Assignment 1 HUL 215 Econometric Methods

Baranidharan Mohan 2010PH10833

(Dated: January 20, 2013) Worked with Deependra Mehalawat and Shefali Chandolia

I.

QUESTION 1

i) Wholesale price index is taken for all products at dierent years from 2001 to 2011 and is published by published by Oce of the Economic Adviser, Ministry of Commerce and Industry, GoI. The data represented here would be time series data , by its denition. ii) National Sample Survey Organisation (NSSO) conducts the Socio-Economic survey on a 10 year basis. During the 10 years of the survey, various variables like land and stock holdings, debt, investment,social consumption ( education and health care, etc.), household consumer expenditure, employment and un-employment, and various other factors are surveyed across the Indian Union. Hence, the data which is would result from this survey would be classied as cross sectional data . iii) The data that has been tabulated by the RBI on Net State Domestic Product of 28 Indian states and 4 Union Territories (as downloaded from the denoted site) contains state-wise NDP at current and constant prices over a 20 year period. In each data set, a variable (NDP at constant prices or current prices) has 32 dierent values (28 states and 4 UTs) for each year. Hence, this data set is a panel or longitudinal data set

II.

QUESTION 2

Randomized controlled experiments, as the name suggests are not totally haphazard but gives

2 the observer some control over the observations and experiments by reducing any kind of bias by normalising the factors that have not been included explicitly in the proposed model. In economics, this method however cannot always work for the proposed model for the following reason. Unlike, the physical variables (like temperature, or pressure) economic variables (like crime rate, income of students graduating from a specic university) can explicit depend on both mensurable and immensurable variables. For example, taking the example of crime rate of a region, we can propose the following simple equation to describe a certain model: crime rate = + 1 literacy rate + 2 population + 3 average sentence awarded + u From this model, if we try to nd out the dependence of the crime rate on three above mentioned factors, by using random sampling, we would get not-so-satisfactory results. This is because we have not included various other mensurable factors (like average income of a criminal) or immensurable factors (like probablity of a criminal getting caught or corruption in that region). Since, we used random sampling, we expect that these factors are normalised and they contribute towards the error term(u). However, this is not the case since the just randomizing the obeservations does not normalise economic variables. For example, a random sample of observation of crime rates may be performed over regions of dierent literacy rate or regions average income. This necessarily may not lead to the normalization. Hence for the above reason, we can see that random sampling is a primitive sampling method which may not be applicable to economics.

III.

QUESTION 3

Casuation is the relationship between an event (the cause) and a second event (the eect), where the second event is understood as a consequence of the rst. Correlation refers to any statistical relationship between two random variables or two sets of data. It is well known (taken as implied by the xkcd comic strip shown in the class and thumb rule in statistics) correlation does not imply causation . In the context of the article, it is clear that Mr. Raj Thackerey has observed that all the people charged with rape in the Delhi gangrape case are migrants from Bihar. Though, Mr. Thackeray has not explicitly

3 mentioned a correlation between these two events in his statements, it can be assumed (or inferred) that he meant the correlation. He is, however, mistaken by the media and general public for making a casuation between the two data sets i.e., the migration from Bihar and the rape incidents in Delhi. Just from the statements made by Mr. Thackeray, we can understand that he has understood the fact the correlation does not imply casuation. On the other hand, if he had made statement stating a casuation between the data sets under observation, then it would be statistically outrageous to conclude such a casuation. Leaving the violation of the thumb-rule aside, the sample space he would have taken (as he has mentioned only this incident) would consist of only one incident. In a nation of more than 1 billion people, this would be too small a sample space. Personal Note: Here is a statement made by Jitender Chhatar, a resident of Jinds Chhatar village in Haryana and thua khap panchayat leader on this issue: To my understanding, consumption of fast food contributes to such incidents. Chowmein (burgers and pizzas) leads to hormonal imbalance evoking an urge to indulge in such acts. Mr. Chhatar in this statement strictly mentions a casuation between consumption of chowmein and the rape incidents. But he does not have any data set or sample space to prove the correlation. In a nation with rights to Freedom of Expression, it sometimes hurts to see people use this rights to make such outrageous and absurd statements.

IV.

QUESTION 4

Let us denote the covariance by Cov (X, Y ) and the mean or the expected value by E(X ). Hence, Cov (X, Y ) = E[(X E[Y ])(X E[Y ])] = E[XY ] E[X ]E[Y ]. a) Given that the c is a constant, the covariance Cov (X, c) = E[cX ] E[X ]E[c]. Since, the expected value of a constant is the same constant, we get E[c] = c and E[cX ] = cE[X ] (by using the linearity principle). Cov (X, c) = cE[X ] cE[X ] = 0. Hence proved.

4 b) Cov (X, X ) = E[(X E[X ])(X E[X ])] = E[X 2 X E[X ] X E[X ] + E[X ]2 ]; = E[X 2 ] E[X ]2 ; = V ar[X ]. c) Cov (a1 + b1 X, a2 + b2 X ) = E[(a1 + b1 X )(a2 + b2 Y )] E[a1 + b1 X ]E[a2 + b2 Y ]; = E[a1 a2 + a2 b1 X + a1 b2 Y + b1 b2 XY ] (E[a1 ] + b1 E[X ])(E[a2 ] + b2 E[Y ]); = (a1 a2 + a2 b1 E[X ] + a1 b2 E[Y ] + b1 b2 E[XY ]) (a1 a2 + a2 b1 E[X ] + a1 b2 E[Y ] + E[X ]E[Y ]); = b1 b2 (E[XY ] E[X ]E[Y ]) = b1 b2 Cov (X, Y ).