Chapter y THE NATURE AND SCOPE OF ECONOMETRICS
Chapter 1 THE NATURE AND SCOPE OF ECONOMETRICS
1. WHATIN ECONOMETRICS? ● Definition (1) Econometrics: economic measurement (2) Econometrics: the social science in which the tools of economic theory, mathematics, and statistical inference are applied to the analysis of economic phenomena (3) Econometrics: the result of a certain outlook on the role of economics, consists of the application of mathematical statistics to economic data to lend empirical support to the models constructed by mathematical economics and to obtain numerical results
1.1 WHAT IS ECONOMETRICS? Definition （1）Econometrics: economic measurement. （2）Econometrics: the social science in which the tools of economic theory, mathematics, and statistical inference are applied to the analysis of economic phenomena. （3）Econometrics: the result of a certain outlook on the role of economics, consists of the application of mathematical statistics to economic data to lend empirical support to the models constructed by mathematical economics and to obtain numerical results
1.2 WHY STUDY ECONOMETRICS? 91. Economic theory and Econometrics (1) Economic theory makes statements or hypotheses that are mostly qualitative in nature. But the theory itself does not provide any numerical measure of the strength of the relationship between the two (2)Econometrics gives empirical (i.e, based on observation or experiment) content to most economic theory and provide the numerical estimates that the economic theory does not do
1.2 WHY STUDY ECONOMETRICS? 1.Economic theory and Econometrics （1）Economic theory makes statements or hypotheses that are mostly qualitative in nature. But the theory itself does not provide any numerical measure of the strength of the relationship between the two. （2）Econometrics gives empirical (i.e., based on observation or experiment) content to most economic theory and provide the numerical estimates that the economic theory does not do
1.2 WHY STUDY ECONOMETRICS? 92. Mathematical economics and econometrics (1) Mathematical economics express economic theory in mathematical form or equations without regard to measurability or empirical verification of the theory (2) Econometrics empirical verification of economic theory. That iS: uses mathematical models proposed by the mathematical economist to do empirical testing
1.2 WHY STUDY ECONOMETRICS? 2.Mathematical economics and Econometrics （1） Mathematical economics express economic theory in mathematical form or equations without regard to measurability or empirical verification of the theory. （2） Econometrics empirical verification of economic theory. That is: uses mathematical models proposed by the mathematical economist to do empirical testing
1.2 WHY STUDY ECONOMETRICS? 03. Economic statistics and econometrics (1) Economic statistics is mainly concerned with collecting, processing, and presenting economic data in the form of charts, diagrams, and tables The data thus collected constitute the raw data for econometric work (2) Econometrics concerned with using the collected data to test economic theories Because the economics data are nonexperimenalin nature, they are likely to contain errors of measurement, the econometrician has to develop specialmethods ofanalysis to deal with such errors of measurement
1.2 WHY STUDY ECONOMETRICS? 3. Economic statistics and Econometrics （1）Economic statistics is mainly concerned with collecting, processing, and presenting economic data in the form of charts, diagrams, and tables. The data thus collected constitute the raw data for econometric work. （2）Econometrics concerned with using the collected data to test economic theories. Because the economics data are nonexperimenal in nature, they are likely to contain errors of measurement, the econometrician has to develop special methods of analysis to deal with such errors of measurement
1.3 THE METHODOLOGY OF ECONOMETRICS e Procedures of econometrics analysis 1. Creating a Statement of Theory or Hypothesis That is to find out what economic theory says on this subject 2. Collecting data Three types of data for empirical analysis (1) Times series data, collected over a period of time Quantitative data Quantitative data/variables( dummy or categorical (2) Cross-sectional data: data on one or more variables collected at one point in time (3) Pooled data: have elements of both time series and cross-sectional data (4) Panel data: longitudinal or micropanel data. the same cross sectional unit, say, a family or firm, is surveyed over time
