Econometrics

01 Econometrics: Introduction

02 What is Econometrics?

03 Need for Econometrics?

Agenda

04 Types of Econometrics?

05 Data Sources and Types

 Econometrics: Introduction
Econometrics is defined by A. H. Studenmund as "the quantitative
measurement and analysis of actual economic and business
phenomena.

It is an integration of economics, mathematical economics and

statistics with an objective to provide numerical values to the
parameters of economic relationships.

Econometrics prime function is to convert the qualitative statements

into quantitative statements.
 What is Econometrics?
Econometrics is the quantitative application of statistical and
mathematical data, models, and theories to develop new economic
theories, test existing hypotheses, and forecast future trends.

Lawrence Klein, Ragnar Frisch, and Simon Kuznets are considered to

be the pioneers of econometrics and also won the Nobel Prize in
economics in 1971 for their contributions
 What is Econometrics?
It seeks to transform real-world data into statistical hypotheses and
then describes the results with the theory or theories in view for
common grounds. This means that these economic models are
converted to tools for economic policymaking

According to Stock and Watson “Econometric methods are used in

many branches of economics, including finance, labor economics,
macroeconomics, microeconomics, and economic policy.”
 What is Econometrics?
Econometrics converts qualitative statements into quantitative ones.
For instance, describing the positive relationship between two
variables,econometrics says:

“with every one dollar increase in disposable income, consumers’

spending increases by 90 cents”. This shows that it uses numbers rather
than concepts or theories to explain phenomena.
 What is Econometrics?
Which Statement is Correct?
Econometrics is the science of testing economic theories.
Econometrics is the set of tools used for forecasting future values of
economic variables, such as a firm’s sales, the overall growth of
the economy, or stock prices.
Econometrics is the process of fitting mathematical economic models
to real-world data.
Econometrics is the science and art of using historical data to make
numerical, or quantitative, policy recommendations in
government and business.
 Need for Econometrics?
The foremost windfall of econometrics is to test economic theories or
hypotheses provided by econometricians. The direct relationship
between consumption and income or the effect of the quantity
demanded of a certain commodity and its price can be tested using
econometric.
Econometrics provides a means to derive numerical estimates for the
variables of economic relationships. These numerical estimates are vital
for reaching economic-related decisions. For instance, a valid estimate
of the coefficient of the relationship between income and consumption
is a fundamental tool for policy-making.
 Need for Econometrics?
Econometrics is pertinent to forecast future economic trends which is
also a key tool for effective policy-making. If according to predictions
there is a high tendency of low inflation in the future, policymakers can
be proactive in their decisions.
Econometrics can help financiers and economists by making the best
financial decisions.
Econometrics facilitate the testing of statistical models, the
development of new theories, and the making of inferences.

Many decisions in business and economics require quantitative estimates of how a

change in one variable affects another variable.
 Need for Econometrics?

Quantitative Questions, Quantitative Answers

Question #1: Does Reducing Class Size Improve
Elementary School Education?
Question #2: Is There Racial Discrimination in the
Market for Home Loans?
Question #3: How Much Do Cigarette Taxes Reduce
Smoking?
Question #4: By How Much Will Indian GDP Grow
Next Year?
Types of Econometrics?
 Types of Econometrics?

Theoretical Econometrics

Theoretical Econometrics studies existing statistical

models to discover their properties and their values.
This is relevant in developing new statistical
procedures, useful in the field of economics, and are
not subject to changes in data.
 Types of Econometrics?

Applied Econometrics

Applied Econometrics is focused on converting qualitative

economic statements into quantitative statements using
econometric techniques.
It concerns itself with topics around the production of goods,
demand for labor, arbitrage pricing theory, and more.
Due to the variance of the data, applied econometrics changes
with time.
 Data: Sources
Experimental Versus Observational Data
• Experimental data come from experiments designed to evaluate a
treatment or policy or to investigate a causal effect.
Because of few financial, practical, and ethical problems, experiments in economics are relatively rare. Instead, most
economic data are obtained by observing real-world behavior.

