Basic Econometrics
Course Instructor
Prof. Dr. Himayatullah Khan
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Himayatullah 2012
Basic Econometrics
Introduction:
What is
Econometrics?
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Prof. Himayatullah
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)
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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)
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Introduction
What is Econometrics?
Definition 4: The social science
which applies economics, mathematics
and statistical inference to the analysis of
economic phenomena (By Arthur S.
Goldberger, 1964)
Definition 5: The empirical
determination of economic laws (By H.
Theil, 1971)
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Prof. Himayatullah May 2004
Introduction
What is Econometrics?
Definition 6: A conjunction of
economic theory and actual
measurements, using the theory and
technique of statistical inference as a
bridge pier (By T.Haavelmo, 1944)
And the others
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Economic Mathematical
Theory Economics
Econometrics
Economic Mathematic
Statistics Statistics
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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
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Prof. Himayatullah May 2004
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
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Economic Mathematical
Theory Economics
Econometrics
Economic Mathematic
Statistics Statistics
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Introduction
Methodology of
Econometrics
(1) 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”
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Prof. Himayatullah May 2004
Introduction
Methodology of Econometrics
(2) Specification of the
mathematical model of the
theory
Y = ß1+ ß2X ; 0 < ß2< 1
Y= consumption expenditure
X= income
ß1 and ß2 are parameters; ß1 is
intercept, and ß2 is slope coefficients
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Prof. Himayatullah May 2004
Introduction
Methodology of Econometrics
(3) Specification of the
econometric model of the
theory
Y = ß1+ ß2X + u ; 0 < ß2< 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
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Prof. Himayatullah May 2004
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
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Introduction
Methodology of Econometrics
(4) Obtaining Data
Year X Y
1980 2447.1 3776.3
1981 2476.9 3843.1
1982 2503.7 3760.3
1983 2619.4 3906.6
1984 2746.1 4148.5
1985 2865.8 4279.8
1986 2969.1 4404.5
1987 3052.2 4539.9
1988 3162.4 4718.6
1989 3223.3 4838.0
1990 3260.4 4877.5
1991 3240.8 4821.0
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Prof. Himayatullah May 2004
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
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Prof. Himayatullah May 2004
Introduction
Methodology of Econometrics
(6) Hypothesis Testing
Are the estimates accord with the
expectations of the theory that is being
tested? Is MPC < 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)
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Prof. Himayatullah May 2004
Introduction
Methodology of Econometrics
(7) Forecasting or Prediction
With given future value(s) of X, what
is the future value(s) of Y?
GDP=$6000Bill in 1994, what is the
forecast consumption expenditure?
Y^= - 231.8+0.7196(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
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Prof.VuThieu May 2004
Introduction
Methodology of Econometrics
(8) Using model for control or
policy purposes
Y=4000= -231.8+0.7194 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
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Prof. Himayatullah May 2004
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
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Economic Theory
Mathematic Model Econometric Model Data Collection
Estimation
Hypothesis Testing
Application
in control or
Forecasting policy
studies
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