OUTLINE 1. What is Econometrics? 2. Steps in Empirical Economic Analysis 3. Examples 4. Economic Data 5. Causality and the notion of “Ceteris Paribus”
1. WHAT IS ECONOMETRICS? • Combination of statistical methods , economics and data to answer empirical questions in economics. • There are many different types of empirical questions in economics. Some examples: • Forecasting: Use current and past economic data to predict future values of variables such as inflation, GDP, stock prices, etc. • Testing economic theories:- Test of the efficiency of the Stock Exchange - Test the Capital Asset Pricing Model (CAPM)
1. WHAT IS ECONOMETRICS? • Estimation of economic relationships:- Demand and supply equations; - Production functions; - Wage equations, etc. • Evaluating government policies:- Employment effects of an increase in the minimum wage; - Effects of monetary policy on inflation. • Evaluating business policies:- Estimate the optimal price and advertising expenditure for a new product; - Compare profits under two pricing policies. - Evaluate the effectiveness of a job training program.
• Econometrics is relevant in virtually every branch of applied economics : finance, labor, health, industrial, macro, development, international, trade, marketing, strategy, etc. • There are two important features which distinguish Econometrics from other applications of statistics : 1. Economic data is non-experimental data . We cannot simply classify individuals or firms in an experimental group and a control group . Individuals are typically free to self-select themselves in a group (e.g., education, occupation, product market, etc). 2. Economic models (either simple or sophisticated) are key to interpret the statistical results in econometric applications 1. WHAT IS ECONOMETRICS?
2. STEPS IN EMPIRICAL ECONOMIC ANALYSIS • The research process in applied econometrics is not simply linear, but it has “loops”. That is, the original question and model, and even the data collection (e.g., search for additional information/variables) can be modified after looking at preliminary econometric results. • Keeping this in mind, it is useful to describe the different
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