ECOM30001

Basic Econometrics
Semester 1, 2017

Week 1
Introduction: What is Econometrics?
1 What is Econometrics?

2 Overview of the Econometric Model

3 Types of Data

4 Statistical Inference
What is Econometrics?

a bridge between economic theory and real-world data

it is a set of tools that allows the measurement and
analysis of economic phenomena and the prediction of
future trends
it uses theory from economics, tools from statistics, and
data to answer how much type questions
What is Econometrics Used For?

to test economic hypothesesdo larger firms pay higher

wages?
forecastingwhat will the rate of inflation be this time
next year?
to answer questions about how muchhow much will
revenue increase if advertising expenditures increase by
$100 ?
Econometric Methodology

1 statement of economic theory and hypotheses

2 specification of the mathematical economic model
3 specification of the econometric modelfunctional form
4 obtain the data
5 estimation of the econometric model
6 hypothesis testing
7 forecasting or prediction
Overview of the Econometric Model

economic theory describes the average or systematic

behaviour of many individual firms or consumers
economic theory:
1 identifies relationships between economic variables
2 makes predictions about the direction of outcomes when
a variable is altered
Example: demand is a function of own price p, price of
substitutes ps , price of complements ps , and income y

qd = f (p, ps , pc , y )
Overview of the Econometric Model

econometrics recognizes that actual behaviour depends

upon the sum of a systematic component described by
economic theory and a random or unpredictable
component
qd = f (p, ps , pc , y ) +
where the random error :
1 reflects the intrinsic uncertainty in economic activity
2 accounts for factors omitted from the model
Overview of the Econometric Model

to complete the econometric model, it is necessary to

specify a functional form for the economic model
in this course, we will only consider models that are linear
(in parameters)

f (p, ps , pc , y ) = 1 + 2 p + 3 ps + 4 pc + 5 y

in this case, the econometric model becomes:

qd = 1 + 2 p + 3 ps + 4 pc + 5 y +
Estimation of the Econometric Model

the econometric model is :

qd = 1 + 2 p + 3 ps + 4 pc + 5 y +

the econometrician uses data on {qd , p, ps , pc , y } to

learn about the values of the parameters
{1 , 2 , 3 , 4 , 5 }
the value of these parameters allows us
1 test economic theories
2 answer questions about how much
Types of Data

Data might be collected in the following forms:

time series: follow a country, region, firm or individual
over time
cross-sectional: collects information on several countries,
regions, firms or individuals at a single point in time
panel: follows several cross-sectional units over time
Data may be collected at several levels of aggregation
micro: individuals, households, firms
macro: regional, state, or national
Statistical Inference

process by which we infer or learn something about the

real world by analyzing a sample of data
statistical inference might include
1 estimating economic parameters, such as elasticities,
using econometric methods
2 predicting outcomes, such as future levels of GDP
3 testing economic hypotheses, such as whether the
demand for cigarettes is price inelastic
What Will You Learn?Sample EVIEWS Output

Dependent Variable: LNWAGE

Method: Least Squares

Sample: 1 534
Included observations: 534

Variable Coefficient Std. Error t-Statistic Prob.

C 0.656024 0.121477 5.400404 0.0000

EDUC 0.088066 0.007935 11.09822 0.0000
EX 0.033623 0.005360 6.272575 0.0000
EXSQ -0.000510 0.000118 -4.329004 0.0000
FE -0.233743 0.038560 -6.061718 0.0000
UNION 0.191606 0.050426 3.799762 0.0002
SOUTH -0.102412 0.042209 -2.426311 0.0156

R-squared 0.325076 Mean dependent var 2.059181

Adjusted R-squared 0.317392 S.D. dependent var 0.527733
S.E. of regression 0.436014 Akaike info criterion 1.190736
Sum squared resid 100.1869 Schwarz criterion 1.246846
Log likelihood -310.9266 F-statistic 42.30486
Durbin-Watson stat 1.900472 Prob(F-statistic) 0.000000