1 Statistical Methods in Economics (06 23062) Statistical Methods in Finance and Economics (06 27099) Lecture notes I

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1 Chapter 0.The Nature of Empirical Data (optional reading) 1 What is the applied statistics in economics? Imagine that you are hired by government to evaluate the effectiveness of a government-funded job training program. Suppose this program teaches unemployed people various ways to use computers and certain skills for 20 weeks. Participation and enrolment for this project is voluntary. You are requested to determine what, if, any effect of the training program has on their subsequent job search. Similar problems frequently come out to decision makers, including: a. A city council ponders the question of how much cyber-crime will be reduced if an additional million dollars is spent on security software. b. The manager of a local furniture store, Lee Longlands must decide how much advertising space to purchase in the Birmingham newspaper, and must estimate the sales. c. The University of Birmingham must estimate how much enrolment will change if fee is raise to £9000 per semester, and thus whether its revenue from tuition will rise or fall. d. A real estate developer must predict by how much population and income will increase to the Harborne area over the next few years, and if it will be profitable to build another set of flat. e. You work in an investment bank. You are to study the returns on different investment strategies short term treasury bills to decide whether they comply with economic theories and predict their trends. To answer these type of “how much” questions, decision makers have to rely onempirical studies. Statistical method in economics is based upon the development of statistical methods to estimate economic relationships, test economic theories, and evaluate and implement government and business policy. These applications can be used to forecast widely published important macroeconomic topics, such as unemployment rate, interest rate, Gross Domestic Product, as well as other interesting topics, e.g., political campaign expenditures on voting outcomes, the effect of school spending, and advertising cost and profits. 2 Where does data come from? Mathematical statistics gradually evolved into a separate discipline to economics (Econometrics), which focuses on the problems in analyzing data from a complex world. This type of data is called nonexperimental data, or observational data.

2 Experimental data are often collected in laboratory environments in natural sciences and agriculture. The key aspect of the experimental data is that the values of the explanatory variables can be fixed at specific values in repeated trials of the experiment. But this type of data is often impossible, financially or morally.

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- Fall '19