1.3 THE METHODOLOGY OF ECONOMETRICS Procedures of econometrics analysis: 1.Creating a Statement of Theory or Hypothesis That is to find out what economic theory says on this subject. 2. Collecting Data Three types of data for empirical analysis: （1）Times series data, collected over a period of time. Quantitative data Quantitative data/variables（dummy or categorical ） （2）Cross-sectional data: data on one or more variables collected at one point in time. （3）Pooled data: have elements of both time series and cross-sectional data. （4）Panel data:longitudinal or micropanel data, the same crosssectional unit, say, a family or firm, is surveyed over time
1.3 THE METHODOLOGY OF ECONOMETRICS e Procedures of econometrics analysis 3. Specifying the Mathematical Model Plot the data in a scatter diagram, or scatter gram, draw a straight line through the scatter points and write the relationship be p etween the two variables by the mathematical model B BX B, B, the parameters of the liner function B, the intercept, the value ofy when Xis zero B, the slope, the rate or change in y for a unit change in X
1.3 THE METHODOLOGY OF ECONOMETRICS Procedures of econometrics analysis 3. Specifying the Mathematical Model Plot the data in a scatter diagram, or scatter gram, draw a straight line through the scatter points and write the relationship between the two variables by the mathematical model: B1 , B2 the parameters of the liner function. B1 the intercept, the value of Y when X is zero; B2 the slope, the rate or change in Y for a unit change in X. Yi = B1 + B2 Xi
1.3 THE METHODOLOGY OF ECONOMETRICS e Procedures of econometrics analysis 4. Specifying the Statistical or Econometric Model Mathematical model assumes an exact or deterministic relationship between the two variables, that is, for a given X, there is a unique value of y. but data or variables are nonexperimentally collected, there may be other forces affectin Y y=B,+B,X1+t(1.2) u represents the random error term, that is, all those forces (besides X) that affect r but are not explicitly introduced in the model, as well as purely random forces
1.3 THE METHODOLOGY OF ECONOMETRICS Procedures of econometrics analysis 4.Specifying the Statistical or Econometric Model Mathematical model assumes an exact, or deterministic, relationship between the two variables, that is, for a given X, there is a unique value of Y. But data or variables are nonexperimentally collected, there may be other forces affecting Y. represents the random error term, that is, all those forces (besides X) that affect Y but are not explicitly introduced in the model, as well as purely random forces. Yi = B1 + B2 Xi + u（1.2） u
1.3 THE METHODOLOGY OF ECONOMETRICS o Procedures of econometrics analysis 5. Estimating the parameters of the chosen Econometric model using the method of ordinary least squares (ols) to estimate the parameters of the model + The estimated regression line gives the relationship between average y and x, that is, on average how responds to a unit change in X. We use"on the average "because the error term u is likely to make relationship somewhat imprecise
1.3 THE METHODOLOGY OF ECONOMETRICS Procedures of econometrics analysis 5. Estimating the Parameters of the Chosen Econometric Model using the method of ordinary least squares (OLS) to estimate the parameters of the model. The estimated regression line gives the relationship between average Y and X, that is, on average how Y responds to a unit change in X. We use “on the average” because the error term u is likely to make relationship somewhat imprecise. Yi b1 b2 Xi ˆ = +
1.3 THE METHODOLOGY OF ECONOMETRICS o Procedures of econometrics analysis 6. Checking for Model Adequacy: Model Specification Testing (1) Multiple linear regression model Simple/Two-variable linear regression model: one explanatory variable Multiple linear regression model: several /multiple explanatory variables (2) B1+B2X2;+B3X3+ C USLllniaucu I CivIl llne b1+b2
1.3 THE METHODOLOGY OF ECONOMETRICS Procedures of econometrics analysis 6. Checking for Model Adequacy: Model Specification Testing （1）Multiple linear regression model Simple/Two-variable linear regression model: one explanatory variable Multiple linear regression model: several/multiple explanatory variables. （2）The estimated regression line: Yi = B1 + B2 X2i + B3 X3i + u Yi b1 b2 X2i b3 X3i ˆ = + +