Introduction To Statistics

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EC114 Introduction to Quantitative Economics

1. Introduction to Statistics
Department of Economics
University of Essex
11/13 October 2011
EC114 Introduction to Quantitative Economics 1. Introduction to Statistics
2/18
Outline
Reference: R. L. Thomas, Using Statistics in Economics,
McGraw-Hill, 2005, Prerequisites 1 and 2.
1
Statistics in Economics
2
Descriptive Statistics
Statistics in Economics 3/18
Why Study Quantitative Economics?
In Economics, we make an argument using quantitative
evidence.
A historian might defend an argument using historical
quotations
Economists make arguments using quantities
e.g. Unemployment rose last year by 1 million because
GDP fell by 0.5%
We use statistics to interpret quantitative evidence
The good news is that knowledge of statistics pays very
well!
In Economics we use Statistics (and Econometrics) to
analyse and interpret economic data with a view to:
1
modelling economic relationships;
- What determines wages? Age, experience, occupation,
education?
2
testing economic theories;
- Are share price movements unpredictable?
3
identifying trends;
- Are global air temperatures rising?
4
forecasting/prediction;
- We predict GDP next year given different government tax
policies
5
making better decisions.
- Which assets should we buy?
The data we observe can be for different types of variable:
1
aggregate: relating to the whole economy or specic
sectors/regions, e.g. consumers expenditure,
producer price ination.
2
individual: relating to individual rms or households
e.g. household expenditure, rms investment
expenditure.
The data can be observed in different ways:
1
time series i.e. for a given variable over time,
e.g. consumers expenditure from 19552009;
2
cross section i.e. for a given variable at a particular
point in time, e.g. car rms investment in 2005;
3
panel data i.e. for a variable on individual units over
time, e.g. households expenditure in the U.K. from
19902009.
Descriptive Statistics 6/18
What can we learn from data? We learn little from looking
at a large set of numbers, so we attempt to summarise the
data using descriptive statistics.
Table P.1 in Thomas reports the yearly clothing expenditure
of 373 families and uses this data set to illustrate the use of
descriptive statistics try to follow what he does.
We shall use a smaller data set of 10 observations picked
from Table P.1, these being
2806, 1743, 3201, 2401, 3567, 1666, 2111, 2848, 1572,
2651
These are observations on a variable we shall denote X.
We shall use the index i to denote a generic observation
X
i
, where i takes on the values 1, 2, 3, . . . , 9, 10.
Hence X
1
= 2806, X
2
= 1743, . . . , X
9
= 1572, X
10
= 2651.
Measures of Central Tendency
What is a typical value for X in the data set?
The most common answer is to compute the (arithmetic)
mean, or average, of the values for X:
X =
X
1
+ X
2
+ . . . + X
9
+ X
10
10
=
24, 566
10
= 2, 456.6;
the typical clothing expenditure is 2,456.60.
In general, if we have n observations, we would write
X =
X
1
+ X
2
+ . . . + X
n1
+ X
n
n
=
n
i=1
X
i
n
.
The summation notation is very useful and the following
properties are worth learning:
1
If is a constant i.e. it does not vary and does not depend
on i, then
n
i=1
X
i
= X
1
+ . . . + X
n
=
n
i=1
X
i
,
n
i=1
= + . . . + (ntimes) = n.
2
If X and Y are two variables, with n observations on each,
then
n
i=1
(X
i
+ Y
i
) = (X
1
+ Y
1
) + . . . + (X
n
+ Y
n
) =
n
i=1
X
i
+
n
i=1
Y
i
.
The above properties can also be combined: if and are two
constants, then
n
i=1
(X
i
+ Y
i
) =
n
i=1
X
i
+
n
i=1
Y
i
=
n
i=1
X
i
+
n
i=1
Y
i
.
Sometimes the summation is written
n
i=1
or
i
or simply
when the range of summation is obvious.

