Introduction (SU1)

Question 1

Define: Econometrics(1)

Answer 1

the social science in which the tools of economic theory, mathematics, and statistical inference are applied to the analysis of economic phenomena.

Question 2

Define: Econometrics(2)

Answer 2

the result of a certain outlook on the role of economics, consists of the application of mathematical statistics to economic data to lend empirical support to the models constructed by mathematical economics and to obtain numerical results.

Question 3

What does econometrics make use of?

Answer 3

Economic theory
Mathematical economics
Economics statistics

Question 4

What differentiates economics and econometrics?

Answer 4

Economic theory mostly postulates the direction of relationships, while econometrics provides numerical estimates of these relationships.

Question 5

What sis the main concern of Mathematical economics?

Answer 5

is to express economic theory in mathematical form or equations (or models) without regard to measurability or empirical verification of the theory.

Question 6

Steps in the econometric analysis

Answer 6

1. Creating a statement of theory or hypothesis.
2. Collecting data.
3. Specifying the mathematical model of theory.
4. Specifying the statistical, or econometric, model of theory.
5. Estimating the parameters of the chosen econometric model.
6. Checking for model adequacy: Model specification testing.
7. Testing the hypothesis derived from the model.
8. Using the model for prediction or forecasting.

Question 7

Step 1: What is the starting point?

Answer 7

The starting point is to find out what economic theory has to say on the subject you want to study.

Question 8

Side note: What is the discouraged-worker hypothesis (effect) state?

Answer 8

states that when economic conditions worsen, as reflected in a higher unemployment rate, many unemployed workers give up hope of finding a job and drop out of the labour force.

Question 9

Side note: What is the added-worker hypothesis (effect) state?

Answer 9

states that when economic conditions
worsen, many secondary workers who are not currently in the labour market (e.g., mothers with children) may decide to join the labour force if the main
breadwinner in the family loses his or her job.

Question 10

Step 2: List the three types of data available for empirical analysis

Answer 10

Time series
Cross-sectional
Pooled (combination of time series and cross-sectional)

Question 11

Step 2: Explain time series data

Answer 11

are collected over a period of time, such as the data on
GDP, employment, unemployment, money supply, or government deficits

Such data may be collected at regular intervals—daily (e.g., stock prices), weekly (e.g., money supply), monthly (e.g., the unemployment rate), quarterly (e.g., GDP), or annually (e.g., government budget)

Question 12

Step 2: Can time series data be quantitative or qualitative in nature?

Answer 12

time series data may be quantitative in nature (e.g., prices, income, money supply) or qualitative (e.g., male or
female, employed or unemployed, married or unmarried, white or black).

Question 13

Step 2: Explain cross-sectional data

Answer 13

are data on one or more variables collected at one point in time, such as the census of population conducted by the U.S.

Question 13

Side note: What are qualitative variables called?

Answer 13

Dummy variables
Categorical variables

Question 14

Step 2: Explain pooled data

Answer 14

We have elements of both time series and cross-sectional data. For example, if we collect data on the unemployment rate for 10 countries for a period of 20 years, the data will constitute an example of pooled data—data on the unemployment rate for each country for the 20-year period will form time series data, whereas data on the unemployment rate for the 10 countries for any single year will be cross-sectional data.

Question 15

Step 2: What special data falls under pooled data? Explain it

Answer 15

Panel data, also called longitudinal or micro panel data.

The same cross-sectional unit, say, a family or firm, is surveyed over time.

Panel data results from repeatedly interviewing the same household at periodic intervals provide very useful information on the dynamics of household behaviour.

Question 16

Step 3: How do we see how x (first variable that we are testing) behaves in relation to y (second variable that we are testing)

Answer 16

Plot the data for these variables (x and y) in a scatter diagram, or scattergram.

For the first approximation we can draw a straight line.

Question 17

Step 4: What is u?

Answer 17

Randon error term OR error term.

Question 18

Step 4: What does u do?

Answer 18

The error term distinguishes econometrics from purely mathematical economics.

Question 19

Step 4: What is the primary objective of the linear regression model?

Answer 19

Is to explain the behaviour of
one variable (the dependent variable) in relation to the behaviour of one or more
other variables (the explanatory variables), allowing for the fact that the relationship between them is inexact.

Question 20

Step 4: Explain Causation

Answer 20

Refers to the casual relationship between two variables, meaning that one event causes another event to occur.

Question 21

Step 4: Does regression imply causation?

Answer 21

Not necessarily.

A statistical relationship, however strong and however suggestive, can never establish causal connection: our ideas

Question 22

Step 5: Why does the dependent variable have a “cap”?

Answer 22

The equation has a symbol (^) in the dependent variable because it is an estimate of the equation in step 4.

Question 23

Step 5: How do we get the estimates of parameters b1 and b2?

Answer 23

We get the estimates of parameters B1 and B2 by using the method of ordinary list squares (OLS).

Question 24

Step 6: What happens in this stage?

Answer 24

We choose a model that best fits our hypothesis.

Question 25

Step 7: Explain hypothesis testing.

Answer 25

Hypothesis testing - find out whether the estimated model makes economic
sense and whether the results obtained conform with the underlying economic theory.

Question 26

Step 8: What do we do with the model after we finally have it

Answer 26

We use it for prediction, or forecasting.

Question 27

Step 8: Explain the prediction error

Answer 27

The discrepancy between the predicted value and the actual value.