Introductory Econometrics

ECON2206/ECON3209

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Lecturer: Minxian Yang

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About the Course

Staff
Lecturer: Minxian Yang
Tutors: Jessica Moses, Jakree Koosakul, Bo Ye

Required textbook
Wooldridge, J.M. (2009), Introductory Econometrics:
A Modern Approach, 4th Edition, South-Western

Assessment
Two tutorial assignments (weeks 5 & 12): 20%
One course project (week 9): 20%
Final exam: 60%

Submit assignments and project to your tutor!

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About the Course

Econometric software
STATA recommended
Available in ASB labs, Lab 2 (Q1035) Mon 12-16.

Course resources
Course website: announcements, course outline,
lecture slides, tutorial questions/answers,
assignments, course project, data, STATA code,
Library (open reserve)

Read Course Outline carefully!

Email is not suitable for discussing course material details with
the lecturer.
Work commitment and travel plans are not excuses for missing
assessment items.
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About the Course

Aim & Summary of ECON2206/3290

Aim to help students develop a working knowledge
of econometrics and its applications.
Focus on linear regression models, their
estimation, inference and interpretation.
Emphasise the applications of econometric methods
in practice.
Foster the ability to conduct empirical research in
economics, finance and other social sciences.

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1. Introduction (Ch1)

1. Introduction
What is econometrics?
It covers the statistical methods useful for

estimating economic relationships;

testing economic theories;
evaluating policies;
forecasting economic variables,

based on data (observations on variables).

eg. Estimating and testing the effect of

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education on wages;
minimum wages on unemployment;
govt policies on inflation and growth;
school spending on student performance; etc.
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1. Introduction (Ch1)

What is econometrics?
Differing from statistics used in physical sciences, it
deals with non-experimental data.
Data are typically not from controlled experiments.
Ideal laboratories are not available in social sciences.
eg.

The effect of a new drug on patients:

possible to assign drug randomly to patients.
Effect of a interest-rate-rise on economies:
impossible to assign a rate-rise randomly to
economies.

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1. Introduction (Ch1)

Empirical economic analysis

Exploring data to estimate economic relationships
and test economic theories.
It involves
embedding the questions of interest in an econometric
model, which may be derived from economic theories;
formulating the questions of interest into hypothesis
about the parameters of the model;
estimating the parameters and drawing conclusions
about the hypotheses from data;
in some cases, making predictions based on the
estimated model.

It helps in business or government decision making.

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1. Introduction (Ch1)

Empirical economic analysis

eg. A model for wage:
wage = 0 + 1educ + 2exper + u,
where
wage : hourly wage,
educ : years of education,
exper : years of employment,
u:
disturbance term that contains excluded
factors (innate ability, job characteristics, ...),
0, 1, 2 :
parameters describing how wage is
affected by the included factors.
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1. Introduction (Ch1)

Empirical economic analysis

eg. Continue with the model
wage = 0 + 1educ + 2exper + u .
a range of hypotheses can be formulated in terms of
the parameters;
econometric methods can be used to estimate the
parameters from data;
the hypotheses then can be tested based on the
estimated parameters;
the estimated model can also be used to make
predictions about wages.

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1. Introduction (Ch1)

Data structures
Empirical analysis requires data.
Different data structures may require different
econometric methods.
It is important to understand data structures.
There are 4 major data structures

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Cross-sectional data,
time series data,
pooled cross sections,
panel (or longitudinal) data.

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1. Introduction (Ch1)

Data structures
Cross-sectional data
The observations of variables are collected at the same
point in time.
minor timing differences usually ignored

The order of observations does not matter (the index

assigned to each observation is immaterial).
Random sampling (observations are independent of
each other) is desirable.
eg. Randomly drawing 100 families from the population of
Australian households and recording the income and
other characteristics of the families.
What if wealthy families tend to decline to report?

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1. Introduction (Ch1)

Data structures
Cross-sectional data
eg. WAGE1.RAW (variables in columns)

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wage (dollars/hour, in 1976 price)

educ (years)
exper (years)
female (dummy)
married (dummy)
obsno (index)

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1. Introduction (Ch1)

Data structures
Time series data
The observations on variables are collected over time.
eg. stock prices, inflation, gdp, ...
The chronological ordering of observations is important.
economic variables (eg. inflation) tend to be related to
their recent histories.
dependence in observations needs to be accounted for
in econometric models.

Observation frequency is important.

Seasonal patterns need to be accounted for.
eg. monthly sales series: peak in Dec, trough in Feb.

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1. Introduction (Ch1)

Data structures
Time series data
eg. Minimum wage: data stored in chronological order.
year: observation year
avgmin: average minimum wage
avgcov: average coverage
(% workers covered
by minimum-wage law)
unemp:
unemployment rate
gnp:
gross national product

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1. Introduction (Ch1)

Data structures
Pooled cross sections
Two or more sets of cross-sectional data at different
points in time, with same variables but different units.
eg. two cross-sectional family surveys in Australia:
one in 2000: recording income, expenditures, size, ...;
one in 2005: same questions;
families in 2005 survey may differ from those in 2000.

Pool two surveys to increase sample size.

An increase in sample size provides more information.
Pooled can be treated as cross-sectional.
Helpful in investigating how economic relationships
change over time.
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1. Introduction (Ch1)

Data structures
Pooled cross sections
An effective way to analyse government policies by
looking at economic relationships before and after the
introduction of a policy.
eg. house prices in
1993 and 1995:
before and after
a reduction in
property taxes in 1994.
year is important here.

