Welcome to Economics 20

What is Econometrics?

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Why study Econometrics?
Rare in economics (and many other areas
without labs!) to have experimental data

Need to use nonexperimental, or

observational, data to make inferences

Important to be able to apply economic

theory to real world data

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Why study Econometrics?
An empirical analysis uses data to test a
theory or to estimate a relationship

A formal economic model can be tested

Theory may be ambiguous as to the effect

of some policy change – can use
econometrics to evaluate the program

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Types of Data – Cross Sectional
Cross-sectional data is a random sample

Each observation is a new individual, firm,

etc. with information at a point in time

If the data is not a random sample, we have

a sample-selection problem

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Types of Data – Panel
Can pool random cross sections and treat
similar to a normal cross section. Will just
need to account for time differences.

Can follow the same random individual

observations over time – known as panel
data or longitudinal data

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Types of Data – Time Series
Time series data has a separate observation
for each time period – e.g. stock prices

Since not a random sample, different

problems to consider

Trends and seasonality will be important

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The Question of Causality
Simply establishing a relationship between
variables is rarely sufficient
Want to the effect to be considered causal
If we’ve truly controlled for enough other
variables, then the estimated ceteris paribus
effect can often be considered to be causal
Can be difficult to establish causality

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Example: Returns to Education
A model of human capital investment implies
getting more education should lead to higher
earnings
In the simplest case, this implies an equation like

Earnings 0  1education u

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Example: (continued)
The estimate of 1, is the return to
education, but can it be considered causal?
While the error term, u, includes other
factors affecting earnings, want to control
for as much as possible
Some things are still unobserved, which
can be problematic

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