• Data obtained by observing actual behavior outside an experimental

setting are called observational data. Observational data are
collected using surveys, such as telephone surveys of consumers, and
administrative records, such as historical records on mortgage
applications maintained by lending institutions.
Observational data pose major challenges to econometric attempts to estimate causal effects, and the tools of econometrics
are designed to tackle these challenges.
 Data Types
• Whether the data are experimental or observational, data
sets come in three main types:

 Cross-Sectional Data

 Time Series Data

 Panel Data.
 Data Types
Cross-Sectional Data

Data on different entities—workers, consumers, firms, governmental units, and so

forth—for a single time period are called cross-sectional data

• Cross-sectional data are data on one or more variables collected at a single point in
time.

For example, the data might be on: A poll of usage of Internet stock-broking
services
Data Types
 Data Types
Time Series Data
• Time series data are data for a single entity (person, firm, country) collected at
multiple time periods.
• Time series data, as the name suggests, are data that have been collected over a
period of time on one or more variables. Time series data have associated with
them a particular frequency of observation or collection of data points. The
frequency is simply a measure of the interval over, or the regularity with which, the
data are collected or recorded
Data Types
 Data Types
Panel Data
• Panel data (longitudinal data) are data for multiple entities in which each entity is
observed at two or more time periods.
• Panel data have the dimensions of both time series and cross-sections.

• For example, the data might be on: the daily prices of a number of blue chip stocks
over two years.
 Continuous and Discreet Data

• Continuous data can take on any value and are not

confined to take specific numbers; their values are

Nature of limited only by precision.

Data, • For example, the rental yield on a property could be

6.2%, 6.24% or 6.238%, and so on.
Information,
and • Discrete data can only take on certain values, which

Measurement are usually integers (whole numbers), and are often

defined to be count numbers.

• For example, the number of people in a particular bus

or the number of shares traded during a day. In these
cases, having 86.3 passengers in the bus or 58571/2
 Nature of
Data,
Information,
and
Measurement
 The principles of measurement (scaling) has three
characteristics:
Nature of 1. Numbers are ordered. One number is less than,
Data, equal to or greater than another number.
2. Difference between numbers are ordered. The
Information, difference between any pair of numbers is greater
than, less than or equal to the difference between

and any other pair of numbers.

3. The number series has a unique origin indicated by

Measurement the number zero.

• The combinations of these characteristics of order,

distance and origin provide the following widely
used classification of measurement scales:
Measurement
Scales
• Nominal scale: A scale of measurement for a
variable that uses a label (or name) to identify
an attribute of an element of the data set.

• Ordinal scale: A scale of measurement for a

variable that is used to rank (or order)
observations in the data set.

• Interval scale: A scale of measurement for a

variable in which the interval between
observations is expressed in terms of a fixed
standard unit of measurement.

• Ratio scale: A scale of measurement for a

variable that has interval measurable is
standard unit of measurement and a
meaningful zero, i.e. the ratio of two values is
meaningful.
 Measurement Scales
Nominal Scale
Nominal scale is usually used for obtaining personal data
such as gender, place of work, and so on, where grouping of
individuals or objects is useful.

Nominal scale is said to be least powerful among four scales

because this scale suggest no order or distance relationship
and have no arithmetic origin.

For example, shirt numbers in a football or cricket match are

measured at a nominal level. A player wearing a shirt
number 24 is not more of anything than a player wearing a
shirt number 12 and is certainly not twice the number 12.
 Measurement Scales
Ordinal Scale In ordinal scaling the numerical values are categorized to
denote qualitative differences among the various categories
as well as rank-ordered from best to worst, first to last,
numbered 1, 2, and so on.
The ordinal scale does not give any indication of the
magnitude of the differences among the ranks, i.e. this
scale implies a statement of ‘greater than’ or ‘less than’
without stating how much greater or less.
Ordinal numbers tell the position of an object rather than
their quantity.
 Measurement Scales
Interval Scale The interval scale not only classify individuals according to
certain categories and determines order of these categories;
it also measure the magnitude of the differences in the
preferences among the individuals.

Temperature (in Fahrenheit), the distance from 30–40 is

same as distance from 70–80. Interval scales hold no true
zero and can represent values below zero.
Interval scale is used when responses to various questions
that measure a variable can be determined on a five-point
(or seven-point or any other number of points) scale.
 Measurement Scales
The ratio scale has an absolute measurement point. Thus
Ratio Scale the ratio scale not only measures the magnitude of the
differences between points on the scale but also provides the
proportions in the differences.

