The Nature of Econometrics

and Economic Data

● Time series data
• Observations of a variable or several variables over time
• For example, stock prices, money supply, consumer price index, gross
domestic product, annual homicide rates, automobile sales, …
• Past events can influence future events and lags in behavior are prevalent in
the social sciences, time is an important dimension in a time series dataset.
• Time series observations are typically serially correlated
• Ordering of observations conveys important information
• Data frequency: daily, weekly, monthly, quarterly, annually, …
• This dataset can be used to study the evolution of variables over time and to
forecast future values of these variables
• Typical features of time series: trends and seasonality
• Typical applications: applied macroeconomics and finance
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 Pakistan Population (1981-
2008)

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 The Nature of Econometrics
and Economic Data
● Time series data on minimum wages and related variables

Average minimum Average coverage rate, Unemployment Gross national

wage for the given year the percentage of workers rate product
covered by the minimum
wage law
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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Sources of Pakistani Time
Series Data
● Pakistan Economic Surveys

● State Bank Annual Reports

● Punjab Development Statistics

● World Bank, IMF, Transparency International, BFRS Political

Violence in Pakistan Data Set.

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 The Nature of Econometrics
and Economic Data
● Pooled cross sections
• To increase sample size, two or more cross sections are combined in
one data set
• Cross sections are drawn independently of each other
• Pooled cross sections often used to evaluate policy changes or to
see how a key relationship as changed over time.

• Example:
• Evaluate effect of change in property taxes on house prices
• Random sample of house prices for the year 1993
• A new random sample of house prices for the year 1995
• Compare before/after (1993: before reform, 1995: after reform)

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Nature of Econometrics
and Economic Data
● Pooled cross sections on housing prices
Property tax
Size of house
in square feet
Number of bedrooms
Number of bathrooms

Before reform

After reform

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Some Pakistani Pooled Cross
Section data sources
● Pakistan Social And Living Standards Measurement(PSLM)

● Multiple Indicator Cluster Survey (MICS)

● Demographic and Health Survey (DHS)

● World Enterprise Survey (WES):

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 23
 The Nature of Econometrics
and Economic Data
● Panel or longitudinal data
• The same cross-sectional units are followed over time
• Panel data have a cross-sectional and a time series dimension
• This dataset can be used to learn about economic relationships
from the experiences of the many different entities in the dataset
and from evolution over time of the variables for each entity.
• Panel data can be used to account for time-invariant unobservables
• Panel data can be used to model lagged responses
• Example:
• City crime statistics; each city is observed in two years
• Time-invariant unobserved city characteristics may be modeled
• Effect of police on crime rates may exhibit time lag

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Nature of Econometrics
and Economic Data
● Two-year panel data on city crime statistics

Each city has two time

series observations

Number of
police in 1986

Number of
police in 1990

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Some Pakistani Panel Datasets

● World Enterprise Survey has panel data for a subsample of

Pakistani firms.

● Pakistan Panel Household Survey (PPHS) collected by the

Pakistan Institute of Development Economic (PIDE) and World Bank is
a panel dataset covering a wide range of socio-economic and
demographic topics for a sample of households collected in 2001 and
1991.

● Pakistan Rural Household Survey (PRHS) continued the PPHS for

rural households and was conducted in 2004 with another round
conducted in 2010 .

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 The Nature of Econometrics
and Economic Data
● Causality and the notion of ceteris paribus
Definition of causal effect of on :
“How does variable change if variable is changed
but all other relevant factors are held constant”

Causality: Cause and effect XèY

Ceteris Paribus: Holding other relevant factors fixed

● Most economic questions are ceteris paribus questions

● It is important to define which causal effect one is interested in

● It is useful to describe how an experiment would have to be designed to

infer the causal effect in question

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 Correlation vs Causation

● Correlation tells us two variables are related.

● Causation means that changes in one variable cause changes in another

variable.

● Example 1: “Students with longer hair get higher grades in econometrics”

● Does that mean that you should grow your hair longer to do well in
this course?
● The real cause might be gender: that is, women (who usually have longer hair)
performed better.

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 28
 Correlation vs Causation

● Example 2: ‘‘The correlation between workers’ education levels and

wages is strongly positive”

● Does this mean education “causes” higher wages?

● Possibility 1
• Education improves skills and skilled workers
get better paying jobs
• Education causes wages to á

● Possibility 2
• Individuals are born with quality A which is relevant for success in
education and on the job
• Quality (NOT education) causes wages to á
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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 29
 The Nature of Econometrics
and Economic Data
● Causal effect of fertilizer on crop yield
• “By how much will the production of soybeans increase if one
increases the amount of fertilizer applied to the ground”
• Implicit assumption: all other factors that influence crop yield such
as quality of land, rainfall, presence of parasites etc. are held fixed

● Experiment:
• Choose several one-acre plots of land; randomly assign different
amounts of fertilizer to the different plots; compare yields
• Experiment works because amount of fertilizer applied is unrelated
to other factors influencing crop yields

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Nature of Econometrics
and Economic Data
● Measuring the return to education
• “If a person is chosen from the population and given another
year of education, by how much will his or her wage increase?”
• Implicit assumption: all other factors that influence wages such as
experience, family background, intelligence etc. are held fixed

● Experiment:
• Choose a group of people; randomly assign different amounts of
education to them (infeasable and ethical concerns!); compare
wage outcomes
• Problem without random assignment: amount of education is
related to other factors that influence wages (e.g. Intelligence and
experience)
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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Nature of Econometrics
and Economic Data
● Effect of law enforcement on city crime level
• “If a city is randomly chosen and given ten additional police officers,
by how much would its crime rate fall?”
• Alternatively: “If two cities are the same in all respects, except that
city A has ten more police officers than city B, by how much would
the two cities‘ crime rates differ?”

● Experiment:
• Randomly assign number of police officers to a large number of
cities
• In reality, number of police officers will be determined by crime rate
(simultaneous determination of crime and number of police)

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Nature of Econometrics
and Economic Data
● Effect of the minimum wage on unemployment
• “By how much (if at all) will unemployment increase if the minimum
wage is increased by a certain amount (holding other things fixed)?”

● Experiment:
• Government randomly chooses minimum wage each year and
observes unemployment outcomes
• Experiment will work because level of minimum wage is unrelated
to other factors determining unemployment
• In reality, the level of the minimum wage will depend on political
and economic factors that also influence unemployment

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Nature of Econometrics
and Economic Data
● Testing predictions of economic theories
• Economic theories are not always stated in terms of causal effects
• For example, the expectations hypothesis states that long term
interest rates equal compounded expected short term interest rates

• An implicaton is that the interest rate of a three-months T-bill

should be equal to the expected interest rate for the first three
months of a six-months T-bill; this can be tested using econometric
methods

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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Top Journals

● International
i. The Quarterly Journal of Economics (QJE)
ii. American Economic Review (AER)
iii. Journal of Political Economy
iv. Econometrica

● Pakistan
i. The Lahore Journal of Economics (LJE)
ii. The Pakistan Development Review (PDR)

● Working Papers
i. National Bureau of Economic Research (NBER)
ii. Munich Personal RePEc Archive (MPRA)
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distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 35