Chapter 1: The Nature of

Econometrics and
Economic Data
1. What Is Econometrics?
2. Steps in Empirical Economic Analysis
3. The Structure of Economic Data
4. Causality & Ceteris Paribus

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What Is Econometrics?
The term “econometrics” is believed to have been crafted by Ragnar Frisch (1895-1973) of Norway, one of the three
principal founders of the Econometric Society, first editor of the journal Econometrica, and co-winner of the first
Nobel Memorial Prize in Economic Sciences in 1969. It is therefore fitting that we turn to Frisch’s own words in the
introduction to the first issue of Econometrica to describe the discipline.

A word of explanation regarding the term econometrics may be in order. Its definition is implied in the statement of
the scope of the [Econometric] Society, in Section I of the Constitution, which reads: “The Econometric Society is an
international society for the advancement of economic theory in its relation to statistics and mathematics.... Its main
object shall be to promote studies that aim at a unification of the theoretical-quantitative and the empirical-
quantitative approach to economic problems....”a

What can you do with Econometrics? ✏ Econometricians typically

analyze non-experimental data.
✔ Estimate relationships between economic variables. Experimental data is often collected in
laboratory environments in the natural
✔ Test economic theories and hypotheses. sciences. Non-experimental data are
✔ Forecast economic variables. sometimes called observational data or
retrospective data on individuals, firms, or
✔ Evaluate and implement government and business policy. segments of the economy.

Machine learning (ML) is the study of

algorithms and statistical models that
Econometrics can be computer systems use to progressively
understood as the use of improve their performance on a specific task.
statistical methods to analyze
economic data. From
<https://en.wikipedia.org/wiki/Machine_learn
ing>
El economista analiza data no
experimental (datos observables que Specific Task: Make Predictions (most
no se obtienen en los laboratorios) common). Making predictions in Economics is
called Forecasting.

Sometimes the term 'Statistical Learning' is

used instead.

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 el primer paso es el planteaminento de la funcion, luego la f debe tener
un modelo, el cual tiene a las variables multiplicadas por parametros
Steps in Empirical análisis emperico son datos para testear una teoría o estimar
Economic Analysis una relación

A model in ML
An empirical analysis uses data to test a theory or to estimate a relationship. is called the
Machine or the
⚠ When testing a theory, a formal economic model is often required: Hypothesis.

Example: Economic Model of Crime Example: Job Training & Worker Productivity A deterministic
relationship!
Becker, G. S. (1968) "Crime and Punishment: An What is the effect of additional training on worker Once we know the
Economic Approach," Journal of Political Economy 76, productivity? values of we
169-217. automatically know the
Simple reasoning leads to a model such as value of y if the
functional form f is
An equation for criminal activity based on utility known!
maximization is derived: ,

, where

where
hourly wage, A deterministic
hours spent in criminal activities, relationship!
years of formal education, Once we know the
"wage" for an hour spent in criminal activity, values of educ, exper
hourly wage in legal employment, years of workforce experience, and
and training we
income other than from crime or employment, weeks spent in job training. automatically know
the value of wage if
probability of getting caught, the functional form f
probability of being convicted if caught, is known!
expected sentence if convicted, and
age.

⚠ One needs to transformed the economic model into an econometric model. This often requires that

• The functional form, , has to be specified.

• Variables may have to be approximated by other quantities.
Example: Econometric Model of Crime Example: Job Training & Worker Productivity
An econometric model of crime can be: ,

where

hourly wage,
where
years of formal education,
some measure of the frequency of criminal activity, years of workforce experience, and
the wage that can be earned in legal employment, weeks spent in job training.
the income from other sources (assets, inheritance, and so
on), unobservables characteristics such as “innate ability,”
the frequency of arrests for prior infractions (to approximate quality of education, family background, etc.
the probability of arrest), the frequency of conviction, and
the average sentence length after conviction. u:cuenta como las cosas que la econometría no
unobservables characteristics such as moral character, "wages" in puede observar (termino de error, perturbación)
criminal activities, family socio-economic background, etc.

✏ The econometric models now introduce parameters, i.e., , , , Parameters are

✏ The econometric models now also introduce a variable, , to account for things the econometrician does not observe. unknown scalars.

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⭐ Econometrics will allow us to estimate (guess) the values of the parameters , , , with economic data on
, , , and (let's say) while accounting for the presence of .

la econometria le permite estimar las variables a los parametros

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The Structure of
Economic Data
Cross-Sectional Data

son de corte transversal, se hace

encuestas en un momento especifico, ejemplo encuestas de
que no necesariamente en el mismo condiciones de vida,
día pero puede ser de 3-5meses) es el nivel de empleo con
como una foto, que representa un la producción de los
corte, se asume que los datos son países
comparables

In Economics, we are going to

call this column the dependent
variables, response, outcome.
In ML, we are going to call it
the dependent variable, or the
'output.'
esta info es de corte transversal porque es
info de un grupo de personas en un In Economics, we are going to
momento en especifico del tiempo call these columns independent
variables, regressors, controls,
covariates, confounders.
La muestra es independiente entre sí y los In ML, we are going to call
datos están bajo el supuesto de these columns 'features' or
independencia inputs.

