Basic Econometrics ` Basic Econometrics


Introduction Methodology of Econometrics



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Basic Econometrics

Introduction Methodology of Econometrics

  • (2) Specification of the mathematical model of the theory
  • Y = ß1+ ß2X ; 0 < ß2< 1
  • Y= consumption expenditure
  • X= income
  • ß1 and ß2 are parameters; ß1 is
  • intercept, and ß2 is slope coefficients
  • May 2004
  • Prof. Himayatullah

Introduction Methodology of Econometrics

  • (3) Specification of the econometric model of the theory
  • Y = 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 2004
  • Prof. Himayatullah

Introduction Methodology of Econometrics

  • (4) Obtaining Data
  • (See Table 1.1, page 6)
  • Y= Personal consumption
  • expenditure
  • X= Gross Domestic Product
  • all in Billion US Dollars
  • May 2004
  • Prof. Himayatullah

Introduction Methodology of Econometrics

  • (4) Obtaining Data
  • May 2004
  • Prof. Himayatullah
  • Year
  • X
  • Y
  • 1980
  • 1981
  • 1982
  • 1983
  • 1984
  • 1985
  • 1986
  • 1987
  • 1988
  • 1989
  • 1990
  • 1991
  • 2447.1
  • 2476.9
  • 2503.7
  • 2619.4
  • 2746.1
  • 2865.8
  • 2969.1
  • 3052.2
  • 3162.4
  • 3223.3
  • 3260.4
  • 3240.8
  • 3776.3
  • 3843.1
  • 3760.3
  • 3906.6
  • 4148.5
  • 4279.8
  • 4404.5
  • 4539.9
  • 4718.6
  • 4838.0
  • 4877.5
  • 4821.0

Introduction Methodology 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 2004
  • Prof. Himayatullah

Introduction Methodology 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)
  • May 2004
  • Prof. Himayatullah

Introduction Methodology 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 2004
  • Prof.VuThieu

Introduction Methodology 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 2004
  • Prof. Himayatullah

Introduction Methodology 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
  • May 2004
  • Prof. Himayatullah
  • May 2004
  • Prof. Himayatullah
  • Economic Theory
  • Mathematic Model
  • Econometric Model
  • Data Collection
  • Estimation
  • Hypothesis Testing
  • Forecasting
  • Application
  • in control or
  • policy
  • studies

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