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Econometrics 4

This lecture introduces econometrics, focusing on causality and the ceteris paribus assumption in economic analysis. It discusses the challenges of establishing causal relationships, particularly in the context of education's impact on wages, and presents the simple linear regression model as a tool for analysis. The lecture emphasizes the importance of holding other factors constant to accurately infer causal effects.

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21 views14 pages

Econometrics 4

This lecture introduces econometrics, focusing on causality and the ceteris paribus assumption in economic analysis. It discusses the challenges of establishing causal relationships, particularly in the context of education's impact on wages, and presents the simple linear regression model as a tool for analysis. The lecture emphasizes the importance of holding other factors constant to accurately infer causal effects.

Uploaded by

manas.juve
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lecture 4

Defining Econometrics, Economic Models, and Econometric Models

Introduction to Econometrics
BSc Eco 2023, Spring 2025
Instructor: Sunaina Dhingra
Email-id: [email protected]
Lecture Date: 13th February
Causality and Ceteris Paribus

• Most econometric analysis concerns itself with tests of economic theory or evaluation of policy
• goal is usually to infer the effect of one variable on another
• does education have a causal effect on wages?
• finding an association between variables is only suggestive, but establishing a causality is compelling
• Recall the notion of ceteris paribus: effect of one variable on another holding everything else constant/‘other things equal’
• effect of changing the price of a good on its quantity demanded while holding other factors like income, prices of
other goods, tastes etc fixed
• Notion of causality is similar
• critical for policy analysis
• does one week of job training, while all other factors are held constant, improve worker’s productivity and in-turn
wages?
• if we succeed in holding all other relevant factors fixed, we can find a causal impact of job training on wages
• This is a difficult task
• Key question in most econometric/empirical research is thus
• Have enough other factors been held fixed to make a case for causality?

• M
Example
Measuring returns to education

• Economists are often interested in answering the question


• If a person is chosen from a population and given one more year of education, by how much will his/her
wage increase?
• Implicit assumption here is: holding everything else (family background, intelligence etc.) constant
• M
Problem
Why are causal questions harder to answer?
Conditional Distribution: Using Expectation
Notation
• Expected value of a random variable x, E(x)=μ𝑥
• E(wage| education=10) = 3.8
• E(wage| education=16)=16
A Simple Linear Regression
Model
Introduction

• y: dependent variable/explained variable/predicted variable/response


variable/regressand
• x: independent variable/explanatory variable/control variable/predictor
variable/regressor variable
• Simple linear regression model:
𝑦𝑖 = β0 + β1 𝑥𝑖 + μ𝑖 −−−−− − 1
• Population regression function or true model
• β0 + β1 𝑥𝑖 : deterministic component
• μ𝑖 : nonsystematic/random component
Components of Simple Linear Regression
Model Using an Example

The STATA commands used:


Equation of a Straight Line

The equation of a straight line in slope intercept form:


y = mx + c ---------(2)

where,
y = variable on the vertical axis
X = variable on the horizontal axis
m = slope
c = vertical intercept
E[wage|education]: Straight Line Equation
Form
E[wage|education] = β0 + β1 𝑒𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛−−−−−−−−−(3)

where,
𝛽0: intercept
𝛽1: slope parameter

E[wage|education] = -0.91 + (0.54) x-------- (4)


The STATA command used:
Simple Linear Regression: Notation
E[y|x] = β0 + β1 𝑥 -----------------(5)

The STATA command used:


Understanding the Disturbance Term : μ
𝑤𝑎𝑔𝑒𝑖 = E[wage|education]+μ𝑖 −−−−−−− −(6)

The STATA command used:

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