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2012Himayatullah1
Basic EconometricsBasic Econometrics
Course Instructor
Prof. Dr. Himayatullah Khan
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Prof. Himayatullah2
Basic EconometricsBasic Econometrics
Introduction: What is Econometrics?
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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)
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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)
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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)
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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
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May 2004Prof. Himayatullah7
Econometrics
Economic Theory
MathematicalEconomics
Economic Statistics
Mathematic Statistics
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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
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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
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May 2004Prof. Himayatullah10
Econometrics
Economic Theory
MathematicalEconomics
Economic Statistics
Mathematic Statistics
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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”
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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
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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
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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
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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
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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
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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)
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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
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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
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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
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May 2004Prof. Himayatullah21
Economic Theory
Mathematic Model Econometric Model Data Collection
Estimation
Hypothesis Testing
Forecasting
Applicationin control or
policy studies