2012 himayatullah 1 basic econometrics course instructor prof. dr. himayatullah khan

2012Himayatullah1

Basic EconometricsBasic Econometrics

Course Instructor

Prof. Dr. Himayatullah Khan

Prof. Himayatullah2

Basic EconometricsBasic Econometrics

Introduction: What is Econometrics?

Prof. Himayatullah 3

IntroductionIntroduction What is EconometricsWhat 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)

Prof. Himayatullah 4

IntroductionIntroduction What is EconometricsWhat 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)

May 2004Prof. Himayatullah5

IntroductionIntroduction What is EconometricsWhat is Econometrics??

Definition 4: The social science which applies economics, mathematics and statistical inference to the analysis of economic phenomena (By Arthur S. Goldberger, 1964) Definition 5: The empirical determination of economic laws (By H. Theil, 1971)

May 2004Prof. Himayatullah6

IntroductionIntroduction What is EconometricsWhat is Econometrics??

Definition 6: A conjunction of economic theory and actual measurements, using the theory and technique of statistical inference as a bridge pier (By T.Haavelmo, 1944)

And the others

May 2004Prof. Himayatullah7

Econometrics

Economic Theory

MathematicalEconomics

Economic Statistics

Mathematic Statistics

May 2004Prof. Himayatullah8

IntroductionIntroduction Why a separate Why a separate disciplinediscipline?? 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

May 2004Prof. Himayatullah9

IntroductionIntroduction Why a separate disciplineWhy 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

May 2004Prof. Himayatullah10

Econometrics

Economic Theory

MathematicalEconomics

Economic Statistics

Mathematic Statistics

May 2004Prof. Himayatullah11

IntroductionIntroduction Methodology of Methodology of EconometricsEconometrics

(1) 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”

May 2004Prof. Himayatullah12

IntroductionIntroduction Methodology of EconometricsMethodology of Econometrics

(2) Specification of the mathematical model of the theoryY = ß1+ ß2X ; 0 < ß2< 1Y= consumption expenditureX= incomeß1 and ß2 are parameters; ß1 isintercept, and ß2 is slope coefficients

May 2004Prof. Himayatullah13

IntroductionIntroduction Methodology of Methodology of EconometricsEconometrics

(3) Specification of the econometric model of the theoryY = 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

May 2004Prof. Himayatullah14

IntroductionIntroduction Methodology of Methodology of EconometricsEconometrics

(4) Obtaining Data (See Table 1.1, page 6)

Y= Personal consumption expenditure X= Gross Domestic Product all in Billion US Dollars

May 2004Prof. Himayatullah15

IntroductionIntroduction Methodology of EconometricsMethodology of Econometrics(4) Obtaining Data

Year X Y

198019811982198319841985198619871988198919901991

2447.12476.92503.72619.42746.12865.82969.13052.23162.43223.33260.43240.8

3776.33843.13760.33906.64148.54279.84404.54539.94718.64838.04877.54821.0

May 2004Prof. Himayatullah16

IntroductionIntroduction Methodology of EconometricsMethodology of Econometrics

(5) Estimating the Econometric Model

Y^ = - 231.8 + 0.7194 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

May 2004Prof. Himayatullah17

IntroductionIntroduction Methodology of Methodology of EconometricsEconometrics

(6) Hypothesis TestingAre the estimates accord with the expectations of the theory that is beingtested? Is MPC < 1 statistically? If so,it may support Keynes’ theory.Confirmation or refutation of economic theories based onsample evidence is object of StatisticalInference (hypothesis testing)

May 2004Prof.VuThieu18

IntroductionIntroduction Methodology of EconometricsMethodology 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^= - 231.8+0.7196(6000) = 4084.6 Income Multiplier M = 1/(1 – MPC)

(=3.57). decrease (increase) of $1 in investment will eventually lead to $3.57 decrease (increase) in income

May 2004Prof. Himayatullah19

IntroductionIntroduction Methodology of EconometricsMethodology of Econometrics

(8) Using model for control or policy purposes

Y=4000= -231.8+0.7194 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

May 2004Prof. Himayatullah20

IntroductionIntroduction Methodology of Methodology of EconometricsEconometrics

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

May 2004Prof. Himayatullah21

Economic Theory

Mathematic Model Econometric Model Data Collection

Estimation

Hypothesis Testing

Forecasting

Applicationin control or

policy studies