I_intro_2011

I_intro_2011 - I 1 James B. McDonald Brigham Young...

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I 1 James B. McDonald Brigham Young University 11/2011 I. Introduction to Econometrics Objective: Make this one of the most interesting and useful courses you take in your undergraduate program. Outline: A. Models and Basic Concepts, B. Data, C. Econometric Projects, D. Problem set Econometrics deals with the problem of estimating relationships between variables. These techniques are widely used in the public and private sectors as well as in academic settings. They help provide an understanding about relationships between variables which can also be useful in policy analysis and in quantifying expectations about future events. Some applications of econometric procedures include: Economics and Business o Estimation of demand relationships impact of advertising on demand pricing decisions determinants of market share estimation of income elasticities o Estimation of cost relationships o International trade and the balance of payments o Macro models o Rational expectations o Predicting corporate bankruptcy or individual default on loans o Identifying takeover targets Education o Production functions Tradeoffs between different education techniques o Estimation of supply and demand for teachers o Predicting acceptance into graduate and professional programs o Estimating the impact of different types of schools on graduate’s salaries Political Science o Analysis of voting behavior Public Sector o Forecasting tax receipts o Public Sector production functions Legal Profession o Models of jury selection o Discrimination
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2 I Each application involves (1) the FORMULATION OF A MODEL (functional form, variable classification as well as the theoretical foundation), (2) ESTIMATION of unknown parameters, (3) TESTING hypotheses, and (4) PREDICTION . A. Models and Basic Concepts 1. The formulation of the model is generally based upon economic considerations. Example 1 . Consumer Demand Theory Maximize U(X 1 , X 2 ) Subject to P 1 X 1 + P 2 X 2 = Y where Y denotes income and the P i and X i , respectively, denote the price and quantity of the i th good. The solution of this problem yields demand equations for X 1 and X 2 X i = D i (P 1 , P 2 , Y) i = 1, 2 where the functional form is unknown unless the utility function U( ) is specified. If advertising (A) effects preferences (U(X 1 , X 2 , A)), then demand will also depend upon advertising expenditure, X i = D i (P 1 , P 2 , Y, A). Statistical data for X i , P i , A and Y and econometric procedures are then used to estimate the demand equations and any unknown parameters. Example 2 . A Simple Macro Model C t = β 1 + β 2 (Y t - T t ) Y t = C t + I t + G t + X t where C t , Y t , I t , G t , T t , and X t respectively denote consumption, total production, investment, government expenditure, taxes, and net exports in period t . β 1 and β 2 are unknown parameters or unknown constants which we may want to estimate.
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3 I It is important to remember that models are not complete descriptions of a situation, but rather attempt to summarize the main relationships between the variables.
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This note was uploaded on 02/29/2012 for the course ECON 388 taught by Professor Mcdonald,j during the Winter '08 term at BYU.

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I_intro_2011 - I 1 James B. McDonald Brigham Young...

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