FUNDAMENTALS OF

ECONOMETRICS
DR ABDUL WAHEED
PhD Econometrics
FUNDAMENTALS OF
ECONOMETRICS
Week 1
Lecture 1
 Course Learning
Outcomes (CLOs)
Upon completion of the course, students should be able to:
• CLO 1. Translate a theoretical model of observed phenomena into an
econometric model. (C2)
• CLO 2. Understand the key concepts of basic linear regression analysis and
its assumptions. (C2)
• CLO 3. Examine various issues associated with linear regression models
in business settings. (C4)
• CLO 4. Apply knowledge of regression models to business decisions
making. (C3)
 Course Outlines
Session
Week Lecture No. and Topic Preparation Material
Outcomes
LECTURE 1: Introduction Chap 1: Basic  
 Discussion on course outlines Econometrics, Gujarati (1.1 (CLO 1)
 Introduction to econometrics to 1.2) (CLO 2)
 Econometric Study  
1  Econometrics applications in business  
LECTURE 2: Statistical background for Econometrics Course books of Statistics I  
 Types of variables, probability distribution, and II (CLO 1)
hypothesis testing, correlation (CLO 2)
LECTURE 3: Basic Regression Model: Theory Chap 1: Econometrics by  
 Economic Model Examples, Gujarati (1.1 and (CLO 1)
1.2)
 Linear regression model: Theory
Types and sources of data Chap 1: Basic
 Regression of standardized variables
Econometrics, Gujarati (1.3)
2 
LECTURE 4: Basic Regression Model: Estimation Chap 1: Econometrics by  
 Introduction to Ordinary Least Squares (OLS) Examples, Gujarati (1.3). (CLO 2)
Method Chap 3: Basic
 Application of OLS to Simple and Multiple Econometrics, Gujarati (3.1)
Regression model  
LECTURE 5: Classical Linear Regression Model Chap 1: Econometrics by
 OLS assumptions Examples, Gujarati (1.4).  
Chap 3: Basic (CLO 2)
Econometrics, Gujarati (3.2)
3 LECTURE 6: Classical Linear Regression Model (Continue) Chap 1: Econometrics by  
Variance and S.E of OLS estimators Examples, Gujarati (1.5 to (CLO 2)
 Examples, Gujarati (3.3)
 Hypothesis testing in regression (t and F Tests) 1.9)
R2 and Adjusted R2  

 Application of OLS to Wage Data and forecasting
LECTURE 7: Functional forms of regression models I    
(Theory, estimation, and interpretation) Chap 2: Econometrics by (CLO 1)
 Log-linear Models, Double-log, or constant Examples, Gujarati (2.1)  
elasticity models (CLO 4)
 Case Study
4 
LECTURE 8: Chap 2: Econometrics by
 Testing the validity of linear restrictions Examples, Gujarati (2.2)
 Cobb-Douglas production function
 Case study
LECTURE 9: Functional forms of regression models II (Theory, Chap 2: Econometrics by  
estimation, and interpretation) Examples, Gujarati (2.3 and (CLO 1)
Log-Lin or growth model and its case study 2.4)  

 Linear trend model and its case study (CLO 4)
5
  LECTURE 10: Chap 2: Econometrics by
 Lin-log model and its case study Examples, Gujarati (2.5 and
 Reciprocal model and its case study 2.6)
LECTURE 11: Functional forms of regression models III (Theory, Chap 2: Econometrics by  
estimation, and interpretation) Examples, Gujarati (2.6 and (CLO 1)
 Polynomial regression model and its case study 2.7)  
 Choice of the functional form of a model (CLO 4)
6 LECTURE 12: Chap 2: Econometrics by
 Comparing linear and log-linear models Examples, Gujarati (2.8 to
2.10)

