Econometrics

Lecture
Introduction
Ramakrishna Gollagari
Professor, Dept. of Economics
IBS Hyderabad
Email: ramakrishnag@ibsindia.org

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Introduction
• Name
• Qualification
• Experience
• Goal
• Achievement
• Experience about the Econometrics
• Future plan
• What do you expect from the course

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books

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Time table
Time Monday Tuesday Wednesday Thursday Friday

9:30AM- HET HET PF HET Library

10:20AM

10:30AM- IE-1 BME IT PF IT

11:20AM

11:30AM- PF IE-1 EMT-1 BME EMT-1

12:20PM

12:30PM-          
1:20PM

1:30PM- IT Tutorial EMT-1 Tutorial Club Activity

2:20PM

2:30PM- BME -- IE-1 -- --

3:20PM

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Men die more due to Covid-19 than women

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Life expectancy at birth

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Introduction

• What is Econometrics?
Definition 1: Economic Measurement
Definition 2: Application of the mathematical statistics to economic data in
order to lend empirical support to the economic mathematical models and
obtain numerical results (Gerhard Tintner, 1968)

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Introduction

Definition 3: The quantitative analysis of actual economic phenomena based

on concurrent development of theory and observation, related by
appropriate methods of inference (P.A.Samuelson, T.C.Koopmans and
J.R.N.Stone, 1954)

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Introduction

Definition 4: The social science which applies economics, mathematics and

statistical inference to the analysis of economic phenomena (By Arthur S.
Goldberger, 1964)
Definition 5: The empirical determination of economic laws (By H. Theil,
1971)

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Introduction

Definition 6: A conjunction of economic theory and actual measurements,

using the theory and technique of statistical inference as a bridge pier (By
T.Haavelmo, 1944)

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 Introduction
Econometrics is what econometricians do”. Kennedy (1996)

“Econometrics is the study of the application of statistical methods to the

analysis of economic phenomena”.Tintner (1953)

“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 them or refuting them.”
Maddala (1992)

“Econometrics is the art and science of using statistical methods for the
measurement of economic relations.”Chow (1985)

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Why separate discipline?

Economic theory makes statements that are mostly qualitative in nature,

while econometrics gives empirical content to most economic theory

Mathematical economics is to express economic theory in mathematical

form without empirical verification of the theory, while econometrics is mainly
interested in the later

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Why separate discipline?

Economic Statistics is mainly concerned with collecting, processing and

presenting economic data. It does not being concerned with using the
collected data to test economic theories

Mathematical statistics provides many of tools for economic studies, but

econometrics supplies the later with many special methods of quantitative
analysis based on economic data

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Methodology
Starting with a theory or hypothesis
• Before any statistical analysis with economic data is performed, one needs
a clear mathematical formulation of the relevant economic theory. For
example, saying that the demand curve is downward sloping is not
enough. We have to write the statement in mathematical form as:
• q = a + b p ,b < 0
• where q is the quantity demanded and p is the price.
• One major problem: economic theory is rarely informative about functional
forms. Thus, we have to use statistical methods to choose the functional
form as well. Putting it differently, we are often presented with no more
than the data themselves and the theory behind the data generation
process is non-existent or far from being complete. Thus, what we do in
practice is:
• • Investigate the important features of the observed data • Construct an
empirical model (incorporating as much available background theory as
possible)

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Methodology

(2) Specification of the mathematical model of the theory (ex: 2)

Y = ß1+ ß2X ; 0 < ß2< 1
Y= consumption expenditure
X= income
ß1 and ß2 are parameters; ß1 is
intercept, and ß2 is slope coefficients

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methodology

Specification of the econometric model of the theory

Y = ß1+ ß2X + u ; 0 < ß2< 1;
Y = consumption expenditure;
X = income;
ß1 and ß2 are parameters; ß1is intercept and ß2 is slope coefficients; u
is disturbance term or error term. It is a random or stochastic variable

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methodology

Obtaining Data

Y= Personal consumption
expenditure
X= Gross Domestic Product
all in Billion US Dollars

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 data
Year X Y

1980 2447.1 3776.3

1981 2476.9 3843.1
1982 2503.7 3760.3
1983 2619.4 3906.6
1984 2746.1 4148.5
1985 2865.8 4279.8
1986 2969.1 4404.5
1987 3052.2 4539.9
1988 3162.4 4718.6
1989 3223.3 4838.0
1990 3260.4 4877.5
1991 3240.8 4821.0

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methodology

Estimating the Econometric Model

Y^ = - 231.8 + 0.7194 X
MPC was about 0.72 and it means that for the sample period when real
income increases 1 USD, led (on average) real consumption expenditure
increases of about 72 cents

Note: A hat symbol (^) above one variable will signify an estimator of the
relevant population value

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methodology

Hypothesis Testing
Are the estimates accord with the expectations of the theory that is being
tested? Is MPC < 1 statistically? If so, it may support Keynes’ theory.
Confirmation or refutation of economic theories based on sample evidence
is object of Statistical Inference (hypothesis testing)

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methodology

Forecasting or Prediction
With given future value(s) of X, what is the future value(s) of Y?
GDP=$6000 in 1994, what is the forecast consumption expenditure?
Y^= - 231.8+0.7196(6000) = 4084.6
Income Multiplier M = 1/(1 – MPC) (=3.57). Decrease (increase) of $1
in investment will eventually lead to $3.57 decrease (increase) in
income.

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methodology

Using model for control or policy purposes

Y=4000= -231.8+0.7194 X  X  5882

MPC = 0.72, an income of $5882 will produce an expenditure of
$4000. By fiscal and monetary policy, Government can manipulate
the control variable X to get the desired level of target variable Y

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Economic Theory

Mathematic Model Econometric Model Data Collection

Estimation

Hypothesis Testing
Application
in control or
Forecasting policy
studies
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Software for quantitative data analysis

• Quantitative Data Analysis, Cross Section data

SPSS , STATA, SAS, Amos, Smart PLS, Xlstat, GAMS, DEAP

• Quantitative Data Analysis, Panel data

STATA, E.Views, Gretl

• Quantitative Data Analysis, Time Series data

E.Views, Microfit, Gauss, Rats, STATA, Past, Python, OxMetrics, Gretl, R (ts)

• Data visualization
Tableau, Excel, R, Python, JMP, Power BI

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 Thank You

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