Professional Documents
Culture Documents
1 An Economic Model
2.2 An Econometric Model
2.3 Estimating the Regression Parameters
2.4 Assessing the Least Squares Estimators
2.5 The Gauss-Markov Theorem
2.6 The Probability Distributions of the Least
Squares Estimators
2.7 Estimating the Variance of the Error Term
Figure 2.1a Probability distribution of food expenditure y given income x = $1000
Slide 2-3
Figure 2.1b Probability distributions of food expenditures y
given incomes x = $1000 and x = $2000
Slide 2-4
The simple regression function
Figure 2.2 The economic model: a linear relationship between
average per person food expenditure and income
Slide 2-6
Slope of regression line
denotes change in
Figure 2.3 The probability density function for y at two levels of income
Rearranging gives
E e | x E y | x 1 2 x 0
E ( y ) 1 2 x
N N
if SSE = ei2 and SSE * = ei*2 then SSE < SSE *
i 1 i 1
b2
x x y y 18671.2684
i
i
10.2096
x x
2
i
1828.7876
yi 83.42 10.21xi
Principles of Econometrics, 3rd Edition Slide 2-33
Figure 2.8 The fitted regression line
percentage change in y y y y x
percentage change in x x x x y
In the linear economic model given by (2.1) we have shown that
E y
2
x
Principles of Econometrics, 3rd Edition Slide 2-36
The elasticity of mean expenditure with respect to income is
x 19.60
b2 10.21 .71
y 283.57
ln( y ) 1 2 ln( x)
d [ln( y )] 1 dy
dx y dx
d [1 2 ln( x )] 1
2
dx x
dy x
2
dx y
Principles of Econometrics, 3rd Edition Slide 2-40
2.4.1 The estimator b2
N
b2 wi yi
i 1
xi x
wi
( xi x )2
b2 2 wi ei
E (b2 ) E 2 wi ei E 2 w1e1 w2 e2 L wN eN
E 2 E w1e1 E w2 e2 L E wN eN
E (2 ) E ( wi ei )
2 wi E (ei ) 2
using and
E wi ei wi E ei E (ei ) 0
Principles of Econometrics, 3rd Edition Slide 2-42
2.4.3 Repeated Sampling
If the regression model assumptions SR1-SR5 are correct (assumption SR6 is not
required), then the variances and covariance of b1 and b2 are:
var(b1 ) 2
xi2
N ( xi x ) 2
2
var(b2 )
( xi x )2
x
cov(b1 , b2 ) 2 2
i
( x x )
Figure 2.11 The influence of variation in the explanatory variable x on precision of estimation
(a) Low x variation, low precision (b) High x variation, high precision
2 xi2
b1 ~ N 1 , 2
N i
( x x )
2
b2 ~ N 2 , 2
i
( x x )
ei yi 1 2 xi
ei yi yi yi b1 b2 xi
2
ei
2
N
There is a simple modification that produces an unbiased estimator, and that is
2
i
e 2
N 2
E ( 2 ) 2
b
var 2 xi2
N ( xi x ) 2
1
b
2
var
i
2
( x x ) 2
x
cov b1 , b2
2
2
( xi x )
b
se b1 var 1
b
se b2 var 2
b
var b , b
cov
1 1 2
b ,b
cov b
var
1 2 2
C INCOME
C 1884.442 -85.90316
INCOME -85.90316 4.381752
b 4.381752
var 2
b , b 85.90316
cov 1 2
b 1884.442 43.410
se b1 var 1
b 4.381752 2.093
se b2 var 2
(2A.2)
(2A.4)
(2A.5)
N (2B.1)
xi2 2 N x 2 N x 2 xi2 N x 2
xi
2
( xi x ) 2
x N x x x xi x
2
i
2 2
i
2
i
N
(2B.2)
xi yi
( xi x )( yi y ) xi yi N x y xi yi N
(2B.3)
b2
( xi x )( yi y )
( xi x )2
b2
( xi x )( yi y ) ( xi x ) yi y ( xi x )
( xi x ) 2
( xi x )2
( xi x ) y i
( xi x )
yi wi yi
2
i( x x ) 2
i
( x x )
b2 wi yi wi (1 2 xi ei )
1 wi 2 wi xi wi ei
2 wi ei
wi xi 1
2 wi xi 2
( xi x ) 0
xi x xi x xi x
xi x xi
xi x xi xi x xi
wi xi 1
xi x xi x xi
2
var b2 E b2 E b2
2
wi e i
2
E
E i i i j i j
w 2 2
e 2 w w e e [square of bracketed term]
i j
2 wi2
2
xi x
2
cov ei , e j E ei E ei e j E e j
E ei e j 0
xi x xi x
2 2
1
wi
2
2 2
xi x xi x xi x
2 2 2
2
xi x
2
b2* ki yi ( wi ci ) yi ( wi ci )(1 2 xi ei )
( wi ci ) 1 ( wi ci ) 2 xi ( wi ci ) ei
(2F.1)
1 wi 1 ci 2 wi xi 2 ci xi ( wi ci ) ei
1 ci 2 2 ci xi ( wi ci ) ei
ci 0 and ci xi 0 (2F.3)
b2* ki yi 2 ( wi ci ) ei (2F.4)
2 wi ci 2 wi2 2 ci2
2
var b2 2 ci2
var b2