Econometrics Lec1 (2) PDF - Introduction to Econometrics

# Course Objectives - This course is an introduction to econometrics that is mainly concerned with the econometric models. - The main objective is to provide students with the basic knowledge and skills of: - Specification of models - Model estimation using real data - Model testing...

# Course Objectives - This course is an introduction to econometrics that is mainly concerned with the econometric models. - The main objective is to provide students with the basic knowledge and skills of: - Specification of models - Model estimation using real data - Model testing - Curing model estimation problems ### Think? - What is the econometric model? **Answer**: It is one (or more) equation that describes one (or more) economic relationships. The economic relationship is a kind of relationship between at least two economic variables. - We will see how can variable (dependent or phenomena) affected by another variable (independent) according to the logic of the economic theory. - We name the model by its dependent variable because: - It is the phenomena that we aim to explain the change in it - We have only one dependent variable in our model but the independent can be more than one variables ### Think? - What is econometrics? - What are the main topics of the course? - What are the main terminologies in this course? **Answer**: - **Econometrics**: The quantitative analysis of the realistic economic relationship. - **Main topics of the course**: - Model specification - Model estimation - Model testing - Model problems These first two topics (Model specification and estimation) are covered in chapter 1. - **Model specification** is covered in the first lecture. - **Model estimation** makes up the rest of chapter 1. - **Model testing** is the focus of chapter 2. - **Model problems** are covered in chapters 5 and 6. - **Important terminologies**: - Regression model - Ordinary Least Squares (OLS) - Hypothesis and null hypothesis - Test problem ### Course Evaluation - **Midterm exam**: 30% - **Attendance and assignments**: 20% - **Final exam**: 50% ## Econometric Skills The course aims to help students develop a number of skills related to econometrics. These can be broken down into four categories: | Category | Skills | Description | |---|---|---| | Knowledge and Understanding Skills | A1. Demonstrate knowledge of the key econometric techniques | Students will be able to describe and apply basic econometric techniques. | | | A2. Describe the related subjects for the empirical analysis of economic, and business phenomena. | Students will be able to explain the context of economic models and their application to real-world situations. | | Intellectual Skills | B1. Analyze theories and models and use them to solve problems and make decisions. |Students will be able to apply theoretical knowledge of econometrics to solve practical problems. | | Professional Skills |C1. Classify relevant data to estimate economic and business relationships in such a way meaningful indicators can be provided for policy making | Students will be able to identify and use appropriate data to build and evaluate econometric models. | | | C2. Examine estimation results in a way they can be used for problem solving and decision making in economic and business contexts. | Students will be able to interpret the results of econometric models and use them to inform decision-making. | | General Skills and Competence | D1. Effectively apply statistical software(Eviews) to implement the econometric estimation and analyses empirical results which can be used in projects (for example: The graduated projects) | Students will be able to use econometric software to test and estimate models, and draw conclusions from the results. | # Chapter One: Basic Concepts ## 1/1: Introduction ### Defining Econometrics - **Edward E. Leamer** defined it as the *use of mathematics extensively* to the extent that it prevented his best friend to specialize in Economics. - **Paul A. Samuelson, T.C. Koopmans, and JR Stone** defined it as the *quantitative analysis of the realistic economic phenomena*. ### Generally speaking, Econometrics can be viewed as trials to put the economic fact in a quantitative form and reduce the gap between the Economic theory and the reality. - Econometrics gives the opportunity to test the statistical data and estimate the businesses, consumers and government practices. ## 1/1/2: The Use of Econometrics There are three main uses of econometrics: 1. **Specification** of the economic reality and estimation. 2. **Testing** the economic relations as can be seen in the economic theory or testing Hypothesis. 3. **Forecasting** economic activity in the future after detecting the model estimation problems. ## Model Specification - **For example**, to construct the **consumption demand** (name of model) for a particular commodity we need to collect data on some variables that affects consumption, those are: - **P**: The price of the good - **Ps**: Price of the substitute commodities - **Yd**: Disposable income - **This relationship can be put in the following form**: What is the name of this form? $C = f(P, Ps, Yd)$ (1-1) - **And if we imagine that we have collected data on the four variables in the function (1-1), where**: - **C**: The dependent variable (economic phenomenon) - **P, Ps, Yd**: Independent variables (the causes or explanations of the phenomenon). - **This function can be putted in the following equation**, which is reflect the behavior of the dependent variable in its relation with the independent variables: $C = α1 + α2P + α3Ps + α4Yd$ (1-2) - **Equation No. (1-2)** Which is known as a true model or the model before estimation under condition: adding the stochastic or random or disturbance error. - **Then**, we collect real data of our variables to end the Model Specification. ## Model Estimation - **The main objective of econometrics is to estimate or measure the values of parameters α1, α2, α3, α4** - **Let's imagine** that the results of estimating equation No. (1-2) Which is known as a true model or the model before estimation under condition adding the stochastic or random or disturbance error as follows (by using a certain econometric approach which is called regression): $C = -60 -0.4P + 0.2Ps + 12Yd$ (1-3) - **Equation (1-3) gives us more accurate concepts.** - **Equation No. (1-3)** Which is known as an **estimated model** or the model after estimation. - **So; for example, an increase in disposable income by one unit,** this would increase consumption by 12 units for each unit. The value 12 is known as the estimated regression coefficient, and what applies to it applies to the rest of the coefficients or other parameters. - **Economist can test the hypothesis** that says, the good to which it is applied is a normal good, that consumed quantities increase with the increase in the disposal income. This can be done by applying several statistical tests to estimate the parameter α4 of the disposable income in equation No. (1-3). - **The estimated parameters may be**: - **Different from zero, statistically significant**. - **Zero, it is not statistically significant**, or in other words, it does not have a fundamental effect. - **The third use of econometrics is in prediction or forecasting in the future**, depending on what happened in the past. - **The accuracy of these predictions or forecasting depends to a large extent on the degree to which the past represents an appropriate measure of the future.** - **For example; Returning to function No (1-1)** $C = f(P, Ps, Yd)$ - **If the manager wanted to increase the prices of the commodity, in this case the sales forecasts can be calculated**: - once without increasing the prices, - and again by increasing the prices, - and comparing the two situations, - and then assisting the manager of the institution in making the decision, - and it can be used by econometrics for forecasting and analyzing the adopted policies. ## 1/2/2 Econometrics Approaches - **There are different methods of analysis are used in different areas (like biological, natural and psychological sciences and economics)** due to the different nature of the problems facing each of them. - **In this regard, Clive Granger indicated to the need for a special area for econometrics and its own references.** ## Steps necessary to be followed for any kind of quantitative research 1. **Specification** of the model or relationships to be studied. 2. **Collecting** the data required to estimate the model (estimating its parameters). 3. **Measure or estimate** the model using the collected data. - **The first and second steps are the same in all quantitative works, while the methods used in the third step for estimating the model differ between and within different works as well.**