Applied Econometrics Introduction PDF

Applied Econometrics Introduction Dr. Narendra Nath Dalei Dept. of Economics-CUHP WHAT IS ECONOMETRICS? ❑Econometrics means “economic measurement”.The scope of econometrics is much broader, as can be seen from the following quotations: ❑It consists of the application of mathematical stati...

Applied Econometrics Introduction Dr. Narendra Nath Dalei Dept. of Economics-CUHP WHAT IS ECONOMETRICS? ❑Econometrics means “economic measurement”.The scope of econometrics is much broader, as can be seen from the following quotations: ❑It 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. ❑It may be defined as the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate inference methods. ❑It is concerned with the empirical determination of economic laws. ❑ The method of econometric research aims, essentially, at a conjunction of economic theory and actual measurements, using the theory and technique of statistical inference as a bridge pier. WHY ECONOMETRICS IS A SEPARATE DISCIPLINE? ❑ Econometrics is an amalgam of economic theory, mathematical economics, economic statistics, and mathematical statistics. ❑ The subject deserves to be studied in its own right for the following reasons. ❑ Economic theory makes statements or hypotheses that are mostly qualitative in nature, But the theory itself does not provide any numerical measure of the relationship. ❑ For example microeconomic theory states that “a reduction in the price of a commodity is expected to increase the quantity demanded of that commodity, other things remaining the same”. ❑ Thus this economic theory postulates that “a negative or inverse relationship between the price and quantity demanded of a commodity”. It does not tell by how much the quantity will go up or down as a result of a certain change in the price of the commodity. It is the job of the econometrician to provide such numerical estimates. ❑ The main concern of mathematical economics is to express economic theory in mathematical form (equations) without regard to measurability or empirical verification of the theory. Econometrics is mainly interested in the empirical verification of economic theory. ❑ Economic statistics is mainly concerned with collecting, processing, and presenting economic data in the form of charts and tables jobs of the economic statistician. But the economic statistician does not go any further. One who does that becomes an econometrician. METHODOLOGY OF ECONOMETRICS ❑ Broadly speaking, traditional econometric methodology proceeds along the following lines. 1. Statement of theory or hypothesis. 2. Specification of the mathematical model of the theory. 3. Specification of the statistical, or econometric, model. 4. Obtaining the data. 5. Estimation of the parameters of the econometric model. 6. Hypothesis testing. 7. Forecasting or prediction. 8. Using the model for control or policy purposes. ❑ To illustrate the preceding steps, let us consider the well-known Keynesian theory of consumption. 1. Statement of Theory or Hypothesis Keynes postulated that the marginal propensity to consume (MPC), the rate of change of consumption for a unit (say, a dollar) change in income, is greater than zero but less than 1 (0