Basic Econo...Lec#7

8/7/2019 Basic Econo...Lec#7

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Basic EconometricsBasic Econometrics

IntroductionIntroduction::

What is Econometrics?What is Econometrics?


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IntroductionIntroduction

What is EconometricsWhat is Econometrics??

Definition 1Definition 1::Economic MeasurementEconomic Measurement

Definition 2Definition 2:: Application of theApplication of themathematical statistics to economic data inmathematical statistics to economic data inorder to lend empirical support to theorder to lend empirical support to theeconomic mathematical models and obtaineconomic mathematical models and obtainnumerical resultsnumerical results ((Gerhard Tintner, 1968Gerhard Tintner, 1968))


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What is EconometricsWhat is Econometrics??

Definition 3Definition 3:: The quantitativeThe quantitativeanalysis of actual economic phenomenaanalysis of actual economic phenomenabased on concurrent development ofbased on concurrent development oftheory and observation, related bytheory and observation, related byappropriate methods of inferenceappropriate methods of inference

((P.A.Samuelson, T.C.Koopmans andP.A.Samuelson, T.C.Koopmans andJ.R.N.Stone, 1954J.R.N.Stone, 1954))


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IntroductionIntroductionWhat is EconometricsWhat is Econometrics??

Definition 4Definition 4:: The social scienceThe social sciencewhich applies economics, mathematics andwhich applies economics, mathematics andstatistical inference to the analysis ofstatistical inference to the analysis ofeconomic phenomenaeconomic phenomena ((ByArthurS. Goldberger,ByArthurS. Goldberger,19641964

)) Definition 5Definition 5:: The empirical determinationThe empirical determinationof economic lawsof economic laws ((By H. Theil, 1971By H. Theil, 1971))


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What is EconometricsWhat is Econometrics?? Definition 6Definition 6: A conjunction of: A conjunction ofeconomic theory and actualeconomic theory and actual

measurements, using the theory andmeasurements, using the theory andtechnique of statistical inference as atechnique of statistical inference as abridge pierbridge pier ((ByBy T.HaavelmoT.Haavelmo, 1944, 1944))

And the othersAnd the others


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Econometrics

Economic

Theory

Mathematical

Economics

Economic

Statistics

Mathematic

Statistics


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Why a separate disciplineWhy a separate discipline?? Economic theoryEconomic theory makes statementsmakes statementsthat are mostly qualitative in nature, whilethat are mostly qualitative in nature, whileeconometrics gives empirical content toeconometrics gives empirical content to

most economic theorymost economic theory

Mathematical economicsMathematical economics is to expressis to expresseconomic theory in mathematical formeconomic theory in mathematical form

without empirical verification of thewithout empirical verification of thetheory, while econometrics is mainlytheory, while econometrics is mainlyinterested in the laterinterested in the later


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Why a separate disciplineWhy a separate discipline?? Economic StatisticsEconomic Statistics is mainlyis mainlyconcerned with collecting, processing andconcerned with collecting, processing andpresenting economic data. It does notpresenting economic data. It does notbeing concerned with using the collectedbeing concerned with using the collecteddata to test economic theoriesdata to test economic theories

Mathematical statisticsMathematical statistics providesprovidesmany of tools for economic studies, butmany of tools for economic studies, buteconometrics supplies the later witheconometrics supplies the later withmany special methods of quantitativemany special methods of quantitativeanalysis based on economic dataanalysis based on economic data


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REGRESSION ANALYSIS:REGRESSION ANALYSIS:

Some Basic ConceptsSome Basic Concepts


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Historical origin of the termHistorical origin of the term

RegressionRegression

The termThe term REGRESSIONREGRESSION waswasintroduced by Francis Galtonintroduced by Francis Galton


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Modern Interpretation ofRegressionModern Interpretation ofRegression

AnalysisAnalysis

The modern way in interpretation ofThe modern way in interpretation ofRegression: Regression Analysis is concernedRegression: Regression Analysis is concernedwith the study of the dependence of onewith the study of the dependence of one

variablevariable ((The Dependent VariableThe Dependent Variable)), on one or, on one ormore other variable(s)more other variable(s)((The ExplanatoryThe ExplanatoryVariableVariable)), with a view to estimating and/or, with a view to estimating and/orpredicting thepredicting the (population)(population) mean or averagemean or average

value of the former in term of the known orvalue of the former in term of the known orfixed (in repeated sampling) values of thefixed (in repeated sampling) values of thelatter.latter.

