Basic Econometrics ` Basic Econometrics

Introduction Methodology of Econometrics

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

• May 2004

• Prof. Himayatullah

Introduction Methodology of Econometrics

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

• May 2004

• Prof. Himayatullah

Introduction Methodology of Econometrics

• (4) Obtaining Data
• (See Table 1.1, page 6)
• Y= Personal consumption
• expenditure
• X= Gross Domestic Product
• all in Billion US Dollars

• May 2004

• Prof. Himayatullah

Introduction Methodology of Econometrics

• (4) Obtaining Data

• May 2004

• Prof. Himayatullah

Year	X	Y
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991	2447.1 2476.9 2503.7 2619.4 2746.1 2865.8 2969.1 3052.2 3162.4 3223.3 3260.4 3240.8	3776.3 3843.1 3760.3 3906.6 4148.5 4279.8 4404.5 4539.9 4718.6 4838.0 4877.5 4821.0

Introduction Methodology of Econometrics

• (5) Estimating the Econometric Model
• Y^ = - 231.8 + 0.7194 X (1.3.3)
• MPC was about 0.72 and it means that for the sample period when real income increases 1 USD, 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

• May 2004

• Prof. Himayatullah

Introduction 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,
• it may support Keynes’ theory.
• Confirmation or refutation of
• economic theories based on
• sample evidence is object of Statistical
• Inference (hypothesis testing)

• May 2004

• Prof. Himayatullah

Introduction Methodology of Econometrics

• (7) Forecasting or Prediction
• With given future value(s) of X, what is the future value(s) of Y?
• GDP=$6000Bill in 1994, what is the forecast consumption expenditure?
• Y^= - 231.8+0.7196(6000) = 4084.6
• Income Multiplier M = 1/(1 – MPC) (=3.57). decrease (increase) of $1 in investment will eventually lead to $3.57 decrease (increase) in income

• May 2004

• Prof.VuThieu

Introduction Methodology of Econometrics

• (8) Using model for control or
• policy purposes
• Y=4000= -231.8+0.7194 X  X  5882
• MPC = 0.72, an income of $5882 Bill
• will produce an expenditure of $4000
• Bill. By fiscal and monetary policy,
• Government can manipulate the
• control variable X to get the desired
• level of target variable Y

• May 2004

• Prof. Himayatullah

Introduction Methodology of Econometrics

• Figure 1.4: Anatomy of economic modelling
• 1) Economic Theory
• 2) Mathematical Model of Theory
• 3) Econometric Model of Theory
• 4) Data
• 5) Estimation of Econometric Model
• 6) Hypothesis Testing
• 7) Forecasting or Prediction
• 8) Using the Model for control or policy purposes

• May 2004

• Prof. Himayatullah

• May 2004

• Prof. Himayatullah

• Economic Theory

• Mathematic Model

• Econometric Model

• Data Collection

• Estimation

• Hypothesis Testing

• Forecasting

• Application
• in control or
• policy
• studies