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Eco Assignment

Econometrics applies statistical and mathematical techniques to test economic hypotheses and estimate relationships. It differentiates between economic theory, economic/financial models, and econometric models, and follows a structured methodology for analysis. The document also discusses regression analysis, including the classical linear regression model, its assumptions, properties, and significance testing of estimated models.

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5 views4 pages

Eco Assignment

Econometrics applies statistical and mathematical techniques to test economic hypotheses and estimate relationships. It differentiates between economic theory, economic/financial models, and econometric models, and follows a structured methodology for analysis. The document also discusses regression analysis, including the classical linear regression model, its assumptions, properties, and significance testing of estimated models.

Uploaded by

henoksisayhenok8
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1. What is Econometrics?

Econometrics is the application of statistical and mathematical techniques to test


hypotheses and estimate relationships in economics. It transforms theoretical economic
models into tools for empirical analysis and policy evaluation.

2. Differences between Economic Theory, Economic/Financial Model, and


Econometric Model:

 Economic Theory: Explains how the economy works based on logical reasoning
(e.g., law of demand).
 Economic/Financial Model: A simplified representation of economic reality
using mathematical equations.
 Econometric Model: Combines theory and real data using statistical tools to
estimate economic relationships and test hypotheses.

3. Steps in Econometric Methodology:

1. Specify the economic model.


2. Formulate the econometric model.
3. Obtain data.
4. Estimate the parameters.
5. Evaluate the model.
6. Use the model for forecasting or policy.

4. Desirable Properties of Econometric Models:

 Unbiasedness
 Efficiency
 Consistency
 Simplicity and interpretability
 Goodness-of-fit (high R-squared)

5. Types of Data:

 Based on Source: Primary vs. secondary


 Based on Nature: Cross-sectional, time-series, panel data
 Based on Scope: Micro vs. macro data

Chapter II: Simple Linear Regression Model


6. Regression vs. Correlation:

 Regression: Examines cause-effect relationships and provides a predictive


equation.
 Correlation: Measures strength and direction of the linear relationship without
implying causation.

7. Assumptions of the Classical Linear Regression Model (CLRM):

1. Linearity
2. Zero mean of error terms
3. Homoscedasticity (constant variance)
4. No autocorrelation
5. Exogeneity (independence of errors and regressors)
6. Normality (for inference)

8. Properties of CLRM:

 BLUE (Best Linear Unbiased Estimator)


 Efficiency and consistency
 Asymptotic normality

9. Model: 𝑌𝑖 = α + βX + 𝜀 – Deriving Parameters:


Using OLS (Ordinary Least Squares):

 β^=∑(Xi−Xˉ)(Yi−Yˉ)∑(Xi−Xˉ)2\hat{\beta} = \frac{\sum (X_i - \bar{X})(Y_i - \


bar{Y})}{\sum (X_i - \bar{X})^2}β^=∑(Xi−Xˉ)2∑(Xi−Xˉ)(Yi−Yˉ)
 α^=Yˉ−β^Xˉ\hat{\alpha} = \bar{Y} - \hat{\beta}\bar{X}α^=Yˉ−β^Xˉ

10. Model: 𝑌𝑖 = βX + 𝜀 – Deriving Parameters:


This model has no intercept. The OLS estimate:

 β^=∑XiYi∑Xi2\hat{\beta} = \frac{\sum X_i Y_i}{\sum X_i^2}β^=∑Xi2∑XiYi

Question 11
a) Estimate the food function:

Based on the data provided (GNP as X and food demand as Y), a simple linear regression was
performed. The estimated food function is:
Y = -3.115 + 0.200X

This equation means that for every 1-unit increase in GNP, the food demand increases by
approximately 0.200 units.

b) Coefficient of determination (R²), Explained and Unexplained variation:

The R-squared (R²) value is 0.751, indicating that 75.1% of the variation in food demand is
explained by GNP. The explained variation is 16.22, while the unexplained variation (residual
sum of squares) is 5.38.

c) Standard error and significance test at 5% level:

Standard error of β is 0.0408.


t-statistic = 4.911, and the p-value = 0.0012.

At the 5% significance level (critical t ≈ 2.306), the t-statistic is greater than the critical value, and
the p-value is less than 0.05. Therefore, the coefficient of GNP is statistically significant.

Question 12
The regression model is: Y = α + βX + ε

Using the data, the estimated regression equation is:


Y = -3.115 + 0.200X

Testing the significance of X at 95% confidence:


a) Standard error of β: 0.0408 (small, indicating precision)
b) t-statistic: 4.911 > 2.306 (significant)
c) 95% Confidence Interval for β: [0.106, 0.294] (does not contain zero)
Thus, GNP (X) significantly influences food demand.

Question 13
The model: LnGDP = α + βLnMS + ε

Based on the STATA output:


LnGDP = 0.534 + 1.126 LnMS

Interpretation:

- R-squared = 0.9904 ⇒ 99.04% of the variation in GDP is explained by MS.


- A 1% increase in Money Supply (MS) results in a 1.126% increase in GDP.

Testing significance of MS (X):


b) t-statistic: 64.37 >> 1.96 ⇒ highly significant
a) Standard Error: 0.0175 (very low, precise estimate)

c) 95% Confidence Interval: [1.091, 1.162] ⇒ does not include zero


d) p-value: 0.000 < 0.05 ⇒ strongly significant

Conclusion: Money Supply has a significant and positive effect on GDP.

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