Time Series Data

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 las unidades temporales se encuentran relacionadas

obviamente lo que
sucedio en el año
50 no se relaciona
con lo que sucedio
en el año 90

Los datos de serie de tiempo se

colectan de manera temporal, los datos
tienen RELACION lo importante es
mantener el orden(los años en los que
la info es levantada)

ejemplo el PIB, (el PIB del 1970

tiene RELACION con el PIB de 1971)

Pooled Cross Sections

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 unir info atemporal pero que son tomadas
en periodos muy distantes del tiempo

por ejemplo las encuestas que hace

el INEC las cuales no son anuales

esto no es un dato de panel porque

las unidades de análisis no son las
mismas a través del tiempo por
ejemplo(en los 3 años las personas
encuestados fueron distintas y si
coincidieron fue coincidencia)

aqui el tiempo de diferencia son años

Panel (longitudinal) Data

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 es la combinación de datos
de corte transversal con serie
de tiempo

es una info de las unidades

para modelar respuestas retrasadas de seccion cruzada a
traves del tiempo

tengo la info de un grupo de personas en

octubre del 2021(info de corte transversal)
y si un año después vuelvo a encuestar a
las mismas personas tengo(info de corte
transversal), por tanto si junto la info de
ambos años es info de panel

los mismos individuos deben ser

analizados a través del tiempo

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Causality & Ceteris si dos variables están correlaciones no significa que una cause a la otra

Paribus la correlacion no implica causalidad

Definition ✏ The notion of 'ceteris paribus' (which A model used for prediction can solely use
means "other (relevant) factors being correlations, but it is understood that causal
The causal effect of on can be defined as equal") plays an important role in the models should in principle predict better!
"How does the variable change if the variable causal analysis. The notion of causation is implicit when talking
changes but all other relevant factors are held about 'model interpretability' in ML.
constant?" Correlation does not mean causation

Effects of Fertilizer on Crop Yield Feasible Experiment:

“By how much will the production of soybeans increase if one
Choose several one-acre plots of land; randomly assign Key point: "randomly assign,"
increases the amount of fertilizer applied to the ground?” makes it independent (and therefore
different amounts of fertilizer to the different plots;
Implicit assumption: all other factors that influence crop yield uncorrelated) of other plot features
compare yields. that affect yield.
such as quality of land, rainfall, presence of parasites, and so on
are held fixed.
Experiment works because amount of fertilizer
applied is unrelated to other factors influencing crop
yields.
Measuring the Return to Education Infeasible Experiment:
“If a person is chosen from the population and given another year Key point: "randomly assign,"
Choose a group of people; randomly assign different
of education, by how much will his or her wage increase?” makes it independent (and therefore
amounts of education to them (infeasable!); compare
uncorrelated) of other factors that
Implicit assumption: all other factors that influence wages such as wage outcomes. influence wages.
experience, family background, intelligence, and so on are held
fixed.
Problem without random assignment, amount of
education is related to other factors that influence wages
(e.g. intelligence).
Effect of Law Enforcement on City Crime Levels Infeasible Experiment:
Key point: "randomly assign,"
“If two cities are the same in all respects, except that city A has ten makes it independent (and therefore
Randomly assign number of police officers to a large
more police officers than city B, by how much would the two cities’ uncorrelated) of other factors that
number of cities. determine the crime rate.
crime rates differ?”
Implicit assumption: all other factors that influence crime such as
population characteristics, geographic location, and so on are held In reality, the number of police officers will be
fixed. determined by the crime rate, i.e., simultaneous
determination of police numbers and crime rate.
Effect of Minimum Wage on Unemployment Infeasible Experiment:
“By how much will unemployment increase if the minimum wage Key point: "randomly chooses," makes
Government randomly chooses minimum wage each
is increased by a certain amount (holding other things fixed)?” it independent (and therefore
year and observes unemployment outcomes. uncorrelated) of other factors that
Implicit assumption: all other factors that influence determine unemployment.
unemployment such as the demand for labor, prices, and so on
are held fixed. In reality, the level of the minimum wage will depend
on political and economic factors that also influence
unemployment.

se hace esto para tener efectos puros, es decir como cambia una variable "y" cuando cambia "x"

no importa que tan significativa sea su correlacion eso no implica causalidad

al momento de hacer una análisis de regresión se debe tener en claro si se hace un análisis de
correlación entre dos variables o de causa efecto

En un modelo de regresión siempre se va a tender a pensar que B1 mide la relación causa efecto
entre X y Y, lo cual no necesariamente es cierto, normalmente lo que se mide es la correlación, ,
deben haber condiciones especificas para decir que se mide la relación causa efecto entre X y Y

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