Chapter 1

Question 1

Economic Measurement

Answer 1

Econometrics

Question 2

Application of the mathematical statistics to economic data in order to lend empirical support to the economic mathematical models and obtain numerical results (GerhardTintner, 1968)

Answer 2

Econometrics

Question 3

: The quantitative analysis of actual economic phenomena based on concurrent development of theory and observation, related by appropriate methods of inference (P.A.Samuelson, T.C.Koopmans and J.R.N.Stone, 1954)

Answer 3

Econometrics

Question 4

The social science which applies economics, mathematics and statistical inference to the analysis of economic phenomena (ByArthur S.Goldberger, 1964)

Answer 4

Econometrics

Question 5

The empirical determination of economic laws (By H.Theil, 1971)

Answer 5

Econometrics

Question 6

makes statements that are mostly qualitative in nature, while econometrics gives empirical content to most economic theory.

Answer 6

Economic theory

Question 7

is to express economic theory in mathematical form without empirical verification of the theory, while econometrics is mainly interested in the in the empirical verification of economic theory.

Answer 7

 Mathematical economics

Question 8

is mainly concerned with collecting, processing and presenting economic data. It does not being concerned with using the collected data to test economic theories.

Answer 8

 Economic Statistics

Question 9

provides many of tools for economic studies, but econometrics supplies the later with many special methods of quantitative analysis based on economic data.

Answer 9

 Mathematical statistics

Question 10

Methodology of Econometrics

Answer 10

1. Statement of theory or hypothesis:
2. Specification of the mathematical model of the theory.
3. Specification of the econometric model of the theory.
4. Obtaining Data
5. Estimating the Econometric Model.
6. Hypothesis Testing
7. Forecasting or Prediction
8. Using model for control or policy purposes

Question 11

Methodology of Econometrics

Keynes stated: ”Consumption increases as income increases, but not as much as the increase in income”. It means that “The marginal propensity to consume (MPC) for a unit change in income is greater than zero but less than unit”

Answer 11

1. Statement of theory or hypothesis:

Question 12

Methodology of Econometrics

• Y = ß1+ ß2X ; 0 < ß2< 1
• Y= consumption expenditure
• X= income

ß1 andß2 are parameters;
ß1 is intercept, and
ß2 is slope coefficients.

Answer 12

2. Specification of the mathematical model of the theory.

Question 13

Methodology of Econometrics

• Y = ß1+ ß2X + u ; 0 < ß2< 1;
• Y = consumption expenditure;
• X = income;
  ß1 and ß2 are parameters;
  ß1 is intercept and
  ß2 is slope coefficients;
  u is disturbance term or error term. It is a random or stochastic variable.

Answer 13

3. Specification of the econometric model of the theory.

Question 14

Methodology of Econometrics

• Y= Personal consumption expenditure
• X= Gross Domestic Product all in Billion US Dollars

Answer 14

4. Obtaining Data

Question 15

Methodology of Econometrics

• Y^ = - 231.8 + 0.7194 X (1.3.3)
• MPC was about 0.72 and it means that for the sample period when real income increases 1 USD, led (on average) real consumption expenditure increases of about 72 cents.

Note: A hat symbol (^) above one variable will signify an estimator of the relevant population value.

Answer 15

5. Estimating the Econometric Model.

Question 16

Methodology of Econometrics

• Are the estimates accord with the expectations of the theory that is being tested? Is MPC < 1 statistically? If so,it may support Keynes’ theory.

Answer 16

6. Hypothesis Testing

Question 17

Methodology of Econometrics

• Confirmation or refutation of economic theories based on sample evidence is object of Statistical Inference (hypothesis testing)

Answer 17

6. Hypothesis Testing

Question 18

Methodology of Econometrics

• With given future value(s) of X, what is the future value(s) of Y?
• GDP=$6000Bill in 1994, what is the forecast consumption expenditure?
• Y^= - 231.8+0.7196(6000) = 4084.6
  Y^= -231.8 + 0.7196(3000) =-231.8 + 2158.8 = 1927

Answer 18

7. Forecasting or Prediction

Question 19

Methodology of Econometrics

• Y=4000= -231.8+0.7194 X  X  5882
• MPC = 0.72, an income of $5882 Bill will produce an expenditure of $4000
• Bill. By fiscal and monetary policy, Government can manipulate the control
  variable X to get the desired level of target variable Y.

Answer 19

8. Using model for control or policy purposes

Question 20

ß1 and ß2 are ______
ß1 is _______
ß2 is _________
u is ______________. It is a random or stochastic variable.

Answer 20

ß1 and ß2 are parameters;
ß1 is intercept and
ß2 is slope coefficients;
u is disturbance term or error term. It is a random or stochastic variable.

Question 21

u

Answer 21

random or stochastic variable.