CH 1 - Wooldridge, Introductory Econometrics, 4th ed....

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Unformatted text preview: Wooldridge, Introductory Econometrics, 4th ed. Chapter 1: Nature of Econometrics and Economic Data What do we mean by econometrics ? Econo- metrics is the field of economics in which sta- tistical methods are developed and applied to estimate economic relationships, test economic theories, and evaluate plans and policies imple- mented by private industry, government, and supranational organizations. Econometrics en- compasses forecastingnot only the high-profile forecasts of macroeconomic and financial vari- ables, but also forecasts of demand for a prod- uct, likely effects of a tax package, or the inter- action between the demand for health services and welfare reform. Why is econometrics separate from mathemat- ical statistics? Because most applications of statistics in economics and finance are related to the use of non-experimental data, or ob- servational data. The fundamental techniques of statistics have been developed for use on experimental data: that gathered from con- trolled experiments, where the design of the experiment and the reliability of measurements from its outcomes are primary foci. In rely- ing on observational data, economists are more like astronomers, able to collect and analyse in- creasingly complete measures on the world (or universe) around them, but unable to influence the outcomes. This distinction is not absolute; some eco- nomic policies are in the nature of experiments, and economists have been heavily involved in both their design and implementation. A good example within the last five years is the imple- mentation of welfare reform, limiting individ- uals tenure on the welfare rolls to five years of lifetime experience. Many doubted that this would be successful in addressing the needs of those welfare recipients who have low job skills; but the reforms have been surprisingly suc- cessful, as a recent article in The Economist states, at raising the employment rate among this cohort. Economists are also able to care- fully examine the economic consequences of massive regime changes in an economy, such as the transition from a planned economy to a capitalist system in the former Soviet bloc. But fundamentally applied econometricians ob- serve the data, and use sophisticated tech- niques to evaluate their meaning. We speak of this work as empirical analysis, or empirical research. The first step is the careful formulation of the question of interest. This will often involve the application or develop- ment of an economic model, which may be as simple as noting that normal goods have neg- ative price elasticities, or exceedingly complex, involving a full-fledged description of many as- pects of a set of interrelated markets and the supply/demand relationships for the products traded (as would, for instance, an economet- ric analysis of an antitrust issue, such as U.S....
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CH 1 - Wooldridge, Introductory Econometrics, 4th ed....

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