For example, the sample mean may be written
X =
i
X
i
n
=
X
i
n
.
Another measure of the typical value is the median, M.
It is obtained by arranging the data in ascending order and
choosing the value in the middle.
If n is odd, then
M = X
(n+1)/2
e.g. if n = 125 then (n + 1)/2 = (125 + 1)/2 = 63 so that M
is the 63rd observation:
M = X
63
.
Note that there are 62 observations below M and 62
observations above M.
If n is even, M is the average of the two middle numbers:
M =
X
n/2
+ X
n/2+1
2
e.g. if n = 126 then n/2 = 63 and n/2 + 1 = 64 so that
M =
X
63
+ X
64
2
.
Putting our sample of 10 observations in ascending order:
1572 1666 1743 2111 2401 2651 2806 2848 3201 3567
Here, n = 10 and so n/2 = 5 and n/2 + 1 = 6; hence
M =
X
5
+ X
6
2
=
2401 + 2651
2
=
5052
2
= 2526.
A third measure of central tendency is the mode, which is
the most frequent observation.
In our sample of 10 clothing expenditures the mode has
little meaning because all the observations are different!
But when values are repeated in a data set the mode
depicts the most common value.
The mean is used most widely but can be distorted by
extreme values, in which case the median is more
meaningful.
Suppose the largest observation in our data set was not
3567 but 13567, which is an extreme value compared to
the other nine observations.
In this case the mean becomes 34,566/10=3,456.6 (larger
than all but the largest, extreme, observation) but the
median remains unchanged at 2526.
Measures of Variation
By how much do the observations vary around their central
value?
The variance is the mean squared deviation around the
mean.
Let x
i
denote the deviation of observation i from the mean,
X, i.e. x
i
= X
i

X.
The squared deviation is x
2
i
= (X
i

X)
2
, and the mean of
these (the variance) is
v
2
=
i
x
2
i
n
=
i
(X
i

X)
2
n
.
It is often easier to calculate
v
2
=
i
X
2
i
n

X
2
.
Returning to our 10 observations on clothing expenditure:
i X
i
X
i

X (X
i

X)
2
X
2
i
1 2806 349.4 122,080.36 7,873,636
2 1743 713.6 509,224.96 3,038,049
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
9 1572 884.6 782,517.16 2,471,184
10 2651 194.4 37,791.36 7,027,801
Sums 24,566 0.0 4,139,506.40 64,488,342
Hence v
2
=
4, 139, 506.40
10
= 413, 950.64
or v
2
=
64, 488, 342
10
(2, 456.6)
2
= 6, 448, 834.2 6, 034, 883.56 = 413, 950.64.
What does a variance of 413,950.64 actually mean?
We can make relative statements e.g. it is larger than a
variance of 10 and smaller than a variance of one million,
but can we say any more about the variation about the
mean?
It is common to consider the standard deviation, the
positive square root of v
2
:
v =
i
x
2
i
n
.
For our data set we nd that v =

413, 950.64 = 643.39
which we interpret as being approximately the average
deviation of observations from their mean.
An alternative measure of variation is to take the mean
absolute deviation rather than the mean squared deviation
from the mean:
mdev =
i
|X
i

X|
n
.
From our previous table we nd:
i X
i
X
i

X |X
i

X|
1 2806 349.4 349.4
2 1743 713.6 713.6
.
.
.
.
.
.
.
.
.
.
.
.
9 1572 884.6 884.6
10 2651 194.4 194.4
Sums 24,566 0.0 5,580.0
Hence we nd that mdev=5580/10=558.
Although mdev may seem the natural measure of the
average variation from the mean, it is used less widely than
the standard deviation, mainly because:
1
mathematically it is easier to analyse squared values
than absolute values, and therefore...
2
the theory about variance and standard deviation is
more developed.
Summary 18/18
Summary
Measures of central tendency (mean, mode, median)
Measures of variation (variance, standard deviation, mean
deviation)
Next week:
Frequency distributions
Mutually exclusive and independent events
Conditional probabilities

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EC114 Introduction to Quantitative Economics

when the range of summation is obvious.

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