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Group 8: Srijita Agarwal (5) Schuyler D souza (9) Chandana Rayachoti (41) Danish Shaikh (52)

What is Ecotrix?

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)

R. T. related by appropriate methods of inference (P.A.C.Samuelson.Koopmans and J. 1954) .What is Ecotrix? Definition 3: The quantitative analysis of actual economic phenomena based on concurrent development of theory and observation.N.Stone.

1964) Definition 5: The empirical determination of economic laws (By H. mathematics and statistical inference to the analysis of economic phenomena (By Arthur S. Goldberger. Theil.What is Ecotrix? Definition 4: The social science which applies economics. 1971) .

Economic Theory Mathematical Economics Economic Statistics Mathematic Statistics .

while econometrics is mainly interested in the later . 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.Why a separate discipline? Economic theory makes statements that are mostly qualitative in nature.

Why a separate discipline? Economic Statistics is mainly concerned with collecting. It does not being concerned with using the collected data to test economic theories Mathematical statistics provides many of tools for economic studies. processing and presenting economic data. but econometrics supplies the later with many special methods of quantitative analysis based on economic data .

Theories do not provide the necessary measure of strength of relationship (numerical estimate of the relationship) & the proper functional relationship between variables .Example: Law of Demand A reduction in price of a commodity is expected to increase the quantity demanded of that commodity To provide empirical verification of theories .Why study Ecotrix? Economic Theory makes statements or hypotheses .

estimating the economic relationship .assess impacts of certain decisions & policy recommendation . forecasting .testing the validity of economic theories or hypotheses .evaluating government policy Use the models for: .Objectives of Ecotrix Formulation of econometrics models for: .predicting.

Economic Model v/s Ecotrix Model An economic model is a set of assumptions that approximately describes the behaviour of an economy Example: Law of Demand An econometric model consists of the following: 1. A specification of the probability distribution of the disturbances . A statement of whether there are errors of observation in the observed variables 3. A set of behavioural equations derived from the economic model 2.

the signs of the estimated coefficients in an econometric model .the significance test of each variables / regression To confirm economic theories .the statistical significance of the variables .What Constitutes a Test of an Economic Theory To report .whether the estimated coefficients carried the expected sign .the fitness of the model .

Methodology of Econometrics 1) Economic Theory 2) Mathematical Model of Theory 3) Econometric Model of Theory 4) Obtaining Data 5) Estimation of Econometric Model 6) Hypothesis Testing 7) Forecasting or Prediction 8) Using the Model for control or policy purposes .

Economic Theory Mathematic Model Econometric Model Data Collection Estimation Hypothesis Testing Application in control or policy studies Forecasting .

It means that The marginal propensity to consume (MPC) for a unit change in income is greater than zero but less than unit .Methodology of Econometrics (1) Statement of theory or hypothesis: Keynes stated: Consumption increases as income increases. but not as much as the increase in income .

0 < ß2< 1 Y= consumption expenditure X= income ß1 and ß2 are parameters.Methodology of Econometrics (2) Specification of the mathematical model of the theory Y = ß1+ ß2X . ß1 is intercept. and ß2 is slope coefficients .

Y = consumption expenditure.Methodology of Econometrics (3) Specification of the econometric model of the theory Y = ß1+ ß2X + u . ß1is intercept and ß2 is slope coefficients. u is disturbance term or error term. ß1 and ß2 are parameters. 0 < ß2< 1. X = income. It is a random or stochastic variable .

Methodology of Econometrics (4) Obtaining Data Y= Personal consumption expenditure X= Gross Domestic Product (all in Billion US Dollars) .

0 .5 4279.4 2746.8 Y 3776.9 4718.6 4148.8 2969.1 2865.5 4539.3 3843.1 3052.9 2503.8 4404.3 3906.4 3223.3 3260.0 4877.Methodology of Econometrics (4) Obtaining Data Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 X 2447.1 3760.5 4821.2 3162.7 2619.6 4838.1 2476.4 3240.

7194 X MPC was about 0. 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 .8 + 0.Methodology of Econometrics (5) Estimating the Econometric Model Y^ = .231.72 and it means that for the sample period when real income increases 1 USD.

it may support Keynes theory. Confirmation or refutation of economic theories based on sample evidence is object of Statistical Inference (hypothesis testing) .Methodology of Econometrics (6) Hypothesis Testing Are the estimates accord with the expectations of the theory that is being tested? Is MPC < 1 statistically? If so.

what is the forecast consumption expenditure? Y^= .8+0.Methodology of Econometrics (7) Forecasting or Prediction With given future value(s) of X.57). what is the future value(s) of Y? GDP=$6000Bill in 1994.231. Decrease ( or increase) of $1 in investment will eventually lead to $3.7196(6000) = 4084.57 decrease ( or increase) in income .6 Income Multiplier M = 1/(1 MPC) (=3.

By fiscal and monetary policy.72. Government can manipulate the control variable X to get the desired level of target variable Y .7194 X X b 5882 MPC = 0. Conclusion & Inference: An income of $5882 will produce an expenditure of $4000.Methodology of Econometrics (8) Using model for control or policy purposes Y=4000= -231.8+0.

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