Lecture I

Reference :
Basic Econometrics by Damodar N. Gujarati
Additional reference: Introductory
Econometrics by Jeffery M Wooldridge



Introduction to Econometrics
Econometrics is means of economic measurement.
It an application of mathematical statistics to
economic data to lend empirical support to the
models constructed by mathematical economics and
to obtain numerical results.
Econometrics may be defined as the quantitative
analysis of actual economic phenomena based on
the concurrent development of theory and
observation, related by appropriate methods of
inference.

Continue..
Econometrics may be defined as the social
science in which the tools of economic theory,
mathematics, and statistical inference are
applied to the analysis of economic
phenomena. Econometrics is concerned with
the empirical determination of economic laws.
Econometrics is an amalgam of economic
theory, mathematical economics, economic
statistics, and mathematical statistics.

Economic theory makes statements or hypotheses that
are mostly qualitative in nature.

For example, microeconomic theory states that, other
things remaining the same, a reduction in the price of a
commodity is expected to increase the quantity
demanded of that commodity. Thus, economic theory
postulates a negative or inverse relationship between
the price and quantity demanded of a commodity. But
the theory itself does not provide any numerical
measure of the relationship between the two; that is, it
does not tell by how much the quantity will go up or
down as a result of a certain change in the price of the
commodity. It is the job of the econometrician to
provide such numerical estimates. Stated differently,
econometrics gives empirical content to most economic
theory.

In broader sense econometric methodology
proceeds along
the following lines
1) Statement of theory or hypothesis: People
Increase their consumption as their income
increases.
2) Specification of the mathematical model of the
theory
Y = 1 + 2X 0 < 2 < 1
where Y = consumption expenditure and X income,
and where 1 and 2, known as the parameters
of the model, are, respectively, the intercept and
slope coefficients.



3) Specification of the statistical, or
econometric model

Y = 1 + 2X + u
(linear regression model)

The econometric consumption function
hypothesizes that the dependent variable Y
(consumption) is linearly related to the
explanatory variable X (income) but that the
relationship between the two is not exact; it is
subject to individual variation.

4) Obtaining the data
5) Estimation of the parameters of the
econometric model

Y = 184.08 + 0.7 064Xi (Regression analysis)

6) Hypothesis testing
Does the income has any significant impact on
consumption?

7) Forecasting or prediction

8) Using the model for control or policy purposes.

Nature of data
Time series data
A time series is a set of observations on the values that a
variable takes at different times. Such data may be collected at
regular time intervals, such as daily (e.g., stock prices, weather
reports), weekly (e.g., money supply figures), monthly [e.g., the
unemployment rate, the Consumer Price Index (CPI)], quarterly
(e.g., GDP), annually (e.g., government budgets),
quinquennially, that is, every 5 years (e.g., the census of
manufactures), or decennially (e.g., the census of population).
Sometime data are available both quarterly as well as annually,
as in the case of the data on GDP and consumer expenditure.

Cross-Section Data
Cross-section data are data on one or more
variables collected at the same point in time,
such as the census of population conducted by
the Census Bureau every 10 years (the latest
being in year 2000), the surveys of consumer
expenditures conducted by the University of
Michigan, and, of course, the opinion polls

Panel, Longitudinal, or Micropanel
Data
This is a special type of pooled data in which
the same cross-sectional unit (say, a family or
a firm) is surveyed over time.
Some important notation
conditional expected values, as they depend
on the given values of the (conditioning)
variable X. Symbolically, we denote them as
E(Y | X), which is read as the expected value of
Y given the value of X.

unconditional expected value of weekly
consumption expenditure, E(Y).


THE CONCEPT OF POPULATION REGRESSION
FUNCTION (PRF)

conditional mean E(Y | Xi) is a function of Xi, where Xi is a given
value of X. Symbolically,
E(Y | Xi) = f (Xi)
Also known as conditional expectation function (CEF) or
population regression function (PRF) or population regression
(PR) for short;
E(Y | Xi) = 1 + 2Xi
where 1 and 2 are unknown but fixed parameters known as
the regression coefficients; 1 and 2 are also known as
intercept and slope coefficients, respectively.

Single-equation regression models
In these models, one variable, called the
dependent variable, is expressed as a linear
function of one or more other variables, called
the explanatory variables. In such models it is
assumed implicitly that causal relationships, if
any, between the dependent and explanatory
variables flow in one direction only, namely,
from the explanatory variables to the
dependent variable.