Types of Data

Week 2
 The Nature of
Econometrics and
Economic Data
Introduction to Econometrics
Econometrics is based upon the
development of statistical methods for
estimating economic relationships, testing
economic theories, and evaluating and
implementing government and business
policy. The most common application of
econometrics is the forecasting of such
important macroeconomic variables as
interest rates, inflation rates, and gross
domestic product (GDP).
Kinds of Economic Data

• Nonexperimental data are not accumulated through

controlled experiments on individuals, firms, or segments of
the economy. (Nonexperimental data are sometimes called
observational data, or retrospective data, to
emphasize the fact that the researcher is a passive collector
of the data.)
• Experimental data are often collected in laboratory
environments in the natural sciences, but they are much
more difficult to obtain in the social sciences. Although
some social experiments can be devised, it is often
impossible, prohibitively expensive, or morally repugnant to
conduct the kinds of controlled experiments that would be
Steps in Empirical Economic
Analysis
1.Careful formulation of the question of interest. The
question might deal with testing a certain aspect
of an economic theory, or it might pertain to
testing the effects of a government policy. In some
cases, especially those that involve the testing of
economic theories, a formal economic model is
constructed. An economic model consists of
mathematical equations that describe various
relationships. Economists are well known for their
building of models to describe a vast array of
behaviors.
Example 1: Economic Model of
Crime
Steps in Empirical Economic
Analysis
2. After we specify an economic model, we need to turn it into what we call an
econometric model. Because we will deal with econometric models, it is
important to know how an econometric model relates to an economic model.
Example of Econometric Model:
Steps in Empirical Economic
Analysis
3. An empirical analysis, by definition, requires data.
After data on the relevant variables have been
collected, econometric methods are used to
estimate the parameters in the econometric model
and to formally test hypotheses of interest. In some
cases, the econometric model is used to make
predictions in either the testing of a theory or the
study of a policy’s impact.
Structures of
Economic
Data
Cross-Sectional Data
• A cross-sectional data set consists of a sample of individuals,
households, firms, cities, states, countries, or a variety of other units,
taken at a given point in time. Sometimes, the data on all units do not
correspond to precisely the same time period. Cross-sectional data
are widely used in economics and other social sciences.
• In economics, the analysis of cross-sectional data is closely aligned
with the applied microeconomics fields, such as labor economics,
state and local public finance, industrial organization, urban
economics, demography, and health economics.
• Data on individuals, households, firms, and cities at a given point in
time are important for testing microeconomic hypotheses and
evaluating economic policies.
Example of cross-sectional
data
Time Series Data

• A time series data set consists of observations on a variable or several

variables over time. Examples of time series data include stock prices,
money supply, consumer price index, GDP, annual homicide rates, and
automobile sales figures.
• Because past events can influence future events and lags in behavior
are prevalent in the social sciences, time is an important dimension in a
time series data set.
• Unlike the arrangement of cross-sectional data, the chronological
ordering of observations in a time series conveys potentially important
information.
• A key feature of time series data that makes them more difficult to
analyze than cross-sectional data is that economic observations can
rarely, if ever, be assumed to be independent across time.
Time Series Data
• Most economic and other time series are related, often
strongly related, to their recent histories. For example,
knowing something about the GDP from last quarter tells
us quite a bit about the likely range of the GDP during
this quarter, because GDP tends to remain fairly stable
from one quarter to the next.
• Another feature of time series data that can require
special attention is the data frequency at which the
data are collected. In economics, the most common
frequencies are daily, weekly, monthly, quarterly, and
annually.
Example of time series data
Time Series Data
• Most economic and other time series are related, often
strongly related, to their recent histories. For example,
knowing something about the GDP from last quarter tells us
quite a bit about the likely range of the GDP during this
quarter, because GDP tends to remain fairly stable from one
quarter to the next.
• Another feature of time series data that can require special
attention is the data frequency at which the data are
collected. In economics, the most common frequencies are
daily, weekly, monthly, quarterly, and annually.
Pooled Cross Section

