• Some definitions
Introduction to Econometrics • Why study econometrics?
• The Econometric Process
Economics 4421 • Example: wages and productivity
• Causality
• Example
• Types of data
Slides by F. Bokhari. Adapted from Ken Clark (2003), P. Anderson (2003) and
David A. Macpherson (1999). 1 2
Econometrics Definition(s)
• Econometrics - Apply statistical methods to • Goldberger – “Econometrics may be defined as
economic data the social science in which the tools of economic
theory, mathematics, and statistical inference are
• Econometric approach: applied to the analysis of economic phenomena”
– Develop working model from an economic • Sameulson – “… econometrics may be defined as
theory the quantitative analysis of actual economic
– Estimate model with real world data. phenomena based on the concurrent development
• Real world data is not perfect of theory and observation, related by appropriate
methods of science”
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Econometric Output Econometric Inputs
• Estimation/Measurement • Ingredients of an econometric exercise:
• Inference/Hypothesis testing – Economic Theory
• Forecasting/Prediction – Mathematics
• Evaluation – Statistical Theory
– Data
– Computing Power
– Interpretation/Economic
Knowledge/Common Sense.
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Data
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Keynesian Consumption Keynesian Consumption
Function Function
• Theory: people increase consumption as • C = D + EY
income increases, but not by as much as the – C = Consumption
increase in their income. D = Intercept
– Marginal Propensity to Consume (MPC) is the – Y = Income
change in consumption divided by change in E = slope (how much C changes for a given
income. change in Y)
• Not an econometric model
– Assumes a deterministic relationship
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Model Estimation Least Squares
• How estimate model? - Fit a line through • Estimate on basis of least squares
the data. – the line of best fit minimizes the sum of the
• Suppose get C = 1000 + .8Y squared deviations of the points on the graph
from the points on the straight line.
D = 1000
• Minimize 6 (CAi - CPi)2
E = .8 – CAi = Actual Consumption for obs i
– CPi = Predicted Consumption for obs i
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Econometric Studies
Interpretation • Price and Quantity
– Demand and elasticities of demand:
• ln Q = D + E lnP + H
• Sample income levels
– Y = 0, Consumption = 1000 • Production Function
– Y = 1000, Consumption = 1800 – Relationship between inputs and outputs.
• Y = f (K,L)
• If Y increases by 1 dollar, then C increases on • Cobb Douglas Y = AKaLb
average by .8 dollars.
• Wage equation
– These estimates are consistent with theory since D >0 – ln W = D0+ D1EDUC + D2EXP + D3GENDER + D4RACE
and 0<E<1
• Suppose E was .9? • Phillips Curve
E < 1, but is it due to the sample? – Relationship between change in money wages and
unemployment 'w = f ('u)
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• Price and Quantity
– Demand and elasticities of demand
• ln Q = D + E lnP + H
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The Question of Causality Example: Returns to Education
• Simply establishing a relationship between • A model of human capital investment implies
variables is rarely sufficient getting more education should lead to higher
earnings
• Want to know if the effect is causal
• In the simplest case, this implies an equation like
• Can be difficult to establish causality
Earnings E 0 E1education u
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