12/10/2023

Introduction to Econometrics (Course No. ECON 304)

3rd Year BSS (Honours)
Department of Economics
December 2023 – July 2024

Dr. Tarequl Hasan Chowdhury

Professor
Department of Economics
University of Chittagong
Contact email: [email protected]

Main Text Book:

 Basic Econometrics (4th or the latest edition) by Damodar N. Gujarati.

Recommended Books:
 1) Introductory Econometrics – By Wooldridge, J.
 2) Principles of Econometrics (4th edition) by Hill, Griffiths, and Lim

1
 12/10/2023

What is econometrics?
• Econometrics means “economic measurement” (the scope of
econometrics is much broader, though).
• “…. when you can measure what you are speaking about, and express it
in numbers, you know something about it; but when you cannot measure
it, when you cannot express it in numbers, your knowledge is of a meagre
and unsatisfactory kind….”. William Thomson (Lord Kalvin) (Irish
Mathematical Physicist).

What is econometrics? (cont.)

• “Econometrics involves the application of the mathematical statistics to economic
data to lend empirical support to the economic mathematical models and obtain
numerical results” (Gerhard, 1968).
• “Econometrics may be defined as the social science in which the tools of economic
theory, mathematics, and statistical inference are applied to the analysis of
economic phenomena”. (Goldberger 1964).
• “Econometrics is concerned with the empirical determination of economic laws”
(Theil 1971).
• “Econometrics is based upon the development of statistical methods for estimating
economic relationships, testing economic theories, and evaluating and
implementing government and business policy” (Wooldridge 2013)

2
 12/10/2023

What is Econometrics? (cont.)

• Econometrics combines economic theory and economic data to answer “how

much” questions.
• Thus, studying econometrics fills the gap between being “a student of
economics” and being “a practicing economists”.
• Nowadays econometrics is widely used as a research tool in such discipline as
finance, accounting, sociology, political science, medicine and so on.

What is Econometrics? (cont.)

3
 12/10/2023

Economic Mathematical
Theory Economics

Econometrics

Economic Mathematical
Statistics Statistics

Why is econometrics a separate discipline?

• How Does Econometrics Differ From Economic Theory?
• Economic theory: qualitative results— If price of a commodity goes up, Qd goes
down, ceteris paribus.

• Econometrics: quantitative results— price elasticity of demand for milk =

-.75

4
 12/10/2023

How Does Econometrics Differ From Economic Statistics?

• Statistics: Economic statistics is mainly concerned with collecting,

processing, and presenting economic data in the form of charts
and tables.
• “Let the data speak for themselves.”

• Econometrics: “What do we learn from economic theory AND the

data at hand?”

How Does Econometrics Differ From mathematical Economics?

• The main concern of mathematical economics is to express economic theory

in mathematical form without regard to measurability or empirical verification
of the theory.

• Econometrics is mainly interested in the empirical verification of economic

theory.

5
 12/10/2023

How Does Econometrics Differ From mathematical statistics?

• Mathematical statistician work with experimental data

• Data collected in controlled experiment or in laboratory environment as in
natural science.
• Econometricians use non-experimental Data
• These data are not accumulated through controlled experiments on
individuals, firms or the segment of the economy.
• Researchers are passive collectors of the data – they do not have any
control over the data. That’s why, non-experimental data also called
observational or retrospective data.
• Collecting experimental data in social sciences are often impossible,
prohibitively expensive and morally unacceptable.

Types of data

• In the social sciences the data that one generally obtains are nonexperimental
in nature that is not subject to the control of the researcher.
• Three types of data:
– Cross-sectional data
– Time series data
– Panel, or longitudinal Data

6
 12/10/2023

Cross-sectional data
• Data collected from different entities in a given point of time.
person GPA study
hours/week

1 3.5 10

2 2.7 8

3 1.9 9

4 2.3 5

5 2.0 8

6 2.2 6

7 2.5 3

Time series data

• A time series is a set of observations on the values that a variable takes at
different times.

Person 1 GPA study

hours/week

1st year (2019) 3.5 10

2nd year (2020) 2.7 8

3rd Year (2021) 1.9 9

4th Year (2022) 2.3 5

7
 12/10/2023

Time series data (example)

The frequency of
time may be year,
quarter, month,
week or day.

