INTRODUCTION TO

ECONOMETRICS
Balaji. B

What is Econometrics?

Econometrics.????

A combination of economic theory,

mathematical
economics,
and
economic statistics.

So what is the difference?

A simple example.

Difference

Controlled Experiments
where an experimenter have full control on
the independent variables
where a treatment group and a control group
is possible

Natural or Quasi-Experiments
It rely solely on the observations of the
variables in the system under study

Difference

Describing Economic reality

Testing hypothesis

Forecasting future economic activity

Deterministic Relationship

is an exact relationship between the

independent variable x and the dependent
variable y

Statistical or Stochastic Relationship

is not an exact relationship; it is a

relationship in which relationship exists
between the independent variable x and the
dependent variable y, but there is also some

Basics

Statement of Theory

Specification of Mathematical model

Specification of Statistical model

Obtain data

Estimating parameters

Hypothesis

Forecasting

Policy purpose

Basics

Types of Data

Scales of Measurement

Population and Sample

Types of Data

Cross Section Data

Data on one or more variables collected at
the same point in time

Time Series Data

Data on a variable collected over a period of
time

Panel / Pooled Data

Combination
section data

of

Time-series

and

Cross

Scales of Measurement

Nominal
Simple labels; No ordering ; No arithmetic
operations

Ordinal
Labels; Natural
operations

Ordering;

No

arithmetic

Interval

Only the distance can be interpreted

Ratio
Identity, Magnitude,
arithmetic operations

Equal

Intervals,

all

Population and Sample

Population
is an entire set of individuals or objects,
which may be finite or infinite

Sample
is a subset of individuals or objects from a
larger population that you collect and analyze
to make inferences

Concern of Econometric Research

Measurement of Parameters of economic

association.

Correlation and Regression.

Population Regression function (PRF) and

Sample Regression function (SRF).

Ordinary Least Square method (OLS) and

Maximum Likelihood method

CLRM Assumptions

Linear in Parameters

X values are fixed in repeated samples

Zero mean value of the disturbance term

E(ui|Xi) = 0

Homoscedasticity or equal variance of ui

No autocorrelation between the disturbances

E(ui |Xi) (uj |Xj) =

0

The role of error term

The stochastic or the random

disturbance error term u

CLRM Assumptions

Linear in Parameters

X values are fixed in repeated samples

Zero mean value of the disturbance term

E(ui|Xi) = 0

Homoscedasticity or equal variance of ui

No autocorrelation between the disturbances

E(ui |Xi) (uj |Xj) =

0

CLRM Assumptions

Variability in X values

Zero covariance between ui and Xi

The number of observations n must be

greater than the number of parameters

The regression model should be correctly specified

There is no perfect Multicollinearity

Basics for empirical

exercise

Plot the data

Descriptive statistics

Functional forms

Stationary conditions

Thank you