CHAPTER ONE

1 Wolaita Sodo University

College of Business & Economics
Econometrics for MBA & MPM

Lecture notes for

Econometrics for MBA & MPM

Lambamo A. (Assis’t Prof.)

lambearega@gmail.com

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CHAPTER ONE

Introduction

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 What is econometrics?
◼ Econometrics is defined as:
◼ Measuring relationships between economic, market,
demographic and organization behavioral variables
◼ Beyond the literal meaning:
◼ Testing/verifying theory
◼ Estimating behavioral relationships
◼ Provision of empirical content to theory
◼ Therefore, Econometrics is:
◼ The integrated application of theory and quantitative
methods to the analysis of economic, social, demographic,
market and organizational data with empirical
measurement of phenomena.
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 Cont’d…

◼ Three important components in enquiry analysis are:

◼ Theory, Data and Methodology (analysis techniques)
◼ How is the analysis of problems carried out in practice
◼ Econometric methodology/approach
◼ Empirical analysis: the use of data to test a theory or to
estimate behavioral relationship

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 Steps in empirical analysis

1) Specification
◼ Expressing behavioral relationship in
mathematical form.
This step involves the determination of:
▪ dependent(outcome) and covariates
(explanatory) variables in the model
▪ a priori theoretical expectations about
the size and sign of the parameters
▪ mathematical form of the model
◼ Should be based on theory and information
related to the phenomena

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 2) Estimation of the Model

◼ Is obtaining numerical value for the

parameters of the relationship
◼ It requires knowledge of analysis methods,
assumptions & implications for the
estimates.
◼ In this stage the following activities
◼ Gathering data on the variables
◼ Examination of the degree of
correlation(multicollinearity)
◼ Choice of appropriate techniques for
estimation

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 3) Evaluation of the estimates

◼ Checking whether the estimates are

theoretically consistent and statistically
reliable.
◼ Can be performed by Correlation
coefficient test, se- test, t-test, F-test)

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 4) Evaluating forecasting power of Model

◼ The model may be meaningful and econometrically

correct
◼ Involves the investigation of the stability of the
estimates and their sensitivity to changes in the size of
the sample.
◼ Desirable properties of an econometric model
◼ Theoretical Plausibility:- compatible with theory
◼ Explanatory ability:- able to explain observation of the actual
world
◼ Accuracy of estimates:- should possess desirable property
◼ Forecasting ability:- should be able to predict future value
◼ Simplicity- simpler mathematical form

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 Source & Methods Of Data Collection

◼ Data are facts or information used as a base for

analysis
◼ Example: Loan secured by borrowers – credit
survey data
◼ Socio-economic data:- age, sex, marital status,
religion, household income level, household
saving status, household consumption,
◼ Performance information(data)

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 Types of data

◼ Cross section, Time Series and Panel

1)Cross-sectional data
◼ Consists of a sample of individuals, households, firms,
organizations, cities, etc. taken at a given point in time
◼ they can be obtained by deferent sampling procedure from
the underlying population
◼ Personal data
◼ Demographic and Socio-economic characteristics
▪ Age, sex, marital status, education, family size,
income, saving status, consumption, race, religion….
◼ Behavioral data
▪ Attitude, opinion, perception, practices, etc…
◼ Organizational data, territorial data
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◼ Time series data
◼ Consists of observation on a variable or several variables
over time
◼ Examples: stock prices, money supply, exchange rates,
consumer prices, GDP
◼ Panel or longitudinal data
◼ Consists of a time series for each cross-sectional member in
the data set
◼ An example: wage, education, and employment history for a
set of individuals followed over a ten-year period
◼ The key feature of panel data that distinguishes it from a
pooled cross section is the fact that the same cross-sectional
units (individuals, firms, or countries) are followed over a
given time period

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 Sources of Data

◼ Two types: Primary and secondary

1. Primary sources
◼ Original, first hand information can obtained
through questionnaire, face to face interview,….
◼ Advantages
◼ Up to date information
◼ More accurate
◼ Specific in nature

◼ Disadvantages
◼ High economic cost
◼ Less coverage of area
◼ Depends on the researcher 12
2. Secondary sources
◼ Already collected by somebody
◼ Published & unpublished data
❖ Advantages
◼ Can be quickly and cheaply obtained
◼ Wider geographic area and longer reference period with least cost
❖ Disadvantages
◼ Data may not meet our specific needs
◼ May not be accurate as desired
◼ Not up to date information and become obsolete
◼ Information about the sources may not be available
◼ Uses
Reference purposes
Used as bench marks
Sources of information for a researcher
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