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The Nature of Econometrics and Economic Data

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19 views10 pages

The Nature of Econometrics and Economic Data

Uploaded by

Kashif javed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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The Nature of Econometrics

and Economic Data

What is Econometrics?

Why study Econometrics?

◼ Rare in economics (and many other areas without


labs!) to have experimental data

◼ Need to use nonexperimental, or observational,


data to make inferences

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Why study Econometrics?

◼ An empirical analysis uses data to test a theory or


to estimate a relationship

◼ Theory may be ambiguous as to the effect of


some policy change – can use econometrics to
evaluate government and business policy

Steps in Empirical Economic Analysis

◼ Construct a formal Economic Model

◼ Turn it into an Econometric Model

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Steps in Empirical Economic Analysis (An
Example of Utility Maximization)

Steps in Empirical Economic Analysis (An


Example of Utility Maximization)

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Types of Data – Cross Sectional

◼ Cross-sectional data is a random sample


(independent data)

◼ Each observation is a new individual, firm, etc.


with information at a point in time

◼ If the data is not a random sample, we have a


sample-selection problem

Types of Data – Cross Sectional (Example)

4
Types of Data – Time Series

◼ Time series data has a separate observation for


each time period – e.g. stock prices

◼ Since not a random sample, more needs to be


done in specifying empirical models for time
series data before theory or policy can be justified

◼ Trends and seasonality will be important

Types of Data – Time Series (Example)

avgmin: average minimum wage; avgcov: average


coverage rate; prunemp: unemployment rate; prgnp: gross
national product 10

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Types of Data – Pooled Cross Sections
and Panel
◼ Pool random cross sections and treat similar to a
normal cross section. Will just need to account
for time differences.

◼ Follow the same random individual observations


over time – known as panel data or longitudinal
data

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Types of Data – Pooled Cross Sections and Panel

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Types of Data – Pooled Cross Sections and Panel

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Types of Data – Pooled Cross Sections


and Panel
◼ The benefit of panel data is that having multiple
observations on the same units allows us to
control for certain unobserved characteristics of
individuals, firms, and so on

◼ A second advantage of panel data is that they


often allow us to study the importance of lags in
behavior or the result of decision making

14

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The Question of Causality

◼ Simply establishing a relationship between


variables is rarely sufficient
◼ The goal is to infer that one variable has a causal
effect on another variable
◼ If we’ve truly controlled for enough other
variables, then the estimated ceteris paribus effect
can often be considered to be causal
◼ Can be difficult to establish causality

15

Example: Returns to Education

◼ A model of human capital investment implies getting


more education should lead to higher earnings
◼ In the simplest case, this implies an equation like

Earnings =  0 + 1education+ u

16

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Example: (continued)

◼ The estimate of 1, is the return to education, but


can it be considered causal?
◼ While the error term, u, includes other factors
affecting earnings, want to control for as much as
possible
◼ Some things are still unobserved, which can be
problematic

17

Example: (continued)

18

9
Example: (continued)

Experience, Innate Ability 19

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