Introduction

Nektarios Aslanidis (Universitat Rovira i Virgili and UNSW)

Semester 2, 2014

Aslanidis (URV, UNSW)

Introduction

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What is Econometrics?
Literally, econometrics means "economic measurement". It can be
dened as the quantitative analysis of actual economic phenomena
based on the concurrent development of theory and observation.
Economic theory makes statements or hypotheses that are mostly
qualitative in nature. E.g. ,the Law of Demand postulates a negative
relationship between the price and quantity demanded of a
commodity.
It is the job of the econometrician to provide numerical estimates of
such change.
Economic statisticians are responsible in collecting, processing, and
presenting economic data in the form of charts and tables. There are
little formal theoretical underpinnings.
While econometricians use the collected data to test economic
theories and to do predictions and forecasting.
Aslanidis (URV, UNSW)

Introduction

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Types of Econometrics: Theoretical Econometrics

It concerns with the development of appropriate methods for

measuring economic relationships specied by econometrics models.
One of the methods that well cover extensively in this course is
Ordinary Least Squares (OLS).
Theoretical econometrics spells out the assumptions and properties of
the method and what happens to these properties when one or more
of the assumptions of the method are not fullled.

Aslanidis (URV, UNSW)

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Types of Econometrics: Applied Econometrics

Our focus ...

It uses the tools developed from theoretical econometrics to study
some special elds of economics.
E.g., applications is macroeconomics, microecomics, nance,
environmental economics, etc.

Aslanidis (URV, UNSW)

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Types of Economics Data

Time series data: A set of observations on the values that a variable

takes at dierent times. Such data may be collected at regular time
intervals, such as daily (nancial data), monthly or quarterly
(macroeconomics data).
Cross-sectional data: Collected at the same point in time. E.g. the
Census of population, the survey of Consumer Expenditures.
Panel data: Repeated measures on individuals over time. A
longitudinal dataset obtained by following a given sample of individual
agents (or households, rms, cities, regions, countries etc) over time.

Aslanidis (URV, UNSW)

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Methodology of Econometrics

Statement of theory or hypothesis.

Specication of a mathematical model.
Specication of an econometrics model.
Data Collection.
Estimation.
Hypothesis Testing.

Aslanidis (URV, UNSW)

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Methodology of Econometrics

Statement of theory or hypothesis. E.g., Keynes postulated that the

Marginal Propensity to Consume (MPC).
Specication of the mathematical model of consumption.
Y = 1 + 2 X

0 < 2 < 1

where
Y = Consumption expenditure (dependent/explained variable)
X = Income (independent/explanatory variable, regressor)
1 , 2 = parameters

Aslanidis (URV, UNSW)

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Methodology of Econometrics

Specication of the econometric model. The purely mathematical

model of the consumption function given above is of limited interest
to econometricians as it assumes an exact or deterministic
relationship between consumption and income.
Y = 1 + 2 X + u
where
u = disturbance/error term/residual (random variable)
The disturbance term u represents all those factors that aect
consumption but are not taken into account explicitly in the model.

Aslanidis (URV, UNSW)

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Methodology of Econometrics
Estimation of the econometric model
Now, with the data and the specication of the econometric model,
we can obtain numerical estimates of the parameters using regression
analysis. In this example, we can do so by tting a regression line.
The estimated consumption functions is:

Y
b
Y

=
=

b +u
184 + 0.8X + u
b=Y
b
184 + 0.8X

b indicates that it is an estimate

where Y
The slope coe cient, i.e. the MPC = 0.8
Interpretation: During the sample period, an increase in real income
of $1 leads, on average, to an increase of about 80 cents in real
consumption expenditure..
Aslanidis (URV, UNSW)

Introduction

Semester 2, 2014

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Methodology of Econometrics

Hypothesis testing. Theorists or Keynes expected the MPC to be

positive but less than 1.
Before we accept the estimated MPC (b
2 = 0.8), we would like to
b
know if 2 is statistically less than 1.
To do so, we have to do hypothesis testing
H0 : 2 = 1
Ha : 2 < 1

Aslanidis (URV, UNSW)

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Methodology of Econometrics

Forecasting or Prediction.
We have specied and estimated an econometric model as shown
above. We may use it to predict the future values of the dependent
(or forecast) value of Y based on the known or expected future values
of the explanatory (or predictor) variable X .
Suppose we want to predict the mean consumption expenditure. The
GDP value for 1997 was $7269.8 billion. Plug in this GDP gure on
the right hand side of the estimated equation.
b1997 =
Y

Aslanidis (URV, UNSW)

184 + 0.8(7269.8) = ...

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