1. CHAPTER 1 ECONOMETRICS x x x x x Econometrics Tools of: Economic theory Mathematics Statistical inference applied to Analysis of economic data

2. The Methodology of Econometrics Create hypothesis from economic theory “Number of UPS shipments demanded is negatively related to the price of ________ and positively related to the price of ___________.” Collect data across time (time series) across units (cross-sectional) Price and quantity data for UPS and FedEx shipments across ______ or across ________.

3. Specify the mathematical model from theory and mathematical economics Q UPS = B 0 − B 1 P UPS + B 2 P FEDX Specify the econometric model recognizing uncertainty and the impact of other factors Intercept Coefficients Q UPS = B 0 − B 1 P UPS + B 2 P FEDX + u Error term

4. Estimate the parameters of the model ordinary least squares (OLS) Test the model specification determine if the right explanatory variables have been included can’t include everything in the model Q UPS = 511 − 26.2 P UPS + 6.5 P FEDX Test the hypothesis are the parameters the right sign and significantly different from zero

5. Use the model for prediction based on the estimated parameters Perhaps we could predict what impact a change in prices at UPS would have.