Introduction and the Nature of Econometrics

Question 1

What is Econometrics?

Answer 1

Econometrics is a discipline that ”aims to give empirical content to economic relations”. It has been defined generally as ”the application of mathematics and statistical methods to economic data”.

Question 2

What are some applications of econometrics?

Answer 2

• To forecast (eg, interest rates, inflation rates, and gross domestic product).
• To study economic relations;
• To test economic theories.
• To evaluate and implement government and business policy.

Question 3

What are the steps in empirical economic analysis?

Answer 3

1. Formulate the question of interest.
2. Build the economic model.
3. Specify the econometric model.
4. Collect the data.
5. Estimate and test the econometric model.

Question 4

What does an economic model look like?

Answer 4

Example: Model of job training and worker productivity
* What is the effect of additional training on worker productivity?
* Formal economic theory not really needed to derive equation:
wage = f(educ, exper,training)

• The functional form has to be specified:
  wage = β0 + β1educ + β2exper + β3training + u

Question 5

What is cross-sectional data?

Answer 5

• Sample of individuals, households, firms, cities, states, countries, etc. taken at a given point in time.
• An important feature of cross-sectional data: they are obtained by random sampling from the underlying population.

Question 6

What is time-series data?

Answer 6

• Consists of observations on a variable or several variables over time.
• It cannot be assumed to be independent across time.

Question 7

What are pooled cross-sections?

Answer 7

It combines independent cross-sectional data that has been collected over time.
(eg. data on house pricing from 1993 and 1995)

Question 8

What is panel or longitudinal data?

Answer 8

Data that is collected through a series of repeated observations of the same subjects over some extended time frame—and is useful for measuring change.
It has a cross-sectional and a time series dimension.

Question 9

What is the concept of causality and ceteris paribus?

Answer 9

Definition of the causal effect of x on y:
”How does variable y change if variable x is changed but all other relevant factors are held constant?”