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What is Econometrics?

Econometrics may be defined as the social science in which the tools of economic theory, mathematics, and statistical inference are applied to the analysis of economic phenomena.

Econometrics refers to the application of economic theory, mathematics, and statistical techniques for the purpose of testing hypotheses and estimating and forecasting economic phenomena.

Econometrics is partly an art and partly a science, (intuition and good judgment of the econometrician plays a crucial role).


What are the branches of Econometrics?

Theoretical and Applied Econometrics


What is Theoretical Econometrics?

Theoretical econometrics refers to the methods for measurement of economic relationships in general.
Theoretical econometrics considers the assumptions of this method, its properties, and what happens to these properties when one or more of the assumptions of the method are not fulfilled.
e.g The method of ordinary least squares.


What is Applied Econometrics?

Applied econometrics examines the problems encountered and the findings in particular fields of economics, such as demand theory, production, investment, consumption, and other fields of applied economic research.
In short, applied econometrics uses the tools of theoretical econometrics to study some special field(s) of economics and business


What are the functions of Econometrics?

(Analysis) To TEST economic theories or hypotheses.

(Policy) To provide numerical estimates of the coefficients of economic relationships. These are essential in decision making.

Forecasting of events.


What is empirical analysis?

An empirical analysis uses data to test a theory or to estimate a relationship.


Traditional or classical methodology

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


What is a theory?

A theory is a set of systematically interrelated constructs and propositions intended to explain and predict a phenomenon or behavior of interest, within certain boundary conditions and assumptions.


What is a hypothesis?

A hypothesis is an untested statement which attempts to explain how one thing is related to the other. Hypothesis will be based on observation and upon certain assumptions about the way the world behaves.


What is a model?

A model is a simplified representation of a theory or a part of theory depicting cause and effect relationship regarding a certain economic phenomenon.
There are prior theoretical expectations about the size, signs and significance (3 S’s) of parameters of the functions.
The mathematical form of the model(linear or non-linear)


What is a mathematical model?

The mathematics model assumes an exact relationship between the dependent and independent variable.
Y = 𝛽0 + 𝛽1X


What is an econometrics model?

The econometric model hypothesizes that the dependent variable Y is related to the explanatory variable X but that the relationship between the two is NOT exact; its is subject to variation.
Y = 𝛽0 + 𝛽1X + 𝒖


Types of data

*Econometrics uses non-experimental data*

Time series data set consists of observations on a variable or several variables over time. It can be daily, monthly, yearly or quarterly. [Depends on the interval between the observations]

Cross-Sectional Data: A cross-sectional data set consists of a sample of individuals, households, firms, cities, states, countries, or a variety of other units, taken at a given point in time.
Often assume that they have been obtained by a sampling technique such as random sampling from the underlying population.
It is data on one or more variables collected at the same point in time.

Pooled Data: Pooled data is basically a mixture of time series data and cross sectional data. In order to increase our sample size, we can form a pooled cross section by combining the two years.

Panel Data: The idea of panel data comes from the surveys of individual. β€˜β€˜Panel’’ means a group of individuals surveyed repeatedly overtime. A panel data (or longitudinal data) set consists of a time series for each cross sectional member in the data set. The advantage of panel data is that it often allows us to study the
importance of lags in behavior or the result of decision making.