act-671 introduction econometrics-2012

7/28/2019 ACT-671 Introduction Econometrics-2012

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ACT 671: Econometrics-I

By

Professor Dr. Mudassir UddinM.Sc. (Karachi)

M.Phil. (Karachi)M.Sc. (Oxford)

PhD (Aberdeen)


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Syllabus: Applied 617: Econometrics-I

a) Basic concept of Econometrics. General Linear Statistical Models. LeastSquares Maximum Likelihood Method of estimation. Point and interval

estimation. Statistical properties of estimation. Prediction and degree ofexplanation. Restricted Maximum Likelihood Estimation.

b) Non-linear Regression Model: Nonlinear least squares and non-linearmaximum likelihood estimation. Functional Form: Box-Coxtransformation. Estimation of Cobb-Douglas and CES production

functions. Newton- Raphson Algorithm.

c) Statistical Model Selection: Model specification. Some variable selectionrules; R-square, Cp, AIC, SC and unconditional mean squared errorcriteria.

d) Dummy variables and varying parameters models: Use of dummyvariables in estimation. Testing for a change in the location vector.


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Text Book:Wooldridge, J.M. (2002). Introductory

Econometrics, (2nd Edition) MIT Press

Reference Books:

Damodar N. Gujrati (2003) Basic Econometrics.McGraw-Hill.

(.)Greene, W.H. (2003) Econometrics Analysis.

(5th Edition), Pearson Education, Inc.

Maddala, G.C. (2002) Introduction toEconometrics, (3rd Edition), Wiley


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What is Econometrics?

The wordEcono means Economic Activity and Metricsmeans measurements. The statistical and applied field that

attempts to test Economic Theory using real world data.

Thus Econometrics is the unification ofeconomic theory,

mathematical economicsandstatistical methods.

It is the branch ofeconomics that applies statisticalmethods to the empirical study ofeconomic theoriesand relationships.


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Econometrics concerned with the empericalestimation of economic relationships. Its

foundations are based on probability andmathematical statistics and it goes beyondthe conventional statistical methods.

Thus, econometrics is the application ofstatistical and mathematical methods in the

field of economics to test and quantifyeconomic theories and the solutions toeconomic problems


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Econometrics = economicmeasurement

Used to:

Estimate the magnitude of quantitativerelationships among economic variables

Test economic hypotheses

Forecast future outcomes

Econometrics


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Definitions of Econometrics

study of the methods and proceduresthat can be used to determine numericalvalues for economic relationships

--- Johnson et. al.

quantitative analysis of actualeconomic phenomena based on theconcurrent development of theory and

observation, related by appropriatemethods of inference---Samuelson, et. al.


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aims at a conjunction of economictheory and actual measurements, using

the theory and techniques of statisticalinference as a bridge pier---Haavelmo

blends economic theory, statistics,mathematics, and research philosophyto measure economic relationships

---Johnson et. al.what econometricians do

---Goldberger


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Econometrics applies mathematical andstatistical methods to analyze data related toeconomic models. For example, a theory may

hypothesize that a person with more educationwill on average earn more income than personwith less education holding everything elseequal. Econometric estimates can estimate the

magnitude and statistical significance of therelation. Econometrics can be used to drawquantitative generalizations. These include

testing or refining a theory, describing therelation of past variables, and forecastingfuture variables.

. Hashem, M. Pesaren (1987)


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Economic

Theory

Mathematics

Deterministic

Economic

Model

Statistical Theory

Statistical

Model

Data

Computing

Estimates &

Inferences

Conclusions

Econometrics as a Process


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Why study Econometrics?

Rare in economics (and many other areaswithout labs!) to have experimental data

Need to use non experimental, orobservational, data to make inferences

Important to be able to apply economictheory to real world data


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Objectives of Econometrics

Structural AnalysisQuantitative measurements of economicrelationships.

ForecastingPrediction of quantitative values ofeconomic variables.

Policy EvaluationSelection of suitable policy among variousalternates.


