ManagerialEcon - Lecture01 - Part 6 Econometrics

DEPARTMENT OF
ECONOMICS
MANAGERIAL ECONOMICS
Mr. Jones Mendoza

Demand Forecasting
Department of Economics
50 Years of Excellence in Economics
WHAT IS
ECONOMETRICS
Construction of a Graph
• Graph
• A visual representation of the
relationship between two variables
• Horizontal axis
• Vertical axis
• Independent variable
• Dependent variable
• Ceteris paribus
LO8 Department of Economics

DEPARTMENT OF
ECONOMICS
What is econometrics
INTRODUCTION TO ECONOMETRICS
Computer Econometrics
and Data Resource for3Economics
Session
Department of Economics Session 6
What is Econometrics?
Economic Measurement
Economics + ‘metrics’ = Economic measurement
What is being measured?
How is it being measured?
Social Science
Econometrics is a social science in which the Tools of

economic theory, mathematics, and statistical inference are
applied to the analysis of economic
phenomena.(Goldberger, 1964)
It is concerned with the empirical determination of

economic laws. (Theil,1971)
Think of it this way…
Economics, as a study, is mainly concerned with

formulating qualitative policy recommendations to various
issues. (e.g., Exports are falling, local industries will suffer
→ “Let’s have the peso depreciate”)
Econometrics attempts to provide the quantitative aspect

of this recommendation
(e.g., “Let’s have the peso depreciate by 0.50 centavos by the
end of the year”)
How was the “0.50 centavos” determined, you ask?
How do we ‘know’ 0.50 centavos is a reliable estimate?
9
Correlation measure LINEAR association only.
10
Correlation
• Measures the relative strength of the linear

relationship between two variables
• Unit-less
• Ranges between –1 and 1
• The closer to –1, the stronger the negative linear
relationship
• The closer to 1, the stronger the positive linear
relationship
• The closer to 0, the weaker any positive linear
relationship
11
Scatter Plots of Data with Various Correlation Coefficients
Y Y Y
X X X
r = -1 r = -.6 r=0
Y
Y Y
X X X
r = +1 r = +.3 r=0
12
Linear Correlation
Linear relationships Curvilinear relationships
Y Y
X X
Y Y
X X
13
Linear Correlation
Strong relationships Weak relationships
Y Y
X X
Y Y
X X
Slide50from:
◼ Years ofStatistics
Excellence infor Managers Using Microsoft® Excel 4th Edition, 2004 Prentice-Hall
Economics
14
Linear Correlation
No relationship
X
15
Simple Linear Regression: Linear Equations
Linear Equations
16
Simple Linear Regression
17
Simple Linear Regression
18
Simple Linear Regression: Least Squares
19
Simple Linear Regression: Coefficient Equations
20
Simple Linear Regression: Computation Table
21
Simple Linear Regression: Interpretation of Coefficients
22
23
24
25
26
27
28
Simple Linear Regression: Measures of Variation
29
Simple Linear Regression: Measures of Variation
30
Simple Linear Regression: Coefficient of Determination
31
Simple Linear Regression: Coefficient of Determination
32
Simple Linear Regression: Goodness of fit
• The coefficient of determination r2 (2 variable case)
or R2 (multiple variable case) is a summary measure
that tells how well the regression line fits the data
– It measure the proportion or percentage of the total
variation in Y explained by the regression model
– It is nonnegative quantity (0≤ R2 ≤1)
• The coefficient of correlation r is a measure of the
degree of association between two variables
– Quantity closely related but conceptually very much
different from r2
33
Simple Linear Regression: Goodness of fit
Regression vs Correlation
Correlation analysis
• Primary objective: to measure the degree of linear association
between two variables
• Symmetry in the way variables are treated
• Both variables are assumed to be random
• It does not imply any cause and effect relationship
• The correlation between two random variables is often due only
to the fact that both variables are correlated with the same third
variable
Regression analysis
• Primary objective: to estimate or predict the average value of one
variable on the basis of fixed values of other variables
• Asymmetry in the way dependent & explanatory variables are
treated
• Dependent variable is random (normal probability distribution)
• Independent variables are assumed to have fixed values
• It implies causality
Department of Economics 34
Regression modeling selection
process
• When you have more than one

regression equation based on data, to
select the "best model", you should
compare:
• R2 or adjusted R2, i.e., the percentage of
variance in Y accounted for variance in X
captured by the model
• Standard deviation of error terms, i.e.,
observed y-value/ predicted y-value for
each X
• The T-statistic of individual parameters
Department of Economics 35
THANK YOU FOR LISTENING
Cbmjr.mnl@gmail.com
0922 804 0084
Department
Departmentof
of Economics
Economics
50
50Years
Yearsof
ofExcellence
Excellencein
inEconomics
Economics

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DEPARTMENT OF

Mr. Jones Mendoza

LO8 Department of Economics

Economics + ‘metrics’ = Economic measurement

What is being measured?

How is it being measured?

Econometrics is a social science in which the Tools of

It is concerned with the empirical determination of

Economics, as a study, is mainly concerned with

Econometrics attempts to provide the quantitative aspect

How was the “0.50 centavos” determined, you ask?

How do we ‘know’ 0.50 centavos is a reliable estimate?

• Measures the relative strength of the linear

Linear relationships Curvilinear relationships

Strong relationships Weak relationships

• When you have more than one

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