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Introduction to Econometrics
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INTRODUCTION
• Example:
– Statisticians: income (Y) and consumption
expenditure (C) go in the same direction
– Economists: an increase in income will raise
consumption expenditure, other things being equal
(Keynesian consumption function)
– Econometricians: 1 USD increase in income will
result in 0.70 cent increase in consumption
expenditure, other things being equal
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EXPECTED OUTCOMES
• Know how to set up econometric models corresponding
to real world economic problems
Hypotheses test
No If the estimated
results are good?
Yes
Forecast
Policy purposes
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Step 1. Question of interest based on economic theories
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Step 2. Set up mathematical model
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Step 3. Set up econometric model
• The mathematic model in Step 2 reflects the exact
relationship between variable consumption and
income of households.
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Step 3. Set up econometric model
• To measure inexact relationships between variables
econometric model:
Ci = β0+ β1Ii+ ui (2)
– Time-series Data
– Pooled Data
• Pooled cross-sectional data
• Panel Data
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Cross-sectional data
• A cross-sectional data set consists of a sample of
individuals, households, firms, cities… taken at a
given point of time.
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A cross-sectional data set on individual characteristics
in 2010
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Time-series data
• A time-series data set consists of observations on a
variable or several variables over time (stock price,
consumer price index, GDP…).
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A time series data on consumption and income of a person
Year C I
1982 3081,5 4620,3
1983 3240,6 4803,7
1984 3407,6 5140,1
1985 3566,5 5323,5
1986 3708,7 5487,7
1987 3822,3 5649,5
1988 3972,7 5865,2
1989 4064,6 6062,0
1990 4132,2 6136,3
1991 4105,8 6079,4
1992 4219,8 6244,4
1993 4343,6 6389,6
1994 4486,0 6610,7
1995 4595,3 6742,1
1996 4714,1 6928,4
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A time-series data FDI and ODA of a country
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Pooled cross sectional data
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Panel data
• A panel data set consists of a time series for each
cross-sectional member in the data set.
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A panel data set on provinces’ characteristics
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• The quality of data depends on:
– Errors in data collection
– Sampling methods
• Data sources:
– Experimental data
– Available data
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Step 5. Estimate parameters of the model
• Data Stata, Eviews, SPSS estimate parameters
of the model (2)
- Multicollinearity
- Heteroskedasticity
- Normality of u
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Step 7: Test hypotheses
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Step 8: Analyze the estimated results
and Forecasting/ policy implication
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