Introductory Econometrics

Prachi Singh & Partha Bandopadhyay

Ashoka University

January 20, 2021

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 Introduction

What you need

Understanding of basic statistics (course ECO-1400).

STATA: No worries if you haven’t used it before but make sure that
you put in extra effort to be comfortable as most of assessments are
going to have a STATA component as well.
Regularity

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 Introduction

Evaluation

Mid-term: 30 percent - 6th March, 2021

STATA Assignment 1: 10 percent - TBD
STATA Assignment 2: 10 percent - TBD
End-term: 50 percent - 5th May, 2021 (can change if the department
decides to conduct the exam of compulsory courses at the same time
for all sections)
IMPORTANT: If I catch you cheating (If your answers are eerily similar -
imagine similar errors, copy pasted material) then I will deduct 20 marks
and report you to OAA directly.
Your grades will be based on your ABSOLUTE marks, I will use OAA
grading cut-offs.

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Reference

Chapters 1 to 7: Introductory Econometrics - A Modern Approach by

Jeffrey M. Woolridge (5th edition)
STATA Introduction & Graphing: German Rodriguez’s website (see
link in CourseOutline.xlsx )
STATA miscellaneous: I will introduce more datasets in class to play
around. You will get some new random dataset for your assignments
and in your exams.
You will not get any problem sets. The exercises at the end of each
chapter of Woolridge should be used as sample exercises.

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No attendance but I will monitor your participation

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Your choice entirely

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What we will learn

Drawing inferences from a sample of a population.

Econometric Modelling.
Data analysis tools.
Coding in STATA

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Reading Journal Articles

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Creating graphs for data analysis

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What you will NOT learn

Building sophisticated models of CAUSALITY

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REMEMBER: Correlation does not IMPLY Causation

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Correlation

Relation between two variables.

Rough Logic: How much do the variables co-vary
Equivalent: How does one variable change when the other variable
changes.
Example: Household income and Average Health of the Household.
Lets say we find a positive correlation!

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Correlation continued

Common Interpretations:
Households that have higher income also have higher average health
Households that have higher health also have higher income
Better Income leads to better health
Better health leads to better income.

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Correlation continued

Conclusion:
Households that have higher income also have higher average health
Households that have higher health also have higher income

THESE ARE TRUE STATEMENTS BUT. . .

Better Income leads to better health
Better health leads to better income.
THESE STATEMENTS IMPLY -
Direction of Effect: Health to Income OR Income to Health

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Correlation continued

If I agree with, say “Better Income Leads to Better Health” Logical

Conclusion: If I transfer some money to households, I should see better

health!

YOU MAY BE COMPLETELY WRONG!

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Partial correlation

For example, Higher Income households may also be households with

better educated adult members and it may be education that drives health
and not income!

Logical Question: Does Income have an effect on Health after you take
into account education?

Partial correlation coefficient: Is a measure that takes into account the

effect of the “other factor(s)”.
It measures how much does income and health co-vary after you subtract
out the effect of education from each of them.
“Partial Out” the effect of education.

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Regression Analysis

Is an equivalent way of answering the same question.

It asks what is the effect of a change in one unit of income on health,

education kept constant “Education kept constant” IS ACTUALLY “the
effect of education partial-ed out!”

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Lets start...

Economic model of crime

Aim: Modelling amount of time spent in criminal activity as a function of
its determinants
y = f (x1 , x2 , x3 , x4 , x5 , x6 , x7 ) (1)
where,
y = hours spent in criminal activities,
x1 = “wage” for an hour spent in criminal activity,
x2 = hourly wage in legal employment,
x3 = income other than from crime or employment,
x4 = probability of getting caught,
x5 = probability of being convicted if caught,
x6 = expected sentence if convicted, and
x7 = age.
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Econometric Modelling

Economic model of crime

Aim: Modelling amount of time spent in criminal activity as a function of
its determinants
crime = β0 + β1 wagef + β2 otherinc + β3 arrestfreq+
(2)
β4 convictprob + β5 Avsentence + β6 age + µ
where,
crime = some measure of frequency of criminal activities,
wagef = wage from formal/legal employment,
otherinc = income from other sources - inheritance, unemployment
benefits,
arrestfreq = the frequency of arrests for prior infractions,
convictprob = the frequency of conviction, and,
Avsentence = the average sentence length after conviction,
age = age
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Another example

Job training and worker productivity

Aim: To assess whether job training has an effect on worker productivity

wage = f (education, experience, training) (3)

where,
wage = hourly wage,
education = years of formal education,
experience = years of workforce experience, and
training = weeks spent in job training.

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Econometric model

Job training and worker productivity

Aim: To assess whether job training has an effect on worker productivity

wage = β0 + β1 educ + β3 exper + β4 training + µ (4)

where,
wage = hourly wage,
education = years of formal education,
experience = years of workforce experience, and
training = weeks spent in job training.

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Cross-sectional data

A cross-sectional data set consists of a sample of individuals, households,

firms, cities, states, countries, or a variety of other units, taken at a given
point in time.
obs wage exper training married
1 10 0 0 1
2 12 4 0 1
3 30 7 1 0
. . . . .
. . . . .
99 100 1.5 0 0
100 80 2 1 1

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Time series data

A time series data set consists of observations on a variable or several

variables over time.
country year GDPrate Unemployment LeftGovt
A 1920 0.5 20 0
A 1921 -0.2 30 0
A 1921 -0.4 40 1
. . . . .
A 2018 0.7 20 1
A 2019 6.5 5 0
A 2020 2 10 0

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Pooled cross-sectional data

A pooled cross sectional data set has both cross-sectional and time
components
country year GDPrate Unemployment LeftGovt
Australia 2013 0.5 20 0
Australia 2014 -0.2 30 0
Bangladesh 2013 -0.4 40 1
. . . . .
Germany 2013 0.7 20 1
Kenya 2013 6.5 5 0
Kenya 2014 2 10 0

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Panel Data

A panel data set set consists of a time series for each cross-sectional
member in the data set.
country year GDPrate Unemployment LeftGovt
A 2013 0.5 20 0
A 2014 -0.2 30 0
A 2015 -0.4 40 1
. . . . .
B 2013 0.7 20 1
B 2014 6.5 5 0
B 2015 2 10 0

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Let’s test our understanding now

Marks of all students in your class in compulsory subjects in semester

1.
Marks of all students in your class in compulsory subjects in semester
1 & 2.
Marks of all students in your class in elective subjects in semester 1 &
2.

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Student Semester Subject1 Subject2

A 1 50 85
B 1 70 90

Student Semester Subject1 Subject2

A 1 50 85
A 2 90 60
B 1 70 90
B 2 60 45

Student Semester ElecSubject1 ElecSubject2

A 1 50 85
C 2 76 65
B 1 45 65
B 2 79 20
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 End

REMEMBER: Correlation does not IMPLY Causation

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 End

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