ExamplesExamples: (pages 16: (pages 16--19)19)


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Dependent Variable Y; Explanatory Variable XsDependent Variable Y; Explanatory Variable Xs

1. Y = Sons Height; X = Fathers Height1. Y = Sons Height; X = Fathers Height2. Y = Height of boys; X = Age of boys2. Y = Height of boys; X = Age of boys

3. Y = PersonalConsumption Expenditure3. Y = PersonalConsumption Expenditure

X = Personal Disposable IncomeX = Personal Disposable Income

4. Y = Demand; X = Price4. Y = Demand; X = Price5. Y = Rate ofChange of Wages5. Y = Rate ofChange of Wages

X = Unemployment RateX = Unemployment Rate

6. Y = Money/Income; X = Inflation Rate6. Y = Money/Income; X = Inflation Rate

7. Y = % Change in Demand; X = % Change in the7. Y = % Change in Demand; X = % Change in theadvertising budgetadvertising budget

8. Y = Crop yield; Xs = temperature, rainfall, sunshine,8. Y = Crop yield; Xs = temperature, rainfall, sunshine,

fertilizerfertilizer


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Regression vs. CorrelationRegression vs. Correlation Correlation Analysis:Correlation Analysis: the primary objective is tothe primary objective is to

measure the strength or degree of linearmeasure the strength or degree of linear

association between two variables (both areassociation between two variables (both areassumed to be random)assumed to be random)

Regression Analysis:Regression Analysis: we try to estimate or predictwe try to estimate or predict

the average value of one variable (dependent, andthe average value of one variable (dependent, and

assumed to be stochastic) on the basis of the fixedassumed to be stochastic) on the basis of the fixedvalues of other variables (independent, and nonvalues of other variables (independent, and non--

stochastic)stochastic)


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Terminology and NotationTerminology and Notation

DependentDependentVariableVariableqoqo

Explained VariableExplained Variableqoqo

PredictandPredictandqoqo

RegressandRegressandqoqo

ResponseResponseqoqo

EndogenousEndogenous

ExplanatoryExplanatoryVariable(s)Variable(s)

qoqoIndependentIndependent

Variable(s)Variable(s)

qoqoPredictor(s)Predictor(s)qoqo

Regressor(s)Regressor(s)qoqo

Stimulus or controlStimulus or controlvariable(s)variable(s)qoqo

Exogenous(es)Exogenous(es)


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Summary and ConclusionsSummary and Conclusions

1) The key idea behind regression1) The key idea behind regressionanalysis is the statistical dependenceanalysis is the statistical dependence

of one variable on one or more otherof one variable on one or more othervariable(s)variable(s)

2) The objective of regression analysis is2) The objective of regression analysis isto estimate and/or predict the mean orto estimate and/or predict the mean or

average value of the dependentaverage value of the dependentvariable on basis of known (or fixed)variable on basis of known (or fixed)values of explanatory variable(s)values of explanatory variable(s)


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Summary and ConclusionsSummary and Conclusions

3) The success of regression depends on3) The success of regression depends on

the available and appropriate datathe available and appropriate data

4) The researcher should clearly state the4) The researcher should clearly state the

sources of the data used in the analysis,sources of the data used in the analysis,

their definitions, their methods oftheir definitions, their methods of

collection, any gaps or omissions andcollection, any gaps or omissions andany revisions in the dataany revisions in the data

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Basic Econo...Lec#7