is zero Cov(u
i
, u
j
)
=0

6. Zero covariance between u
i
and X
i
E(u
i
X
i
)=0
7. The number of observations n must be greater than the
number of parameters to be estimated. Alternatively, the
number of observations n must be greater than the number
of explanatory variables
8. Variability in X values. The X values in a given sample must
not all be the same. Var(X) must be a finite positive number.
9. The regression model is correctly specified. Alternatively,
there is no specification bias or error
10. There is no perfect multicollinearity. That is, there is no
perfect linear relationship among the explanatory variable.


Assumptions of Standard, or classical linear
regression Model

Actual model
Now, the econometrician does not know the true values of
parameters and . we will use statistics to infer estimates of
these values based on the observation of the data. Of course,
these estimates will be a little wrong: they will differ from the
true values and . We will denote them: and . The
true equation can be substituted by the estimated equation:

u X Y + + = | o

c | o + + = X Y
o
|
o


It is easy to compute the formulae





estimated regression line


represents the fitted or predicted value

( )( )
( )

=
=


=
N
i
i
i
N
i
i
X X
X X Y Y
1
2
1

|
X Y | o

=
i i
X Y | o

+ =
i
Y




=
= =>
2 2
R r
outcome in the variation total
predictor by the explained variation


2
R

2

Confidence interval for




With (n-2) df
Pr [
2
t
/2
se (
2
)
2

2
+ t
/2
se (
2
)] = 1
Pr [
1
t
/2
se (
1
)
1

1
+ t
/2
se (
1
)] = 1

2

1

Testing of hypothesis

ANOVA
F = (MSS of ESS) / (MSS of RSS)
=
2
2
x
2
i
/ ( u
2
i
/ (n 2))
=
2
2
x
2
i
/
2

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