What is Econometrics

V c Hong V

University of Economics HCMC

June 2015

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What is Econometrics?

1 Econometrics is based upon the development of statisticalmethods for estimating economic relationships, testing economictheories, and evaluating and implementing government andbusiness policy.

2 forecasting of such important macroeconomics variables asinterest rates, inflation rates, and gross domestic product.

3 Ex: Effects of political campaign expenditure on voting outcome(Expenditure voting outcome)

4 impact of school spending on student performance (schoolspending student performance)

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Example

crime = 0 + 1wagem + 2othinc + 3freqarr + 4freqconv+

5avgsen + 6age + u, (1)

where

crime = some measure of the frequency of criminal activity,

wagem = the wage that can be earned in legal employment,

othinc = the income from other sources (assets, inheritance, and so on),

freqarr = the frequency of arrests for prior infractions (to approximate the probability of arrest),

freqconv = the frequency of conviction, and

avgsen = the average sentence length after conviction

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Example 2.1

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Steps in Econometrics

1 Specify an economic model, then turn it into what we call aneconometric model.

2 Identify function form: f () before undertaking an econometricanalysis.

3 Formulating hypotheses of interest

ex: the wage that can be earned in the legal employment has noeffect on criminal behaviour.H0 : 1 = 0H1 : 1 6= 0

4 Data collection

5 Empirical analysis.

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Structure of Economic Data

1 Cross-sectional Data (CS): consists of a sample of individuals,households, firms, cities, countries or a variety of other units,taken at a given point in time.

2 Time Series Data (TS): consists of observations on a variable orseveral variables over time. Ex: stock-price, money supply.

3 Pooled Cross Sections: combine between CS and TS. However,it is organized as a stacked CS data over years.

4 Panel Data: consists of a time series for each cross-sectionalmember in the dataset.

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Structure of Economic Data

1 Cross-sectional Data (CS): consists of a sample of individuals,households, firms, cities, countries or a variety of other units,taken at a given point in time.

2 Time Series Data (TS): consists of observations on a variable orseveral variables over time. Ex: stock-price, money supply.

3 Pooled Cross Sections: combine between CS and TS. However,it is organized as a stacked CS data over years.

4 Panel Data: consists of a time series for each cross-sectionalmember in the dataset.

V c Hong V (UEH) Applied Econometrics June 2015 6 / 18

Structure of Economic Data

1 Cross-sectional Data (CS): consists of a sample of individuals,households, firms, cities, countries or a variety of other units,taken at a given point in time.

2 Time Series Data (TS): consists of observations on a variable orseveral variables over time. Ex: stock-price, money supply.

3 Pooled Cross Sections: combine between CS and TS. However,it is organized as a stacked CS data over years.

4 Panel Data: consists of a time series for each cross-sectionalmember in the dataset.

V c Hong V (UEH) Applied Econometrics June 2015 6 / 18

Structure of Economic Data

1 Cross-sectional Data (CS): consists of a sample of individuals,households, firms, cities, countries or a variety of other units,taken at a given point in time.

2 Time Series Data (TS): consists of observations on a variable orseveral variables over time. Ex: stock-price, money supply.

3 Pooled Cross Sections: combine between CS and TS. However,it is organized as a stacked CS data over years.

4 Panel Data: consists of a time series for each cross-sectionalmember in the dataset.

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A Cross-Sectional Data Set

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Time Series Data Set

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Figure 2-1

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Figure 2-2

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Figure 2-3

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Figure 2-4

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Figure 2-5

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Figure 2-6

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Figure 2-7

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Figure 2-8

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Figure 2-9

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Table 2-1

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Table 2-2

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Table 2-3

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