Measures of goodness of fit (R2, Adjusted-R2, AIC, SIC and HQC)
LECTURE 13: Regression models with Qualitative Variables I
 Background Chap 3: Econometrics by  
 Dummy variables and dummy variables trap Examples, Gujarati (3.1 and (CLO 1)
Interpretation of dummy variables 3.2)  

 Estimation and interpretation of regression with dummy variables
7
LECTURE 14: Regression models with Qualitative Variables II Chap 3: Econometrics by
 Interactive dummy variables
 Differential dummy variables  
 Application, estimation, and interpretation
LECTURE 15: Regression models with Qualitative Variables III Chap 3: Econometrics by
Use of dummy variables in structural change Examples, Gujarati (3.4 and (CLO 4)

 Use of dummy variables in seasonal data 3.5)
LECTURE 16: Regression models with Qualitative Variables IV Chap 3: Econometrics by
8 Depersonalization of a time series Examples, Gujarati (3.6 and
 Empirical examples using Sales data 3.7)
 Application and interpretation
 
9  
  MID-TERM EXAM WEEK
 Course Outlines
LECTURE 17: Regression Diagnostic I: Multicollinearity (Theory and Chap 4: Econometrics   LECTURE 25: Tests of autocorrelation Chap 6: Econometrics  
Applications) by Examples, Gujarati (CLO 3)  Graphical Method by Examples, Gujarati (CLO 3)
 Consequences of Multicollinearity (4.1 to 4.3)    Durbin Watson Test (6.2). Chap 12: Basic  
 Detection of Multicollinearity (CLO 4)  BG- Test Econometrics, Gujarati (CLO 4)
 Case Study   (12.6)  
 Checking for multicollinearity
10
LECTURE 26: Remedial measures Chap 6: Econometrics
LECTURE 18: Chap 4: Econometrics Background by Examples, Gujarati
Remedial measures of Multicollinearity by Examples, Gujarati 
 14  Use of the first Difference method (6.3 and 6.4)
 Introduction to principal components (PCA) method (4.4 to 4.6) Different ways to get values of autocorrelation

coefficients
 Case study
LECTURE 19: Regression Diagnostic II: Heteroscedasticity (Theory and Chap 5: Econometrics   Remedial measuring using Hetero-Auto corrected S.E
Applications) by Examples, Gujarati (CLO 3) 
procedure (HAC)
 Concept of heteroscedasticity (5.1)  
 Causes of heteroscedasticity (CLO 4)
 Consequences of heteroscedasticity  
11  Case Study
  LECTURE 27: Regression Diagnostic IV: Model Specification Chap 7: Econometrics by  
LECTURE 20: Detection of heteroscedasticity Chap 5: Econometrics Errors (Theory and Applications) Examples, Gujarati (7.1 to (CLO 3)
 Graphical Method by Examples, Gujarati  Model overfitting (theory and tests) 7.3)  
 Tests (BP Test, White Test, others) (5.2 and 5.3)  Model under-fitting (theory and tests)   (CLO 4)
 Case Study  
LECTURE 28: consequences for OLS estimation in case of: Chap 7: Econometrics by
LECTURE 21: Remedial measures for heteroscedasticity Chap 5: Econometrics    Outliers in data Examples, Gujarati (7.1 to
 Transformation when variance is known (general transformation) by Examples, Gujarati (CLO 3) 15 Measurement errors in dependent/independent 7.3)

 Case Study (5.4)   variables  
(CLO 4)  Non-random independent variables
LECTURE 22: Remedial measures for heteroscedasticity Chap 5: Econometrics    simultaneity bias
12 Transformation when variance is unknown (guessing the value of by Examples, Gujarati
  