• Some data sets have both cross-sectional and time series features. For
example, suppose that two cross-sectional household surveys are taken
in the United States, one in 1985 and one in 1990. In 1985, a random
sample of households is surveyed for variables such as income, savings,
family size, and so on. In 1990, a new random sample of households is
taken using the same survey questions.
• To increase our sample size, we can form a pooled cross section by
combining the two years. Pooling cross sections from different years is
often an effective way of analyzing the effects of a new government
policy. The idea is to collect data from the years before and after a key
policy change.
Example of pooled cross
sections data
Panel or Longitudinal Data
• A panel data (or longitudinal data) set consists of a time series for each
cross-sectional member in the data set. As an example, suppose we have
wage, education, and employment history for a set of individuals followed
over a 10-year period.
• Or we might collect information, such as investment and financial data,
about the same set of firms over a five-year time period. Panel data can also
be collected on geographical units. For example, we can collect data for the
same set of counties in the United States on immigration flows, tax rates,
wage rates, government expenditures, and so on, for the years 1980, 1985,
and 1990.
• The key feature of panel data that distinguishes them from a pooled cross
section is that the same cross-sectional units (individuals, firms, or counties
in the preceding examples) are followed over a given time period.
Example of panel data
 Structures of
Economic
Data
Watch
https://www.youtube.com/watch?v=BN
-FTZ7qvN0
 Causality and Ceteris Paribus

• In most tests of economic theory, and certainly

for evaluating public policy, the economist’s
goal is to infer that one variable (such as
education) has a causal effect on another
variable (such as worker productivity). Simply
finding an association between two or more
variables might be suggestive, but unless
causality can be established, it is rarely
compelling.
• The notion of ceteris paribus—which means
“other (relevant) factors being equal”—plays
an important role in causal analysis. This idea
has been implicit in some of our earlier
discussion, particularly Examples 1.1 and 1.2,
Simple Linear
Regression Model
• Simple linear regression model is a
model that will “explain y in terms
of x,” y and x are two variables,
representing some population.
• It is also called the two-variable
linear regression model or
bivariate linear regression model
because it relates the two
variables x and y.
Simple Linear
Regression
Simple Linear Regression
Model
When related by equation, the variables y and
x have several different names used
interchangeably, as follows: y is called the
dependent variable, the explained
variable, the response variable, the
predicted variable, or the regressand; x is
called the independent variable, the
explanatory variable, the control variable,
the predictor variable, or the regressor.
(The term covariate is also used for x.)
Simple Linear Regression
Model
The variable u, called the error term or
disturbance in the relationship, represents
factors other than x that affect y. A simple
regression analysis effectively treats all
factors affecting y other than x as being
unobserved. You can usefully think of u as
standing for “unobserved.”
Simple Linear Regression Model
• Equation (2.1) also addresses the issue of the functional relationship

change in u is zero, Delta ∆u = 0, then x has a linear effect on y:

between y and x. If the other factors in u are held fixed, so that the

• Thus, the change in y is simply β1 multiplied by the change in x. This

means that b1 is the slope parameter in the relationship between y

applied economics. The intercept parameter β0, sometimes called the

and x, holding the other factors in u fixed; it is of primary interest in

constant term, also has its uses, although it is rarely central to an

analysis.
Simple Linear Regression
Model
Simple Linear Regression
Model
Simple Linear Regression
https://www.youtube.com/watch?v=CBa8frhRKMw
Assignment
Read: Introductory Econometrics book (Wooldridge)
pages 24-49
Read: Using R in Introductory Econometrics (Heiss)
R Basic Operations pages 1-55

Sample data sets link:

https://ideas.repec.org/s/boc/bocins.html
Short Quiz

• Definition of Terms
• Short Essay
Thank you