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Introduction
Nektarios Aslanidis (Universitat Rovira i Virgili and UNSW)
Aslanidis (URV, UNSW) Introduction 1 / 12
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What is Econometrics?
Literally, econometrics means "economic measurement". It can
bedened as the quantitative analysis of actual economic
phenomenabased on the concurrent development of theory and
observation.
Economic theory makes statements or hypotheses that are
mostlyqualitative in nature. E.g. ,the Law of Demand postulates a
negativerelationship between the price and quantity demanded of
acommodity.
It is the job of the econometrician to provide numerical
estimates ofsuch change.
Economic statisticians are responsible in collecting,
processing, andpresenting economic data in the form of charts and
tables. There arelittle formal theoretical underpinnings.
While econometricians use the collected data to test
economictheories and to do predictions and forecasting.
Aslanidis (URV, UNSW) Introduction 2 / 12
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Types of Econometrics: Theoretical Econometrics
It concerns with the development of appropriate methods
formeasuring economic relationships specied by econometrics
models.
One of the methods that well cover extensively in this course
isOrdinary Least Squares (OLS).
Theoretical econometrics spells out the assumptions and
properties ofthe method and what happens to these properties when
one or moreof the assumptions of the method are not fullled.
Aslanidis (URV, UNSW) Introduction 3 / 12
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Types of Econometrics: Applied Econometrics
Our focus ...
It uses the tools developed from theoretical econometrics to
studysome special elds of economics.
E.g., applications in macroeconomics, microecomics,
nance,environmental economics, etc.
Aslanidis (URV, UNSW) Introduction 4 / 12
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Types of Economics Data
Time series data: A set of observations on the values that a
variabletakes at dierent times. Such data may be collected at
regular timeintervals, such as daily (nancial data), monthly or
quarterly(macroeconomics data).
Cross-sectional data: Collected at the same point in time. E.g.
theCensus of population, the survey of Consumer Expenditures.
Panel data: Repeated measures on individuals over time.
Alongitudinal dataset obtained by following a given sample of
individualagents (or households, rms, cities, regions, countries
etc) over time.
Aslanidis (URV, UNSW) Introduction 5 / 12
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Methodology of Econometrics
Statement of theory or hypothesis.
Specication of a mathematical model.
Specication of an econometrics model.
Data Collection.
Estimation.
Hypothesis Testing.
Aslanidis (URV, UNSW) Introduction 6 / 12
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Methodology of Econometrics
Statement of theory or hypothesis. E.g., Keynes postulated that
theMarginal Propensity to Consume (MPC).
Specication of the mathematical model of consumption.
Y = 1 + 2X 0 < 2 < 1
where
Y = Consumption expenditure (dependent/explained variable)X =
Income (independent/explanatory variable, regressor)1, 2 =
parameters
Aslanidis (URV, UNSW) Introduction 7 / 12
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Methodology of Econometrics
Specication of the econometric model. The purely
mathematicalmodel of the consumption function given above is of
limited interestto econometricians as it assumes an exact or
deterministicrelationship between consumption and income.
Y = 1 + 2X + u
where
u = disturbance/error term/residual (random variable)
The disturbance term u represents all those factors that
aectconsumption but are not taken into account explicitly in the
model.
Aslanidis (URV, UNSW) Introduction 8 / 12
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Methodology of Econometrics
Estimation of the econometric modelNow, with the data and the
specication of the econometric model,we can obtain numerical
estimates of the parameters using regressionanalysis. In this
example, we can do so by tting a regression line.The estimated
consumption functions is:
Y = 184+ 0.8X + bu = bY + bubY = 184+ 0.8Xwhere bY indicates
that it is an estimateThe slope coe cient, i.e. the MPC =
0.8Interpretation: During the sample period, an increase in real
incomeof $1 leads, on average, to an increase of about 80 cents in
realconsumption expenditure..
Aslanidis (URV, UNSW) Introduction 9 / 12
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Methodology of Econometrics
Hypothesis testing. Theorists or Keynes expected the MPC to
bepositive but less than 1.Before we accept the estimated MPC (b2 =
0.8), we would like toknow if b2 is statistically less than 1.To do
so, we have to do hypothesis testing
H0 : 2 = 1Ha : 2 < 1
Aslanidis (URV, UNSW) Introduction 10 / 12
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Methodology of Econometrics
Forecasting or Prediction.We have specied and estimated an
econometric model as shownabove. We may use it to predict the
future values of the dependent(or forecast) value of Y based on the
known or expected future valuesof the explanatory (or predictor)
variable X .Suppose we want to predict the mean consumption
expenditure. TheGDP value for 1997 was $7269.8 billion. Plug in
this GDP gure onthe right hand side of the estimated equation.
bY1997 = 184+ 0.8(7269.8) = ...
Aslanidis (URV, UNSW) Introduction 11 / 12
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Suggested readings
Wooldridge J.M. Introductory Econometrics: A Modern
Approach.Chapter 1
Aslanidis (URV, UNSW) Introduction 12 / 12
IntroductionWhat is Econometrics?What is Econometrics?What is
Econometrics?What is Econometrics?Methodology of
EconometricsMethodology of EconometricsMethodology of
EconometricsMethodology of EconometricsMethodology of
EconometricsMethodology of EconometricsSuggested readings
