Lecture 1

# Lecture 1 - Economics 513 Lecture 1 Empirical economic...

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Economics 513 Lecture 1: Empirical economic relations What is econometrics? Econometrics is measurement of economic relations. We need to know What is an economic relation? How do we measure such a relation? Definition: An economic relation is a relation between economic variables. 1

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Economics 513 Examples: Production function: relation between output of firm and inputs of labor, capital, materials. Engel curve: relation between expenditure on a commodity and household income. Phillips curve: relation between inflation and unemployment rates. Earnings function: relation between earnings and education, work experience. All these relations can be expressed as mathematical functions ) , , ( 1 K x x f y = with y the dependent variable in the relation and K x x , , 1 the independent variables. 2
Economics 513 Example: Earnings function y earnings education x 2 2 1 1 3

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Economics 513 1: straight line, linear relation x y 1 0 β β+ = 2: non-linear relation Economic theory usually does not specify functional form, but it may sign derivatives. From the National Longitudinal Survey of Youth (NLSY) we obtain (usual) weekly earnings and years of education for a sample of 935 individuals logarithm of usual weekly earnings of i = i y i years of education of = i x We plot the 935 pairs in a diagram that is called a scatterplot (see figure) ) , ( i i x y 4
Economics 513

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Lecture 1 - Economics 513 Lecture 1 Empirical economic...

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