Combined Notes - 1 Introductory Econometrics I....

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1 Introductory Econometrics I. Introduction A. Definition of Econometrics - consider the two "parts" of the word. 1. Economics - allocation of scarce resources to competing ends. Framework - economics provides a framework that helps us think about how the economy works. For example, how consumers and firms make allocation decisions. Relationships - theories of how economic variables or factors are related - i.e., "what causes what to change." Example: A consumer's demand for a commodity is a function of the price of that commodity ( P ) and the consumer's income ( I ). Microeconomic theory suggests we also include the price of a substitute ( P s ), the price of a complement ( P c ) and a measure of expectations ( E ). We can express this mathematically as: Q d = f(P,I,P s ,P c ,E) , which is a concise way of stating that quantity demanded is a function of the set of variables enclosed by parentheses. Such a relationship might be as simple as the following linear equation: d sc 01 2 3 4 5 = + P I E Q PP  2. Metrics - of, involving, or used in estimation - in a word, measurement . If we can get numbers for the intercept ( β 0 ) and the various slopes ( β 1 - β 5 ) of the demand equation above, then we have measured that particular economic relationship. 3. Now combine the two - Econometrics Economic Measurement Econometrics - study of methods and procedures that can be used to measure economic relationships. B. Why do we need Econometrics? 1. Estimates - we need estimates of economic relationships (estimates are numerical values). As an economist, you have (or you will have) several tools with which to work. Two of these are: Economic Theory - provides theories or conjectures about relationships between economic variables - gives "qualitative" answers about relationships. Theory tells us how particular variables should be related. (Mathematical economics deals with expressing theory in equations.)
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2 Econometrics - a methodology that provides numerical values or estimates for these relationships - "quantitative" answers. Econometrics allows us to quantify relationships expressed by mathematical models of theory. Example: Demand theory again. Economic theory (microeconomics) says that demand curves slope downward: i.e. d / P < 0 . Q  Theory indicates the direction of effect. If price increases, then the quantity demanded should go down. A qualitative statement. Econometrics can be used to get a numerical value for this derivative: i.e. d = -1.3 . Q Econometrics can provide us with a real number; an estimate of the magnitude of the effect. If price increases by one unit, quantity demanded will go down by 1.3 units. A quantitative statement. 2. Methodology - Econometrics is a methodology designed to address data and estimation problems faced by economists. There are special problems that economists face in estimating models. Econometrics has been developed to deal with these problems. We will discuss a number of these special problems throughout the course, especially in the second half of the semester.
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This note was uploaded on 12/08/2011 for the course ECON 702 taught by Professor Staff during the Spring '08 term at UMass (Amherst).

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Combined Notes - 1 Introductory Econometrics I....

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