Econometrics Ora

lOMoARcPSD|17800309
Econometrics ora
Econometrics (Ceska zemedelska univerzita v Praze)
Studocu is not sponsored or endorsed by any college or university

Downloaded by PR 7 (ch.sophearom@gmail.com)
lOMoARcPSD|17800309
ECONOMETRICS
1. What is Econometrics (definition)? What is the use and subject?

Econometrics is “confrontation” of economic theory with statistical data .
use of mathematical and statistical techniques to estimate the economic relationship, testing and
implementation of economic theories in economic analysis .
2. What is the use and subject of econometrics?
Based on economic theory and statistical methods quantifying the relationship between economic
variables for modelling of the examined phenomenon.
3. Which disciplines uses econometrics knowledge, and for what use?
Economics (economic theory) – economic relations
Statistics – statistical analysis
Mathematics – mathematical quantification of economic phenomena
CONSTRUCTION OF ECM
1. Name the steps for the construction of ECM
1) Economic theory
2) Economic model
3) Econometric model
4) Data set
5) Estimation of econometric model
6) Verification of econometric model
7) Application of econometric model
2. Write down an arbitrary econometric model
3. What is the difference between econometric and economic model?

-contains a random component ut and specifies the functional form of the model (if the economic
model is not specified) .
4. What is stochastic (residual) term of econometric model?

It's the difference between the actual (measured) value of the dependent variable and the
theoretical value.
5. What is the content of stochastic (residual) term of econometric model?
Random term contains:
- factors ( variables ) included in the model ( the explanatory variables )
- data errors
- errors resulting from the approximation of unknown functional form of the model
6. What is the subject, aim and purpose of the verification step of the construction of ECM?
Mathematical verification - used to assess the accuracy of the calculation parameters - mean
value of the response variable must equal the average of the theoretical values.
lOMoARcPSD|17800309
Economic verification - used to assess the direction and intensity of the effect of explanatory
variables on the response variable (accuracy marks and the size of numeric values).
Statistical verification - used to assess the statistical significance of the estimated parameters, the
individual equations and the whole model).
Econometric verification - verifies assumptions of econometric model (conditions necessary for
the application of specific econometric methods, tests and techniques) - autocorrelation test,
residue test of normality, multicollinearity of explanatory variables…
7. Name the three main areas of application ECM.
- Prognostic use of econometric model (Forecasting)
- Structural analysis (Ex-post analysis)
- Simulation of different scenarios
8. How can we dynamize an econometric model?
Model can be dynamized with:
- Inclusion of delayed variables
- Variable transformation – absolute or relative differences of variables
- Inclusion of trend (time vector)
- Inclusion of dummy variables
9. What is multicollinearity? List reasons, consequences and solutions.
High dependency between explanatory variables.
Main reasons for multicollinearity:
-sample does not have sufficient variability
-trend data with approximately same increases
-lagged variables in the model.
Consequences of multicollinearity:
-standard errors of parameters are high
-it is not possible to separate the influence of repressors
-estimates are very sensitive to model specification
Checking for high multicollinearity:
Correlation matrix => pair correlation coefficient is high. => IrI > 0.8
Solution for high multicollinearity:
-omitting one problematic variable
-transformation of one problematic variable => first differences (xt – xt-1); relative
differences (xt/xt-1); differences from an average
-introduction of dummy variable
-ignore it => if parameters are statistically significant
10. What is a dummy variable? For which purposes do we use dummy variables?
It is an artificial variable. The value can be 0 or 1. They may be used for:
-categorical variables (eg. Women/Man)
-modelling of structural shocks
-seasonal dummy variables
-numerical expression of qualitative properties (has / has not a particular property)
lOMoARcPSD|17800309
LRM – Linear Regression Model

1. Write down the full specification of LRM
2. What is the content of LRM? (define variables and parameters)

Variables:
- endogenous (yit) => dependant variable, explained variable, controlled variable,
predictand, regressand => subject of the model research and their values are generated by
the model
- exogenous (xjt) => independent variable, explanatory variable, exogenous variable, control
variable, predictor, regressor => characters of explanatory variables, they are not
determined by the model
- predetermined => set of exogenous variables, lagged exogenous variables and lagged
endogenous variables
- stochastic (random) variable (ut) => includes the effect of all other variables on the
dependent variable, which is not included in the model, also includes measurement errors
and distortions arising from the choice of the wrong type functions.
Parameters: (generally estimated on the basis of the relevant data)
- Structural (βis – connected to the endogenous variable; γir – connected to exogenous
variable) => express a direction and intensity of the impact of predetermined variables on
endogenous variable. Every structural parameter has 2 indexes (γ xx): 1st index shows the
sequence of the equation – not important in one-equation models, and 2 nd index shows the
sequence of xplanatory variable. Ex. γ 45 means 4th equation, connected to 5th variable. γ
interpretation: if x changes by one unit, yt will change by γ units
- Stochastic (E(u)=0; D2(u)) => express basic characteristics of a probability density, a
distribution of a stochastic variables.
3. Name assumptions of LRM (assumptions about the stochastic (residual) term).
1) Mean value of stochastic variable is 0. => E(ut) = 0
2) Variance of stochastic variable is constant and finite (homoscedasticity) => var(ut) = σ2<∞
3) Covariance between ui and uj is 0 (no autocorrelation between residuals) => cov(u i, uj) = 0
for i ≠ j
4) Covariance between xit and ut is 0 (ut is not correlated with exogenous var.) => cov(xit, ut)=0
5) There is a normal distribution of the random (stochastic) terms
ut ~ n.i.d. (0, σ2) => normal inedependant distribution; 0 mean and constant variance
lOMoARcPSD|17800309
4. Name specification assumptions of LRM.

