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Flashcards in Lecture 1 Deck (11)
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1
Q

What are the 3 major uses of econometrics

A
  1. Describe economic reality
  2. Test hypotheses about economic theory
  3. Forecast future economic activity
2
Q

Explain the 3 steps involved in quantifying economic relationship

A
  1. Specifying/ Identifying theoretical economic relationships between variables
  2. Collecting data on those variables identified by the theoretical model.
  3. Obtaining estimates of the parameters in the theoretical relationships
3
Q

Explain what correlation measures

A

Measures the linear relationship between x and Y from a probability distribution.

4
Q

Explain the main advantage and disadvantage of using the correlation measure

A

Correlation divides by the variance which ensures it produces a scale-free measure with value always between -1 and 1. The main disadvantage of using correlation is that it only takes into account linear relationships. For example, if there was a quadratic relationship between 2 variables correlation would fail to take this into account.

5
Q

Explain what the covariance measures

A

The covariance measures the average cross product of devotions of X around its mean.

6
Q

What is linear regression used to measure

A

Linear regression models the relationship between 2 variables that are assumed to be linear,

7
Q

What does ei (epsilon) measure?

A

Epsilon measures the error and this is calculated by subtracting the estimated value of Y from the estimated value of Y.

8
Q

What is the equation for a standard linear regression equation

A

Y=A + Bx + e

9
Q

What are the 4 assumptions of the CLRM?

A
  1. E(e|x)=0 the error term is independent of xi see notes for full proof.
  2. V(e|x)=O^2 ( theta squared) This shows that the variance of the error term conditioned on x equals a constant. How far the estimated value is from the actual value is assumed to be constant throughout.
  3. Cov(ei,ej|x)=0, information about the ith person had no info about the Jth person.
  4. Ei|x-N(0,0^2), The regression model follows a normal distribution with a mean of 0 and a standard deviation of theta squared.
10
Q

How do you derive a from the residual ei

A
  1. Sqaure the residual ei and then replace with y-a-bx

2. Differentiate with respect to a and replace with y bar and x bar and then you should have a=

11
Q

How do you derive b from the residual ei

A
  1. Replace ei with y-a-bx squares and then differentiate with respect to b.
  2. replace a with the equation derived and rearrange for b see notes for full detail.