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1. Introduction (Ch1)

Data structures
Panel (longitudinal) data
The observations follow the same units (individuals,
families, firms, ...) over time.
a times series for each cross-sectional unit.

eg. data on individuals wage, education, union

membership over 5 years.
Panel data has advantages in controlling certain
unobserved factors and studying dynamic behaviour.
Panel data are more difficult and expensive to obtain
than pooled cross section.
Depending on time, we will briefly consider panel data
method toward the end of this course.
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1. Introduction (Ch1)

Data structures
Panel (longitudinal) data
eg. crime in 150 US cities:
1986 and 1990.
Data are stored by
city and year.

Our topics will be grouped according to data type.

Part 1: cross-sectional, where econometric foundations
will be formed.
Part 2: time series, where trends, seasonality and
dynamics will be treated.
Part 3: pooled cross sections and panel.
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1. Introduction (Ch1)

Work with STATA

Create a folder, say F:\ie
Save bwght_1st.do and
bwght.raw in the folder F:\ie
Launch STATA
(by clicking STATA icon)
Press Ctrl+8 to open Do-file Editor,
Click File/Open to open
F:\ie\bwght_1st.do
Press Ctrl+D to execute the
commands in the .do file
and check the Results window
Create, modify and save .do files
as you wish
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Open Do-Editor

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Data Browser

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1. Introduction (Ch1)

Notes on STATA
A do-file (ie, .do file) contains a collection of STATA
commands for specific tasks.
Commands are separated by semincolon.
A do-file may be created, modified and saved by using the
Do-File Editor.
Once a do-file is run, the results or error messages show
up in the Results window (or log file).
The output must be carefully checked for errors.
If any errors, the do-file must be corrected and re-run.
Blackboard: data in Data Files folder , do-files in STATA
Files folder.
See A Guide for Using STATA in Tutorial folder
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1. Introduction (Ch1)
Some useful STATA commands
/* and */ : whatever comments between /* and */ are ignored by STATA
// : whatever after // are ignored (not for 2 or more lines of comments)
#delimit; : commands should be separated by semicolon (;)
version 9 : compatible with Stata Version 9
clear : clear things from previous runs (clear all in version 11)
capture log close : close possibly open log file
cd : define working folder (cd means change directory)
log using xxx : save output in the file xxx.smcl
infile v1 v2 using vvv.raw : read v1 v2 from data file vvv.raw
summarize : produce descriptive statistics
graph twoway (scatter y x) : produce scatter plot y versus x
histogram y : produce histogram of y
regress y x : regressing y on x (OLS)
exit : stop execution
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1. Introduction (Ch1)

Causality and Ceteris Paribus

In testing economic theories and evaluating policies,
the goal is often to infer the causal effect of one
variable on another.
eg. Does education has causal effect on workers productivity?

Most economics propositions are ceteris paribus,

which means other factors being equal.
eg. The demand for coffee decreases as price goes up, holding
other factors (income, prices of other goods, ...) constant.

Ceteris paribus is critical in policy analysis.

eg. Would OHS training reduce accidents, holding other factors
fixed?

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1. Introduction (Ch1)

Causality and Ceteris Paribus

In social sciences, obtaining experimental data is
usually impractical.
It is not feasible to literally hold all else equal.
However, when properly applied, econometric
methods can simulate a ceteris paribus experiment
and help us uncover causal effects.
We look at the examples below from two angles.
If we were able to carry out an experiment, ...
think of how the experiment would be structured.
As we are unable to do the experiment,
think of why and how observed data differ from the
experimental data.
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1. Introduction (Ch1)

Causality and Ceteris Paribus

Example 1. Effects of fertiliser on soybean yield
Yield is affected by fertiliser, land quality,
Infeasible experiment:
Choose many plots of land of same quality, ;
Apply various amounts of fertiliser to the plots;
Measure the yields and find the effect of fertiliser.

Feasible experiment:
Choose many plots of land;
Apply various amounts of fertiliser to the plots randomly
(the amounts applied are independent of land characteristics);
Measure the yields and find the ceteris paribus effect of
fertiliser statistically.

What if we only have passively-observed data?

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1. Introduction (Ch1)

Causality and Ceteris Paribus

Example 2. Return to education: the wage increase
caused by an extra year of education?
Wage is affected by education, experience, ability, ...
Experiment:
Choose many individuals (kids);
Assign various levels of education to them randomly;
Measure the wages and find the ceteris paribus effect of
education statistically.

But we only have passively-observed data.

It would be an easy task if education were independent
of experience, innate ability,
But education is likely correlated with experience, etc,
It will be doable if we have measures on experience,
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1. Introduction (Ch1)

Causality and Ceteris Paribus

Example 2. Return to education
Wage is affected by education, experience, ability, ...
Ceteris paribus effect of education on wage can be
properly estimated
if data were collected such that education were
independent of experience, ability,
(but these factors are likely correlated)
if we have measures (or data) on experience, ability,
(but ability, for instance, is hard to measure)

We have to deal with these issues in empirical analysis.

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1. Introduction (Ch1)

A summary

Meaning of econometrics
Meaning of empirical economic analysis
Four major data structures
Work with STATA
Causal effect and ceteris paribus

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