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Basic Econometrics

Basic Econometrics. Course Instructor Prof. Dr. Himayatullah Khan. Basic Econometrics. Introduction : What is Econometrics?. Introduction What is Econometrics ?. Definition 1 : Economic Measurement

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Basic Econometrics

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  1. Basic Econometrics Course Instructor Prof. Dr. Himayatullah Khan Himayatullah

  2. Basic Econometrics Introduction: What is Econometrics? Prof. Himayatullah

  3. IntroductionWhat 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. IntroductionWhat 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) Prof. Himayatullah

  5. IntroductionWhat 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) Prof. Himayatullah

  6. IntroductionWhat 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 Prof. Himayatullah

  7. Economic Theory Mathematical Economics Econometrics Economic Statistics Mathematic Statistics Prof. Himayatullah

  8. IntroductionWhy a separate discipline? Economic theorymakes statements that are mostly qualitative in nature, while econometrics gives empirical content to most economic theory Mathematical economicsis to express economic theory in mathematical form without empirical verification of the theory, while econometrics is mainly interested in the later Prof. Himayatullah

  9. IntroductionWhy a separate discipline? Economic Statisticsis mainly concerned with collecting, processing and presenting economic data. It does not being concerned with using the collected data to test economic theories Mathematical statisticsprovides many of tools for economic studies, but econometrics supplies the later with many special methods of quantitative analysis based on economic data Prof. Himayatullah

  10. Economic Theory Mathematical Economics Econometrics Economic Statistics Mathematic Statistics Prof. Himayatullah

  11. IntroductionMethodology of Econometrics 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” Prof. Himayatullah

  12. IntroductionMethodology of Econometrics (2) Specification of the mathematical model of the theory Y = ß1+ ß2X ; 0 < ß2< 1 Y= consumption expenditure X= income ß1 andß2 are parameters; ß1 is intercept, and ß2 is slope coefficients Prof. Himayatullah

  13. IntroductionMethodology of Econometrics (3) Specification of the econometric model of the theory Y = ß1+ ß2X + u ; 0 < ß2< 1; Y = consumption expenditure; X = income; ß1 andß2 are parameters; ß1is intercept and ß2 is slope coefficients; u is disturbance term or error term. It is a random or stochastic variable Prof. Himayatullah

  14. IntroductionMethodology of Econometrics (4) Obtaining Data (See Table 1.1, page 6) Y= Personal consumption expenditure X= Gross Domestic Product all in Billion US Dollars Prof. Himayatullah

  15. IntroductionMethodology of Econometrics (4) Obtaining Data Prof. Himayatullah

  16. IntroductionMethodology 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 Prof. Himayatullah

  17. IntroductionMethodology of Econometrics (6) Hypothesis Testing Are the estimates accord with the expectations of the theory that is being tested? Is MPC < 1 statistically? If so, it may support Keynes’ theory. Confirmation or refutation of economic theories based on sample evidence is object of Statistical Inference (hypothesis testing) Prof. Himayatullah

  18. IntroductionMethodology 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 Prof.VuThieu

  19. IntroductionMethodology 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 Prof. Himayatullah

  20. IntroductionMethodology of Econometrics 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 Prof. Himayatullah

  21. Economic Theory Mathematic Model Econometric Model Data Collection Estimation Hypothesis Testing Application in control or policy studies Forecasting Prof. Himayatullah

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