Econometrics file 1.doc - Unit I Basic Regression Analysis...

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Unit I: Basic Regression Analysis Nature and Scope of Econometrics – Simple Regression Model: Specification, OLS Method, Assumptions of CLRM and Gauss Markov Theorem, Hypothesis Testing and Goodness of Fit – Extensions of Simple Regression Model: Regression through Origin, Scaling and Units of Measurement, Functional Forms of Regression Model – Maximum Likelihood Estimation Nature and Scope of Econometrics Definition Goldberger defines econometrics as “ the social science in which the tools of economic theory, mathematics and statistical inference are applied to the analysis of economic phenomena ”. It is concerned with the empirical determination of economic relationships. In econometric analysis we formulate the economic theory in mathematical terms and is combined with empirical measurement of economic phenomena. The most important characteristic of econometric relationships is that they contain a random element which is however ignored by economic theory and mathematical economics which postulates exact relationship between the various economic magnitudes. Econometrics Economic theory Mathematical economics Statistical methods Methodology of econometrics Categories of econometrics Functions of econometrics Measurement of economic relations In many cases we can apply the various econometric techniques in order to obtain estimates of the individual coefficients of the economic relationships, from which we may evaluate other parameters of economic theory. Verification of economic theory Econometrics aims primarily at the verification of economic theories. In this case we can say that the purpose of the research analysis ie obtaining empirical evidence to test the explanatory power of economic theories to decide how well they explain the observed behavior of the economic units Forecasting In formulating policy decisions it is essential to be able to forecast the value of the economic magnitudes. Such forecasts will enable the policy makers to judge whether it is necessary to take any measure in order to influence the relevant economic variable. Regression analysis The term regression was introduced by Francis Galton . Regression analysis is concerned with the study of the dependent variable , on one or more explanatory variables. Simple and multiple regressions If we are studying the dependence of a variable on only a single explanatory variable, such a study is known as simple , or two-variable regression analysis. However, if we are studying the dependence of one variable on more than one explanatory variable, it is known as multiple regression analysis. Types of Data A time series is a set of observations on the values that a variable takes at different times. Cross-section data are data on one or more variables collected at the same point in time. In pooled data are elements of both time series and cross-section data THE METHOD OF ORDINARY LEAST SQUARES The method of ordinary least squares is attributed to Carl Friedrich Gauss, a German mathematician.
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