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Chapter-1 Gujrathi

The document provides an overview of econometrics, defining it as the application of mathematical statistics to economic data for empirical support of economic theories. It outlines the methodology of econometrics, including theory formulation, model specification, data collection, estimation, hypothesis testing, forecasting, and policy application. The document emphasizes the distinction between econometrics and related fields like economic theory and statistics.

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7 views21 pages

Chapter-1 Gujrathi

The document provides an overview of econometrics, defining it as the application of mathematical statistics to economic data for empirical support of economic theories. It outlines the methodology of econometrics, including theory formulation, model specification, data collection, estimation, hypothesis testing, forecasting, and policy application. The document emphasizes the distinction between econometrics and related fields like economic theory and statistics.

Uploaded by

Javeria Javed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Econometrics

Javed Anwar
Basic Econometrics

Introduction:
What is
Econometrics?
Introduction
What is Econometrics?

 Definition 1: Economic
Measurement

 Definition 2: Application of the


mathematical statistics to economic
data in order to lend empirical support
to the economic mathematical models
and obtain numerical results
(Gerhard Tintner, 1968)
Introduction
What is Econometrics?

 Definition 3: The quantitative


analysis of actual economic
phenomena based on concurrent
development of theory and
observation, related by appropriate
methods of inference
(P.A.Samuelson, T.C.Koopmans and
J.R.N.Stone, 1954)
Introduction
What is Econometrics?
 Definition 4: The social science
which applies economics, mathematics
and statistical inference to the analysis
of economic phenomena (By Arthur S.
Goldberger, 1964)
 Definition 5: The empirical
determination of economic laws (By H.
Theil, 1971)
Introduction
What is Econometrics?
 Definition 6: A conjunction of
economic theory and actual
measurements, using the theory and
technique of statistical inference as a
bridge pier (By T.Haavelmo, 1944)

 And the others


Economic Mathematical
Theory Economics

Econometrics

Economic Mathematical
Statistics Statistics
Introduction
Why a separate discipline?
 Economic theory makes
statements that are mostly
qualitative in nature, while
econometrics gives empirical
content to most economic theory

 Mathematical economics
is to express economic theory in
mathematical form without empirical
verification of the theory, while
econometrics is mainly interested in
Introduction
Why a separate discipline?
 Economic Statistics is mainly
concerned with collecting, processing
and presenting economic data. It does
not being concerned with using the
collected data to test economic theories

 Mathematical statistics
provides many of tools for economic
studies, but econometrics supplies the
later with many special methods of
quantitative analysis based on economic
data
Economic Mathematical
Theory Economics

Econometrics

Economic Mathematic
Statistics Statistics
Introduction
Methodology of
Econometrics
(1) Statement
of theory or
hypothesis:

Keynes stated: ”Consumption


increases as income increases,
but not as much as the increase in
income”. It means that “The
marginal propensity to consume
(MPC) for a unit change in income
is grater than zero but less than
unit”
Introduction
Methodology of Econometrics

(2) Specification of the


mathematical model of
the theory
Y = ß 1+ ß2X ; 0 < ß 2< 1
Y= consumption
expenditure
X= income
ß1 and ß2 are parameters; ß1 is
intercept, and ß2 is slope coefficients
Introduction
Methodology of Econometrics
(3) Specification of the
econometric model of the
theory
Y = ß1+ ß2X + u ; 0 < ß2< 1;
Y = consumption expenditure;
X = income;
ß1 and ß2 are parameters; ß1is intercept and
ß2 is slope coefficients; u is disturbance
term or error term. It is a random or
stochastic variable
Introduction
Methodology of
Econometrics
(4) Obtaining Data
(See Table 1.1, page 6)

Y= Personal consumption
expenditure
X= Gross Domestic Product
all in Billion US Dollars
(4) Obtaining Data
Table 1.1
Year X Y

1980 2447.1 3776.3


1981 2476.9 3843.1
1982 2503.7 3760.3
1983 2619.4 3906.6
1984 2746.1 4148.5
1985 2865.8 4279.8
1986 2969.1 4404.5
1987 3052.2 4539.9
1988 3162.4 4718.6
1989 3223.3 4838.0
1990 3260.4 4877.5
1991 3240.8 4821.0
Introduction
Methodology of Econometrics
(5) Estimating the
Econometric Model
Y^ = - 231.8 + 0.7194 X (1.3.3)
MPC was about 0.72 and it means that
for the sample period when real
income increases 1 USD, led (on
average) real consumption
expenditure increases of about 72
cents

Note: A hat symbol (^) above one


variable will signify an estimator of
the relevant population value
Introduction
Methodology of Econometrics
(6) Hypothesis Testing
Are the estimates accord with the
expectations of the theory that is
being
tested? Is MPC < 1 statistically? If
so,
it may support Keynes’ theory.
Confirmation or refutation of
economic theories based on
sample evidence is object of
Introduction
Methodology of Econometrics
(7) Forecasting or
Prediction
 With given future value(s) of X,
what is the future value(s) of Y?
 GDP=$6000Bill in 1994, what is the
forecast consumption expenditure?
 Y^= - 231.8+0.7196(6000) =
4084.6
 Income Multiplier M = 1/(1 – MPC)
(=3.57). decrease (increase) of $1
in investment will eventually lead
Introduction
Methodology of Econometrics
(8) Using model for
control or
policy purposes
Y=4000= -231.8+0.7194 X  X  5882
MPC = 0.72, an income of $5882 Bill
will produce an expenditure of $4000
Bill. By fiscal and monetary policy,
Government can manipulate the
control variable X to get the desired
level of target variable Y
Introduction
Methodology of Econometrics
Figure 1.4: Anatomy of
economic modelling
• 1) Economic Theory
• 2) Mathematical Model of Theory
• 3) Econometric Model of Theory
• 4) Data
• 5) Estimation of Econometric Model
• 6) Hypothesis Testing
• 7) Forecasting or Prediction
• 8) Using the Model for control or policy
purposes
Economic Theory

Mathematic Model Econometric Model Data Collection

Estimation

Hypothesis Testing
Application
in control or
Forecasting policy
studies

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