It is the most powerful of the four scales because it has a

unique zero origin. For example, a person weighing 90 kg is
twice as heavy as one who weighs 45 kg. Since multiplying
or dividing both of these numbers (90 and 45) by any given
number will preserve the ratio of 2 : 1.

Classic examples of a ratio scale are any variable that

possesses an absolute zero characteristic, like age, weight,
height, or sales figures.
 MGMT 436L Computer
Lab – II (EViews and R)

Course 1. To understand the basics of EViews and its use for

analysis.
Objective 2. To learn to apply various formulas for analysis using
EViews.
3. To understand the basics of R and its applicability in data
analysis.
 MGMT 436L Computer
Lab – II (EViews and R)
EViews:
Overviews of the EViews Desktop: The EViews Desktop,
EViewsWorkfiles, EViews objects. Workfiles and Workfile
pages getting data into EViews: How EViews
Course understands/organizes data: The structure of a Workfile,
Content Creating blank Workfiles for three types of data structures,
Bringing data into blank Workfiles, Creating Workfiles by
reading data in EViews., Creating Workfile pages.
EViews Samples: refining your analysis: Changing the sample,
Key Sample functions and if statements.
Series and Groups: EViews data objects: Creating new Series
and Groups, Data analysis in one click: Series and Group menu
items, Auto-Series.
Estimation in EViews: a first look: Specifying and estimating
an Equation, Equation objects, Equation output, Multiple
regression analysis. Introduction to other EViews objects:
Graph objects, Table objects, Text objects, Spool objects.
 MGMT 436L Computer
Lab – II (EViews and R)
Advances in EViews:

Data manipulation: functions everyone should know: Basic

operators and mathematical functions, Descriptive statistic
Course functions, Statistical distribution functions, Time series
Content functions, Cumulative and moving statistic functions, Group
functions. Date functions: manipulating dated data: Basic
date functions.

Dummy variables: Creating dummy variables using Samples,

Creating dummy variables using date functions, Creating
dummy variables using other EViews functions.

Frequency conversion and data merging: Page links in

EViews, Frequency conversion: High to Low, Frequency
conversion: Low to High, General match-merge data
copying, Data match-merging.
 MGMT 436L Computer
Lab – II (EViews and R)
Advances in EViews:

Graphing data in EViews: Graphs and Graph objects, Basic

Course graphs of single and multiple series, Analytical graphs,
Content Categorical graphs, Basic graph customization

Analyzing your data in EViews: basic statistics: Calculating

basic statistics: Histograms, stats tables, stats by
classification, one-way and N-way tabulations, covariance
analysis, Simple hypothesis and distributional tests, Odds
and ends: the Series Proc menu (Generate by Classification,
Resample and Interpolate).
 MGMT 436L Computer
Lab – II (EViews and R)
Introduction to R programming:
Installation, getting Started R, RStudio,
Data Types in R: Constants, vectors, matrix, data frames,
lists, Data Handing in R, Working with functions, summary
Course measures,
Content Data Visualization using R : Base, lattice and ggplot
packages,
Statistical Analysis using R: Probability Distribution using R,
Statistical Analysis using R Hypothesis Testing –I Parametric,
Analysis of Variance : One way and two-way ANOVA,
Hypothesis Testing -II Non Parametric, Logistic Regression,
Reproducible research using Rstudio knitr and markdown
packages, Reproducible research using Rstudio: bookdown
packages and blogs, website, Time Series Analysis, Factor
Analysis.
 MGMT 436L Computer
Lab – II (EViews and R)

Learning  Use EViews for data analysis and interpretation

Outcomes
Use R for finding statistical results and future forecasting of

business

Apply the skill attained for better performance of their job

of analysis
 MGMT 436L Computer
Lab – II (EViews and R)
1. Griffiths, W. (2008). Using EViews for Principles of
Econometrics (1ed). Wiley, New Delhi.

Suggested 2. Agung, G.N. (2013). Panel Data Analysis using EViews(1

Readings ed). Wiley, New Delhi.

3. Wickham, H. (2016) R for Data Science: Import, Tidy,

Transform, Visualize, and Model Data, (1ed). "O'Reilly
Media, Inc.Delhi

4. Grolemund, G., (2014). Hands-On Programming with R:

Write Your Own Functions and Simulations, (1 ed),"O'Reilly
Media, Inc. Delhi