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Lecture 1 - Econometrics 1 - Nature of Econometrics

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125 views23 pages

Lecture 1 - Econometrics 1 - Nature of Econometrics

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kirill.bail00
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Econometrics I

Lecturer: Arman Olzhabayev


KAZGUU University – Spring 2019

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Content of the Course

Chapter 1: Introduction
Chapter 2: Probability and Statistics
Chapter 3: The Nature of Econometrics
Chapter 4: Simple Regression Analysis
Chapter 5: Residual Statistics
Chapter 6: Hypothesis Testing
Chapter 7: Multiple Regression
Chapter 8: Alternate Functional Forms
Chapter 9: Dichotomous Variables
Chapter 10: Properties of Ordinary Least-Squares Estimators
Chapter 11: Multicollinearity
Chapter 12: Heteroskedasticity
Chapter 13: Serial Correlation
Chapter 14: Time-Series Models
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Textbooks

• MAIN TEXTBOOK: A Guide to Basic


Econometric Techniques. Routledge Taylor &
Francis Group, 2015.
• Jeffrey M. Wooldridge. Introductory
Econometrics. A Modern Approach (2013).
South-Western, Cengage Learning.
• Abdey. J.S., Statistics 1. A Guide Study (2011). University of
London, London School of Economics and Political Science.
• Магнус Я.Р., Катышев П.К., Пересецкий А.А. Эконометрика.
Начальный курс: учебник.-М.: Дело, 2005.

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Chapter 1

THE NATURE OF
ECONOMETRICS

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1.1 What is econometrics?
• Econometrics means “economic measurement.”
– Gathering data, generating economic statistics such as gross domestic
product and the consumer price index could be considered econometrics.
• Econometrics is testing economic hypotheses with statistical
techniques.
• Henri Theil: “Econometrics is concerned with the empirical
determination of economic laws” (Theil 1971, p. 1).

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1.2 Econometric Modelling

• Econometrics combines economics, statistics, and


mathematics
– Empirically deriving economic laws
– Use observations to get quantitative economic interrelations.
• Econometrician is doing as well following:
– Formalize econometric models based on economic theory or
empirical data
– Estimate parameters of models
– Make forecasts and calibrate the models for better accuracy of
the results
– Give recommendations to policy makers

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1.3 Example of Econometric Model

С – consumption of a food per capita in a certain year

Y – real income per capita in the same year

Р – price index of the food adjusted by cost-of-living index

This is a behavioral equation

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1.4 Questions entailing Hypothesis

• Is there any variable, which we should include in the


equation?
• Is there any variable we should exclude from the equation?
• Are the data you have correct?
• Is your model linear? Is the theory behind true?
• Is your model complete?
• Micro vs. Macro?
• Static vs. Dynamic?

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2.1 Types of Econometric Models

• Time-series models

• Regression models with one equation

• System of equations

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2.2 Time-series models

• Trend Models: 𝑦(𝑡)=𝑇(𝑡)+𝜀𝑡, where 𝑇(𝑡) is time trend of given


functional form like 𝑇(𝑡)=𝑎+𝑏𝑡, 𝜀𝑡 – stochastic component

• Seasonal: 𝑦(𝑡)=𝑆(𝑡)+𝜀𝑡, where 𝑆(𝑡) – regular or seasonal


component, 𝜀𝑡 – stochastic component

• Trend and seasonal: 𝑦(𝑡)=𝑆(𝑡)+𝑇(𝑡)+𝜀𝑡 – additive or


𝑦(𝑡)=𝑆(𝑡)𝑇(𝑡)+𝜀𝑡 – multiplicative

• AR, MA, ARIMA etc.

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2.3 Regression model with one
equation
• 𝑓(𝑥, 𝛽)=𝑓(𝑥1,…,𝑥𝑘, 𝛽1,…,𝛽𝑛 ), where где 𝑥1,…,𝑥𝑘 are independent
variables, and 𝛽1,…,𝛽𝑛 - parameters.

• The most common type of econometric models

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2.4 System of equations

▪ - Supply

▪ Demand

▪ - Equilibrium

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2.5 Types of Data

• Cross-sectional data – Information on many units at a point in


time.

• Time-series data – Information on one unit over time.

• Panel data – Information on more than one unit over time. It


is a combination of cross sectional and time-series data.

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3.1 Econometric Methodology
• John Meynard Keynes’ Law of Consumption:

“The fundamental psychological law, upon which we are entitled to


depend with great confidence both a priori from our knowledge of
human nature and from the detailed facts of experience, is that men
are disposed, as a rule and on average, to increase their consumption
as their income increases, but not by as much as the increase in
income” (Keynes 1936, p. 96).

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3.2 Econometric Methodology
1. State the theory, law, or hypothesis

2. Specify the econometric model:

It means writing the idea in mathematical form

CONS = 0 + 1 INC + u

u - the error term which is explicit recognition that the


relationship is not exact.

Keynes’ law implies that 0 < 1 < 1. That way if INC increases
by 1 dollar, CONS will increase by 1 dollars.

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3.3 Econometric Methodology
3) Collect the data

Cross-sectional
CONS and INC for each household in 2011
Time-series
CONS and INC for the entire nation
over the years.

Panel
Pool cross-sectional and time-series
data

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3.4 Econometric Methodology

Using the time-


series data from
1960 to 2011 we
can graph the
numbers

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3.5 Econometric Methodology
4) Estimate the parameters of the model

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3.6 Econometric Methodology
5) Test the theory, law, or hypothesis

By OLS technique

CONS = -1216 + 0.96 INC + u

5) Forecast with the model

in 2010 INC = $32,335.


CONS = -1216 + 0.96 INC = -1216 +.96 * $32,335 =
$29,871.

The actual value of CONS in 2010 is $29,871.


The forecast error u = $29,687 - $29,871 = -$184.

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3.7 Different Applications

• Did legalization of abortion lower the crime rate?


• Is a backyard swimming pool more dangerous to little children
than a gun?
• Do street level drug dealers make less than the minimum
wage?
• Biometrics, psychometrics, and sociometrics

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Terms

• Econometrics – The empirical determination of economic laws,


theories, and hypotheses.

• Error term (residual or disturbance) – variable attached to an


econometric model, which captures the difference between
the observed value of the Y-variable and the value predicted
by the econometric model.

• Ordinary least-squares – an estimating technique to find the


structural parameters of an econometric model. This
technique minimizes

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