321_09_slides2 - Week 1 Review Econ 321 Introduction to...

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Week 1 Review Econ 321  Introduction to Econometrics Econ 321-Stéphanie Lluis 1
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Outline Causality Main steps in statistical analysis Econ 321-Stéphanie Lluis 2
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Causality Econ 321 - Stéphanie Lluis 3
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Correlation versus Causality Correlation: Two economic variables are  correlated if they move together. Causality: Two economic variables are  causally related if the movement of one  causes movement of the other. Econ 321 - Stéphanie Lluis 4
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Correlation versus Causality Q: Which one do we need? • A: Depends on the context: – To test the theoretical predictions, we  need causality. (Ex: to estimate the impact  of subsidized daycare on the labour  market supply of single mothers.) – In order to forecast the future value of an  economic variable, correlation is sufficient. Econ 321-Stéphanie Lluis 5
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Correlation versus Causality It is crucial to realize the difference  between causality and correlation. Examples: – More police officers (A) in high crime  areas (B) – My grandmother’s arthritis (A) and rain  (B) – Taking SAT preparation course (A)  and SAT scores (B) Econ 321-Stéphanie Lluis 6
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Correlation vs. Causality Assume you found that event A is  correlated with event B  A is causing B B is causing A Some third factor is causing both Econ 321-Stéphanie Lluis 7
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Why Isn’t Correlation alone  enough? Econ 321 - Stéphanie Lluis 8
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Conditions for Causality Econ 321 - Stéphanie Lluis 9
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How do we Establish Causality? Randomized experiment Statistical models Econ 321 - Stéphanie Lluis 10
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Ideal Case: Randomized Trials Typical example: How do new medical  treatments affect the health of medical  patients?  Example: the impact of sleeping pills on  patients suffering insomnia Econ 321-Stéphanie Lluis 11
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Ideal Case: Randomized Trials Randomized trial – Given a group of volunteers,  randomly  assign some of them to the  control  group  and some to the  treatment  group –  Treatment group: the set of  individuals who  are subject to an  intervention being studied  –  Control group: the set of  individuals  comparable to the  treatment group who are not subject to  Econ 321-Stéphanie Lluis 12
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Ideal Case: Randomized Trials Randomized trial-Insomnia Example  Given a group of volunteer insomnia patients,  randomly assign some of them to the 
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