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1. Shambel Zenebe………………………………………02742/09

2. Bayisa Tolesa……………………………………………02087/09

3. Amarech Agmas………………………………………00029/10

4. Habtamu Dawit……………………………………….02353/09

5. Gemechis Regasa……………………………………..02326/09

1) The word Econometrics means measurement in economics.

It is concerned with the use of statistical methods to attach numerical- values to

the parameters of economic models and also with the use of these models for

prediction.

Generally, Econometrics is the application of statistical and mathematical

methods to the analysis of economic data with a purpose of giving empirical

content to economic theories and verifying or refuting them.

2) Methodology of econometrics are the following:

let us consider the well-known Keynesian theory of consumption.

Keynes postulated that the marginal propensity to consume (MPC), the rate of change of

consumption for a unit change in income, is greater than zero but less than 1.

For simplicity, a mathematical economist might suggest the following form of the Keynesian

consumption function:

Y = β1 + β2X 0 ≤ β ≤ 1………………………………………. (#)

where Y= consumption expenditure and X = income, and where β1 and β2, known as the parameters of

the model. The coefficient β2 measures the MPC (propensity to consume).

The purely mathematical model of the consumption function given in (#) is of limited interest to the

econometrician, for it assumes that there is an exact or deterministic relationship between consumption

and income. But relationships between economic variables are generally inexact. To allow for the inexact

relationships between economic variables, the econometrician would modify the deterministic

consumption function 1 as follows:

Y = β1 + β2X + ʋ………………………………………. (##)

where ʋ, known as the disturbance, or error, term, is a random (stochastic) variable that has well-defined

probabilistic properties. The disturbance term 𝝊 may well represent all those factors that affect

consumption but are not taken into account explicitly.

To estimate the econometric model given in(##), that is, to obtain the numerical values of β1

and β2, we need data. For empirical purposes, therefore, we need quantitative information on the

two variables. There are three types of data that are generally available for empirical analysis.

2.4.1) Time series: Are collected over a period of time, such as the data on GDP, employment,

unemployment, money supply, or government deficits. Such data may be collected at regular intervals

that are daily, weekly, monthly, quarterly or annually.

2.4.2) Cross-sectional: are data on one or more variables collected at one point in time 3. Pooled:

we have elements of both time series and cross-sectional data.

2.5) Estimation of the Econometric Model: Now that we have the data, our next task is to

estimate the parameters of the consumption function. The numerical estimates of the parameters

give empirical content to the consumption function.

Thus, the estimated consumption function is:

Y = β1 + β2X………………………………………………… (###)

The hat over a variable or parameter indicates that it is an estimated value.

2.6) Hypothesis Testing: Assuming that the fitted model is a reasonably good approximation of

reality, we have to develop suitable criteria to find out whether the estimates obtained in (###) are in

accord with the expectations of the theory that is being tested.

If the chosen model does not refute the hypothesis or theory under consideration, we may use it

to predict the future value(s) of the dependent variable Y on the basis of known or expected

future value(s) of the explanatory, or predictor, variable X.

2.8) Use of the Model for Control or Policy Purposes: We have the estimated consumption

function given in (###) and the government may use this estimated function for policy making

and further works.

1)Developing statistical methods for the estimation of economic relationships

2)Testing economic theories and hypothesis

3)Evaluating and applying economic policies

4)Forecasting

5)Collecting and analyzing non-experimental or observational data.

Objectives of Econometrics are:

Analysis: - Obtaining empirical evidence to test the explanatory power of economic theories, to

decide how well they explain in the observed behavior of economic units.

Forecast: - forecasting future values of economic magnitudes

Policy making: - The knowledge of reliable estimates of coefficients of economic relationships

very important for the decision of firms as well as the formulation of economic policies.

Steps in econometric analysis:

1) Specification of the model: - Specify the model with which the economic phenomena

will be explored empirically; formulation of the maintained hypothesis. It involves the

determination of:

The dependent and explanatory variables which will be included in the model.

Setting up the mathematical form of the model

A prior theoretical expectation concerning sign and size of regression parameters.

2) Estimation of the model: - obtaining numerical estimates of parameters using some

econometric methods.

Gathering the statistical data on the variable providing in the model.

Examination of the identification condition of the functions

Examination of the aggregation condition of the functions

Examination of the design of correlation between explanatory variables

Choice of an appropriate econometric technique

3) Evaluation of estimates: - determination of the reliability of results obtained from the

estimation stage.

Consists of deciding whether the estimates of the parameters are theoretically

meaningful and statistically satisfactory.

We use econometric a prior criterion: refer to the sign and the size of the parameters of

the model postulated by economic criteria.

We use statistical criteria (first order test): the proportion of variation in the dependent

variable explained by changes in the independent variable (explanatory) variable and

verification that the spread of each estimated coefficient around the true parameters is

sufficiently narrow to give as confidence intervals for estimates.

We use economic criteria (2nd order test): refer to tests that the assumption of the basic

regression model and particularly those about the disturbance or error term are satisfied.

model

4) a)

Scatterplot of Y vs X

60

50

40

Y

30

20

10

X

b)

Y = - 2.70 + 0.268 X

Generally, the minitab out of the regression become:

The regression equation is

Y = - 2.70 + 0.268 X

Constant -2.695 5.137 -0.52 0.614

X 0.26844 0.04033 6.66 0.000

Analysis of Variance

Source DF SS MS F P

Regression 1 1706.6 1706.6 44.29 0.000

Residual Error 8 308.3 38.5

Total 9 2014.9

The scatter diagram of regression plot is as follow:

Scatterplot of Y vs X

60

50

40

Y

30

20

10

X

Also we can apply spss software to fit regression line then we get the following graph:

C) i )

output for minitab for residual also:

Y X RESI1 Y X RESI1

21 65 6.24665 27 90 5.53572

55 187 7.49728 44 157 4.55041

23 126 -8.12803 19 74 1.83072

8 52 -3.26366 17 88 -3.92741

28 143 -7.69147

47 195 -2.65022

collector A B C D E F G H I J

X 65 187 126 52 143 90 157 74 88 195

Y 21 55 823 8 28 27 44 19 17 47

Residuals 6.25 7.50 -8.13 -3.26 -7.69 5.54 4.55 1.83 -3.93 -2.65

Mean = - 4.738 x 10 -15 Approximately is = 0

5) a)

β1 = -15424 β2 = 0.742 β3 = 8.044

Coefficientsa

Standardized

Unstandardized Coefficients Coefficients

b)

C)

R2 = 0.998

Meaning: The explanatory variables per capital disposable income (PPDI (X2)) and (1956-

1970) (X3) are expresses the response variable that is per capital personal consumption

expenditure(PCPCE)(Y) about 99.8%

Adjusted R2

Model Summaryb

Change Statistics

Model R Square Square the Estimate Change Change df1 df2 Change

a

1 .999 .998 .997 12.835 .998 2513.521 2 12 .000

b. Dependent Variable: Y

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