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Dougherty

Introduction to Econometrics,
5th edition
Chapter heading
Review: Random Variables,
Sampling, Estimation, and
Inference

© Christopher Dougherty, 2016. All rights reserved.

 THE NORMAL DISTRIBUTION

f(X)

0
0 m X

In the analysis so far, we have discussed the mean and the variance of a distribution of a
random variable, but we have not said anything specific about the actual shape of the
distribution. It is time to do that.
1
 THE NORMAL DISTRIBUTION

f(X)

0
0 m X

There are only four distributions, all of them continuous, that are going to be of importance
to us: the normal distribution, the t distribution, the F distribution, and the chi-squared (c2)
distribution.
2
 THE NORMAL DISTRIBUTION

f(X)

0
0 m X

The normal distribution has the graceful, bell-shaped form shown.

3
 THE NORMAL DISTRIBUTION

2
1 X   
1   
f(X) fX  e 2  

 2

0
0 m X

The probability density function for a normally distributed random variable X is as shown,
where a and b are parameters.

4
 THE NORMAL DISTRIBUTION

2
1 X   
1   
f(X) fX  e 2  

 2

0
0 m X

It is in fact an infinite family of distributions since b can be any finite real number and a any
finite positive real number.

5
 THE NORMAL DISTRIBUTION

2
1 X   
1   
f(X) fX  e 2  

 2

0
0 m- 4s m- 3s m- 2s m- s m m+s m+2s m+3s m+4s X

It can be shown that the expected value of the distribution, m, is equal to b and its variance,
s2, is equal to a2. Thus it is natural to write the probability density function as shown.

6
 THE NORMAL DISTRIBUTION

2
1 X   
1   
f(X) fX  e 2  

 2

0
0 m- 4s m- 3s m- 2s m- s m m+s m+2s m+3s m+4s X

The distribution is symmetric, so it automatically follows that the mean and the mode
coincide in the middle of the distribution.

7
 THE NORMAL DISTRIBUTION

2
1 X   
1   
f(X) fX  e 2  

 2

0
0 m- 4s m- 3s m- 2s m- s m m+s m+2s m+3s m+4s X

The shape of the distribution is fixed when expressed in terms of standard deviations, so
all normal distributions look the same when expressed in terms of m and s. This is shown
in figure.
8
 THE NORMAL DISTRIBUTION

2
1 X   
1   
f(X) fX  e 2  

 2

X ~ N   , 2 

0
0 m- 4s m- 3s m- 2s m- s m m+s m+2s m+3s m+4s X

As a matter of mathematical shorthand, if a variable X is normally distributed with mean m

and variance s2, this is written X ~ N(m, s2). (The symbol ~ means ‘is distributed as’). The
first argument in the parentheses refers to the mean and the second to the variance.
9
 THE NORMAL DISTRIBUTION

2
1 X   
1   
f(X) fX  e 2  

 2

X ~ N   , 2 

0
0 m- 4s m- 3s m- 2s m- s m m+s m+2s m+3s m+4s X

This, of course, is the general expression. If you had a specific normal distribution, you
would replace the arguments with the actual numerical values.

10
 THE NORMAL DISTRIBUTION

1  12 X 2
fX  e f(X)
2
0.5

0.4
X ~ N  0,1
0.3

0.2

0.1

0
-5 -3 -1 1 3 X

An important special case is the standard normal distribution, where m = 0 and s = 1. This
is shown in the figure.

11
Copyright Christopher Dougherty 2016.

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The content of this slideshow comes from Section R.8 of C. Dougherty,

Introduction to Econometrics, fifth edition 2016, Oxford University Press.
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Individuals studying econometrics on their own who feel that they might benefit
from participation in a formal course should consider the London School of
Economics summer school course
EC212 Introduction to Econometrics
http://www2.lse.ac.uk/study/summerSchools/summerSchool/Home.aspx
or the University of London International Programmes distance learning course
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2015.12.17