A. Econometrics literally means economic measurement.

This measurement is frequently undertaken

as a part of an investigation or verification of economic phenomena. Econometrics as a discipline makes
use of an amalgamation of statistics, mathematics and economic theories, concepts or principles.

B.The methodology of econometrics. The use of econometrics as a methodology should involve the
following:

i.)statement of theory or hypothesis

ii.)a presentation of the mathematical [version] of the econometric model

iii.)specification(characterization) of econometric model; inclusive of functional forms,

description of data to be used in the estimation, etc.

iv.)gathering the data to be used in the estimation [inclusive of source and method for
gathering]

v.)estimation of model parameters

vi.)test of hypothesis and other relevant statistical inferences

vii.)forecasting or prediction(if necessary)

viii.)using the model for control(simuation) and policy formulation/implications

C. Regression Functions

The population regression function(PRF) takes the following form

E(Y​i​/X​2i​,…X​ki​) = β​1​ + β​2​X​2i​ +….+ β​k​X​ki

or in stochastic form,

Y​i​ = E(Y​i​/X​2i​,…X​ki​) + u​i

The error term u normally distribution with mean E(u​i​) = 0, variance var(u​i​2​) = σ​2 and covariance
cov(u​i​,u​j​) = 0 for I ≠ j. For the sample regression function(SRF) – using least squares method, takes the
form

Ŷ I​ = β̂ 1​ + β̂ 2​X​2i​ +… + β̂ k​X​ki​ + û i

The residual, û I​ = Y​i​ - Ŷ i​ .

D.Underlying assumptions of classical least square regression model(CLRM)

i.)linearity in parameters

ii.)X​i​’s are fixed

 iii.)zero mean; i.e. E(u​i​ / X​2i​,…X​ki​) = 0

iv.)homoscedasticity; i.e. var(u​i​/X​i​) = σ​2

v.)no autocorrelation; i.e. cov(u​i​,u​j​/X​i​) =0 for i ≠ j

vi.)zero covariance; i.e. cov(u​i​ , X​i​) = 0

vii.)number of observations n must be > number of parameters k

viii.)X​i​’s must be variable

ix.)regression model is correctly specified; i.e. correct functional form, no error in

measurement, etc.

x.)no multicollinearity; i.e. cov(X​i​ , X​j​) = 0 for i ≠ j

n
E.)3 possible methods of estimation: least squares(min ∑ û i​2​), maximum likelihood(estimating
i=1
unknown parameters while maximizing probability of estimating Y high) and method of
moments(population characteristic is estimated by using sample characteristic).

F.)There are desirable properties of estimators: unbiasedness E( θ̂ ) – ​𝛉 = 0, efficiency(minimum

variance when compared with alternative estimators), linearity(linear function of sample observations
and consistency(estimator approaches parameter as sample size increases indefinitely)