unknown variance) (5.4)
 Specification bias & heteroscedasticity
 Case Study
 White Method for hetero-corrected S.E. LECTURE 29: Introduction to Advance topics in Econometrics Chap 7: Econometrics by  
 Introduction to Microeconometrics ( A brief Examples, Gujarati (7.5 to (CLO 3)
introduction to models used for cross-section data) 7.9)
LECTURE 23: Regression Diagnostic III: Autocorrelation (Theory and Chap 6: Econometrics    
Applications) by Examples, Gujarati (CLO 3)
 Concept of autocorrelation (6.1). Chap 12: Basic   16
 Causes of Autocorrelation Econometrics, Gujarati (CLO 4)
(12.1)   LECTURE 30: Introduction to Time Series Econometrics ( A Chap 3: Econometrics by
brief introduction to models used for Time Series Data) Examples, Gujarati
13 LECTURE 24: Consequences of Autocorrelation Chap 6: Econometrics (Chapters 13 to 17)
 Case Study by Examples, Gujarati
(6.1). Chap 12: Basic 17 BUFFER WEEK  
Econometrics, Gujarati
(12.2) 18 FINAL EXAM WEEK  
 Grading Scheme
Assignment: 10% (2 Assignments)
Quizzes: 15% (3 Quizzes)
Project: 15%
Mid-term Exam: 20%
End-term Exam: 40%

Make sure you meet NBS minimum Attendance requirements during the semester.
 Quiz schedule
(Tentative)
• Quiz 1: Week 4 (Date: TBA)
▪ Course: Week 1
• Quiz 2: Week 7 (Date: TBA)
▪ Course: Week 2, Week 3 and Week 4
• Quiz 3: Week 15 (Date: TBA)
▪ Course: Week 12, Week 13 and Week 14
Assignments (Tentative)
• A1: Week 3 (Date: TBA)
• A2: Week 8 (Date: TBA)
 Project
(More details later)
• You have to do a small project based on the econometric analysis.
• You will be required to start with some economic or management theory (given
that you can get its data from secondary sources), first, you will develop an economic
model.
• Then you are going to estimate the econometric model, but you have to take care
of the problems. Such as specification error, Multicollinearity, heteroscedasticity and
autocorrelation in your estimation and you must follow/arrange the project in a given
template.
• All your work will result in a Project Report, that will be evaluated.
 Text and Reference
Books
Text Book:
Econometrics by Examples, by Damodar N Gujarati (latest Edition) McGraw-Hill.

Reference Book:
Basic Econometrics, by Damodar N Gujarati (latest Edition) Palgrave Macmillan.
How to get maximum
out of this course ?
• Nature of the course… Quantitative
• Book reading versus Slides
• One book versus more than one book
• Aim for Life long learnings
• Class attendance
 Econometrics?
✓ Literarily meaning: “economic measurement”
✓ It is the use of statistical methods to analyze economic data (no single definition)
✓ typically analyze non-experimental data
✓ ….. started as a part of economics sciences
✓ …..gradually emerged as a separate discipline with wide applications in other
fields such as finance, management, sociology, HR, etc.
✓ not a very old science
✓ Jan Tinbergen and Ragnar Frisch (the first Nobel Laureate in economics, 1969) are
considered by many to be the founding fathers of econometrics
 Why you need to study this
course?
Some Examples other than Economics
✓ Estimating the impact of immigration on native workers.
✓ Identifying the factors that affect a firm’s entry and exit into a market.
✓ Finding the relationship between management techniques and worker.
productivity (HR application)
✓ Deriving the effect of dividend announcements on stock market prices and
investor behavior (Finance application).
✓ Predicting revenue increases in response to a marketing campaign (Marketing
application).
 Why you need to study this
course?
Some Applications of Econometric Analysis
✓ Estimating relationships between economic variables, forecasting
economic variables, testing economic theories.
✓ Evaluating and implementing government and business policies.
✓ It has wide applications in field of management, finance, marketing, HR,
sociology and other social and administrative sciences.
Nature of Econometrics and
Economic Data
Steps in econometric analysis
1. Economic models (this step is often skipped)
2. Econometric model
Economic models
• Maybe micro or macro models
• Often use optimizing behavior, equilibrium modeling, …
• Establish relationships between economic variables
• Examples: demand equations, pricing equations, …