ECONOMETRICS

INTRODUCTION TO
STATA
COURSE INSTRUCTOR: SYEDA FATIMA JAFFERY
TIME DURATION:3 HOURS
LECTURE NO:
Agenda:
Discussion about Econometrics.
Why we study Econometrics.
Practical implications of Econometrics and Methodology
Practical examples
Anatomy of an econometric model
Econometrics:
• Econometrics is a branch of economics that applies
statistical and mathematical methods to analyze
economic data. It is used to test hypotheses, estimate
economic relationships, and forecast future trends.
• Econometrics helps economists understand and
quantify how different factors (like prices, income,
policies) affect economic outcomes (like consumption,
employment, GDP).
• In simple terms, econometrics turns economic theories
into practical tools by using data to measure and test
these theories.
In simple terms, econometrics turns economic
theories into practical tools by using data to
measure and test these theories. How?
• Econometrics turns economic theories into practical tools by taking the following steps:
• Start with an Economic Theory:
• For example, a theory might suggest that an increase in income leads to an increase in spending.
• Build a Mathematical Model:
• The theory is expressed as a mathematical equation.
• For example, Spending=α+β×Income = alpha + beta times {Income}
• Spending=α+β×Income, where β\betaβ represents the relationship between income and spending.
• Collect Data:
• Real-world data is collected, such as income and spending information from a sample of households.
• Estimate the Model:
• Using statistical methods, econometrics estimates the values of the parameters (like β\betaβ) in the model to
see how strongly income affects spending.
• Test the Theory:
• The estimated model is used to test whether the theory holds true in the real world. For example,
econometrics can show if the increase in income is statistically significant in increasing spending.
• Make Predictions:
The model can then be used to predict future outcomes, like how much spending might increase if income
rises by a certain amount.
• In short, econometrics uses data to measure how well economic theories match reality and to make informed
predictions based on those theories.
I.3 Methodology of
Econometrics
• How do econometricians proceed in their analysis
of an economic problem?
• That is, what is their methodology?
• Although there are several schools of thought on
econometric methodology, we present here the
traditional or classical methodology, which still
dominates empirical research in economics and
other social and behavioral sciences.
Traditional Econometric
Methodology proceeds
• Broadly speaking, traditional econometric methodology
proceeds along the following lines:
• 1. Statement of theory or hypothesis.
• 2. Specification of the mathematical model of the theory.
• 3. Specification of the statistical, or econometric, model.
• 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
Anatomy of Econometric Model:
Practical Example:
1. Set Up the Problem
•Theory: Higher income leads to higher spending.
•Model: Spending=α+β×Income+ϵ
•alpha + beta times {Income} + epsilon
•Spending=α+β×Income+ϵ
•Objective: Estimate β to see how much spending changes with
income.
2. Prepare the Data
•Load the Dataset: Suppose you have a dataset named
household_data.dta
•with variables income and spending.
•Example Command:
In stata
regress y x
Interpretation of results:
• For the period 1960–2005 the slope coefficient (i.e., the
MPC) was about 0.72, suggesting that for the sample
period an increase in real income of one dollar led, on
average, to an increase of about 72 cents in real
consumption expenditure.
• We say on average because the relationship between
consumption and income is inexact; as is clear from
Figure I.3, not all the data points lie exactly on the
regression line.
• In simple terms we can say that, according to our data,
the average, or mean, consumption expenditure went up
by about 72 cents for a dollar’s increase in real income.
Explanation:
• As noted earlier, Keynes expected the MPC to be positive
but less than 1.
• In our example we found the MPC to be about 0.72. But
before we accept this finding as confirmation of Keynesian
consumption theory, we must enquire whether this
estimate is sufficiently below unity to convince us that this
is not a chance occurrence or peculiarity of the particular
data we have used.
• In other words, is 0.72 statistically less than 1? If it is, it
may support Keynes’s theory. Such confirmation or
refutation of economic theories on the basis of sample
evidence is based on a branch of statistical theory known
as statistical inference (hypothesis testing).
Forecasting or Prediction
If the chosen model does not refute the hypothesis or
theory under consideration, we may use it to predict the
future value(s) of the dependent, or forecast, variable Y on
the basis of the known or expected future value(s) of the
explanatory, or predictor, variable X.
To illustrate, suppose we want to predict the mean
consumption expenditure for 2006.
The GDP value for 2006 was 11319.4 billion dollars.
Putting this GDP figure on the right-hand side of Eq., we
obtain:
Yˆ 2006 = −299.5913 + 0.7218 (11319.4) = 7870.7516
or about 7870 billion dollars.
Thus, given the value of the GDP, the mean, or average,
forecast consumption expenditure is about 7870 billion
Summary Commands:

Here’s a quick summary of the key commands:

In Stata
use household_data.dta, clear
summarize spending income
scatter spending income
regress spending income
predict yhat
This hands-on approach will help students grasp
the core concepts of econometrics while learning
how to implement them using Stata.