Panel Data
• In Panel data the same cross-sectional unit is surveyed over time.

Person/e time GPA study

ntity hs/week

1 2010 2.5 9
1 2011 2.7 7
1 2012 2.3 6
2 2010 1.9 8
2 2011 3.1 12
2 2012 2.4 6
3 2010 2.0 5
3 2011 3.9 11
3 2012 1.2 2

8
 12/10/2023

Pooled data
• Pooled data occur when we have a “time series of cross sections,” but the
observations in each cross section do not necessarily refer to the same unit.

Person/ time GPA study Person/ time GPA study

entity hs/week entity hs/week
1 2000 2.5 9 4 2010 2.4 7

2 2000 2.7 8 5 2010 2.0 5

3 2000 2.3 6 6 2010 3.9 11

7 2010 1.2 2

Pooled data
Person/entity time GPA study
hs/week
1 2000 2.5 9

2 2000 2.7 8

3 2000 2.3 6

4 2010 2.4 7

5 2010 2.0 5

6 2010 3.9 11

7 2010 1.2 2

9
 12/10/2023

Sources of Data
• Primary data – Data collected and provided by the researcher(s), and used
for the first time (Survey data).
• Secondary data – Data provided by organisations and other researchers,
• Government organisation - Bangladesh Bureau Statistics (BBS) – socioeconomic
data about Bangladesh
• International organisations - The World Bank or IMF (socioeconomic data of its
member country
• Bloomberg – business and market news data

Types of variables

Variable

Quantitative Qualitative (or

or Numerical Nominal or
categorical)

Discrete (whole
number, such as no. Continuous
of Siblings, No. of (age, profit) Non-ordered
motor accidents) Ordered (Job
(gender, colour
satisfaction)
of the car)

10
 12/10/2023

Measurement Scales of variables

• Four kinds of measurement scales of varaibles.
• Ratio scale: X is a variable, taking two values X1 and X2.
• the ratio X1/X2 and difference (X2 – X1) are meaningful quantities
• There is a natural ordering of the values (X1<X2).
• Most of the quantitative variables fall into this category (GDP)
• Interval scale: Satisfies last two properties (difference and ordering) of the ratio
variable. Say, (2000 – 2005)
• Ordinal scale: Satisfies only natural ordering properties. Example, grading system,
life satisfaction.
• Nominal scale: Has none of the features of the ratio scale. Such as Gender,

Basic Concepts
• Variable – Denotes characteristics of items or individuals (age is a variable)
• Data – Observed values of the variables.
• Population – Consists of all the members of a group about which we want to draw a conclusion.
Example:
– CU wants to know the characteristics of the students studying Economics. Population in this case are all
the currently enrolled in the Economics Department.
– Effects of COVID – 19 on RMG workers in Chittagong. Population: All RMG workers in Chittagong.
• Census – collecting information about all the members in the population. But, it can be expensive
and time consuming.
• Sample – A representative part of the population
• Parameter – is a numerical measure that describes the characteristics of the population. If we are
interested in the age of the population, parameter is Population Mean age.
• Statistic – A numerical measure that describes the characteristics of the sample. Sample mean.

11
 12/10/2023

Classical Methodology of Econometrics

• 1) Statement of Economic Theory

• 2) Specification of the Mathematical Model of the Theory
• 3) Specification of the Econometric Model of the Theory
• 4) Obtaining the Data
• 5) Estimation of the parameters of the Econometric Model
• 6) Hypothesis Testing
• 7) Forecasting or Prediction
• 8) Using the Model for control or policy purposes

A caution about Economic Data

• The quality of data which are used in economics is often not that good.
1. Possibility of observational errors.
2. Approximations and round-offs.
3. Nonresponse to surveys may cause selectivity bias.
4. The sampling method used in obtaining the data may vary so widely that it might be very
difficult to compare them.
5. Economic data are generally available at a highly aggregate level. Such highly
aggregated data may not tell us much about the individual or micro-level units (GNP...).
6. Because of confidentiality, certain data can be published only in highly aggregate form
(health data...).

The researcher should always keep in mind that the results of research are only as
good as the quality of data.

12