1. Introduction: What is Econometrics?
Basic Econometrics
Introduction:
What is Econometrics?

2. Introduction What is Econometrics?
Definition 1: Economic Measurement
Definition 2: Application of the mathematical statistics to economic data in order to lend empirical support to the economic mathematical models and obtain numerical results (Gerhard Tintner, 1968)

3. Introduction What is Econometrics?
Definition 3: The quantitative analysis of actual economic phenomena based on concurrent development of theory and observation, related by appropriate methods of inference
(P.A.Samuelson, T.C.Koopmans and J.R.N.Stone, 1954)

4. Econometrics Economic Theory Mathematical Economics Economic
Statistics
Mathematic
Statistics

5. Introduction Why a separate discipline?
Economic theory makes statements that are mostly qualitative in nature, while econometrics gives empirical content to most economic theory
Mathematical economics is to express economic theory in mathematical form without empirical verification of the theory, while econometrics is mainly interested in the later

6. Introduction Why a separate discipline?
Economic Statistics is mainly concerned with collecting, processing and presenting economic data. It does not being concerned with using the collected data to test economic theories
Mathematical statistics provides many of tools for economic studies, but econometrics supplies the later with many special methods of quantitative analysis based on economic data

7. Econometrics Economic Theory Mathematical Economics Economic
Statistics
Mathematic
Statistics

8. Introduction Methodology of Econometrics
Statement of theory or hypothesis:
Keynes stated: ”Consumption increases as income increases, but not as much as the increase in income”. It means that “The marginal propensity to consume (MPC) for a unit change in income is grater than zero but less than unit”

9. Introduction Methodology of Econometrics
(2) Specification of the mathematical model of the theory
Y = ß1+ ß2X ; 0 < ß2< 1
Y= consumption expenditure
X= income
ß1 and ß2 are parameters; ß1 is
intercept, and ß2 is slope coefficients

10. Introduction Methodology of Econometrics
(3) Specification of the econometric model of the theory
Y = ß1+ ß2X + u ; 0 < ß2< 1;
Y = consumption expenditure;
X = income;
ß1 and ß2 are parameters; ß1is intercept and ß2 is slope coefficients; u is disturbance term or error term. It is a random or stochastic variable

11. Introduction Methodology of Econometrics
(4) Obtaining Data
(See Table 1.1, page 6)
Y= Personal consumption
expenditure
X= Gross Domestic Product
all in Billion US Dollars

12. Introduction Methodology of Econometrics
(4) Obtaining Data
Year X Y
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
2447.1
2476.9
2503.7
2619.4
2746.1
2865.8
2969.1
3052.2
3162.4
3223.3
3260.4
3240.8
3776.3
3843.1
3760.3
3906.6
4148.5
4279.8
4404.5
4539.9
4718.6
4838.0
4877.5
4821.0

13. Introduction Methodology of Econometrics
(5) Estimating the Econometric Model
Y^ = X (1.3.3)
MPC was about 0.72 and it means that for the sample period when real income increases 1 USD, led (on average) real consumption expenditure increases of about 72 cents
Note: A hat symbol (^) above one variable will signify an estimator of the relevant population value

14. Introduction Methodology of Econometrics
(6) Hypothesis Testing
Are the estimates accord with the
expectations of the theory that is being
tested? Is MPC < 1 statistically? If so,
it may support Keynes’ theory.
Confirmation or refutation of
economic theories based on
sample evidence is object of Statistical
Inference (hypothesis testing)

15. Introduction Methodology of Econometrics
(7) Forecasting or Prediction
With given future value(s) of X, what is the future value(s) of Y?
GDP=$6000Bill in 1994, what is the forecast consumption expenditure?
Y^= (6000) =
Income Multiplier M = 1/(1 – MPC) (=3.57). decrease (increase) of $1 in investment will eventually lead to $3.57 decrease (increase) in income

16. Introduction Methodology of Econometrics
(8) Using model for control or
policy purposes
Y=4000= X  X  5882
MPC = 0.72, an income of $5882 Bill
will produce an expenditure of $4000
Bill. By fiscal and monetary policy,
Government can manipulate the
control variable X to get the desired
level of target variable Y

17. Introduction Methodology of Econometrics
Figure 1.4: Anatomy of economic modelling
1) Economic Theory
2) Mathematical Model of Theory
3) Econometric Model of Theory
4) Data
5) Estimation of Econometric Model
6) Hypothesis Testing
7) Forecasting or Prediction
8) Using the Model for control or policy purposes

18. Economic Theory
Mathematic Model
Econometric Model
Data Collection
Estimation
Hypothesis Testing
Application
in control or
policy
studies
Forecasting