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Understanding Economic

RelationshipsGovt.

budget

Stock Index

trade

deficit Discount Rate

by Govt.

capital gains tax

rent

control

laws

short term

treasury bills

power of

labor unions

crime rate

inflation

unemployment

money supply


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economic theoryeconomic data }

economicdecisions

To use information effectively:

Econometrics helps us to combine

economic theory and economic data.

Economic Decisions


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demand,qd, for an individual commodity:

qd = f( p, pc, ps, i )

supply,qs, of an individual commodity:

qs = f( p, pc, pf)

p = own price; pc = price of complements;

ps = price of substitutes; i = income

p = own price; pc = price of competitive products;

ps = price of substitutes; pf= price of factor inputs

demand

supply


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Types of Model

ModelMathematical

Model

Statistical

Model

Econometrics

Model

A model is an idealized

description of a reallife problem or situation


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Mathematical Model

It is a description of idealized relationshipbetween mathematical variables in a real lifesituation. The model describes exact

relationships, deterministic and reversible.Example:

Y= +X

Use:In biological sciences, social sciences etc.

Limited Scope in economics.

Brief historical development

Here, both variables

X and Y are free

from errors


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Statistical ModelA statistical model is based on the observation.It is

representation of exact relationship betweenmeasurable characteristics in a real life situation. Themodel describes averages relationship. Neither themodel is deterministic nor reversible. Also, therelationship is not exact.

Example: Y = + X + e

E[Y/X] = + X

Y: is subject to errors X: is free from errors

Use:

Brief historical development

Response

Variables

Explanatory

Variables


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Econometric Model

It is appropriate representation of relationship

between measurable economic variables in a real lifesituation. e.g. Production theory, demand theory,financial theory, etc. The model describes anapproximate relationship, indeterminist and notreversible.

Example: Yt= +Xt

State Yt and Xt will be subject to errorsYt = Endogenous VariablesXt = Exogenous VariablesUse:Brief historical description

Demand

Function

Price

Income


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Economic Model vs. Statistical Model

Adding a random error and functionalform converts an economic model into astatistical model, which gives a basis forstatistical inference and economicprediction.


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Methodology of Econometrics

Three basic steps are properly combined toachieve the above stated objectives.

1. Specification to economic phenomenon(Econometric Model)

2. Observation of economic phenomenon(Economic Data)

3. Application of statistical and econometricmethods


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Econometrics relies heavily on oneparticular statistical method which is

regression analysis.Exposition of regression analysis is thelogical beginning of econometrics.

Methodology of Econometrics


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Types of DataCross Sectional

Cross-sectional data is a random sample

Each observation is a new individual, firm,

etc. with information at a point in time

If the data is not a random sample, we have

a sample-selection problem


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Types of Data

Panel or Longitudinal

Can pool random cross sections and treat

similar to a normal cross section. Will just

need to account for time differences.

Can follow the same random individual

observations over timeknown as paneldata or longitudinal data


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Types of DataTime Series

Time series data has a separate observation

for each time periode.g. stock prices

Since not a random sample, different

problems to consider

Trends and seasonality will be important


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The Question of Causality

Simply establishing a relationship between

variables is rarely sufficient

Want to the effect to be considered causalIf weve truly controlled for enough other

variables, then the estimated ceteris paribus

effect can often be considered to be causalCan be difficult to establish causality


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Example: Returns to Education

A model of human capital investment implies

getting more education should lead to higher

earnings

In the simplest case, this implies an equation like

ueducationEarnings 10


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Example: (continued)

The estimate of1,is the return to

education, but can it be considered causal?

While the error term, u, includes otherfactors affecting earnings, want to control

for as much as possible

Some things are still unobserved, whichcan be problematic


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Uncertainty regarding an outcome.Relationships suggested by economic theory.

Assumptions and hypotheses to be specified.Sampling process including functional form.Obtaining data for the analysis.Estimation rule with good statisticalproperties.

Fit and test model using software package.Analyze and evaluate implications of theresults.Problems suggest approaches for further

research

The Practice of Econometrics

act-671 introduction econometrics-2012

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