1) Don’t neglect significant explanatory variables.
2) Don’t care about irrelevant explanatory variables.
3) Select the right functional form of the model
4) Stable estimated parameters and expression of time
5) Lack of simultaneous relationship between endogenous and exogenous variable
5. What is OLS?
Ordinary least squares method is used to estimate parameters of the linear regression model. This
method provides the best, unbiased and consistent estimates of model parameters (ie. BLUE) for
the conditions of the model. The essence is to find the parameters that minimize the sum of
squared deviations of the theoretical values of the response variable from their actual values.
6. What is the OLS criterion? (show it in the figure)

The criterion is to minimize the sum of the squares of residues:
7. Write down the OLS formula and declare the content and the size of matrix and vectors.
γ = (XTX)-1XTy
X – predetermined matrix variables and random components (n x k)

y – vector of endogenous variables (n x 1)
γ – vector of estimated parameters (k x 1)
8. Write down the LRM in matrix form, declare the content and the size of the used matrix and
vectors.
lOMoARcPSD|17800309
X–nxk y–nx1 γ–kx1 u–kx1
9. What is the difference between actual y and theoretical y.

Y are actual measured values, while the theoretical part is the actual y explained by the model
without random component.
10. What is the projection matrix Q and M? What are their properties?
Projection matrix vector maps of observed values with respect to the vector-compliant values. The
diagonal element of the matrix Q is called a lever t-th observation.
X
Projection matrix Q: XT ¿
¿
Q= X ∙ ¿
^y =Q ∙ y=X ∙ ( X T X ) ∙ X T y =X ∙ γ
Projection matrix on orthogonal space M M =( E−Q)
u=M ∙ y=( E−Q ) ∙ y= y −Q∙ y= y ∙ ^y
Properties of matrix Q:
- Symmetric QT =Q; M T =M
- Indempotentni Q∙ Q=Q ; M ∙ M =M
- Perpendicular M ∙ Q=0
11. Define the terms: best, unbiased and consistent estimation.

best – estimate does not have higher variance than the one to which it is compared
unbiased – it is not either underestimated not overestimated
consistent – it converges in probability to the value of the estimated parameter with increasing T
12. What is the content of economic verification of econometric model?
Economic verification is to assess the direction and intensity of the effect of explanatory variables
on the response variable (accuracy marks and the size of numeric values).
lOMoARcPSD|17800309
13. What is the content of statistical verification of econometric model?

Statistical verification is used to assess the statistical significance of the estimated parameters, the
individual equations and the whole model).
- Hypothesis Testing
- Coefficient of Determination
14. What is the content of econometric verification of econometric model?

Econometric verification validates the assumptions of econometric model (conditions necessary
for the application of specific econometric methods, techniques and tests) - test autocorrelation
residues - test multicollinearity of explanatory variables - homoscedasticity test model - a test of
normality - test functional forms
15. For what do we use t-test? For what do we use F-test?

T- test is used to test the statistical significance of individual structural parameters, while the F-test
is used to test the statistical significance of the model as a whole.
16. Describe the process of testing parameter significance.
1) Calculate the testing matrix

2) Calculate the residuals variance
3) Calculate the variance of the estimated parameters
4) Calculate standard errors of estimated parameters
5) Calculate test criteria (t-values)
6) Compare the calculated t-value with a tabulated value t-test at a significance level of a selected
number of degrees of freedom
17. What is the confidence interval and how can we use it for the detection of parameter
significance?
These are the limits in which the actual parameter value after repeated selections is located with a
certain degree of reliability, i.e. with a certain selected probability. If the confidence interval
contains zero, then the parameter is statistically insignificant.
18. What is the p-value and for what do we use it?

It indicates the probability that the null hypothesis is true. It is located in the interval <0; 1>. It is
used to evaluate pre-formulated hypotheses.
19. What is the R2 (coefficient of determination)?

It is a goodness of fit => a statistical measure of how well the regression line approximates the real
data points. It describes how well is the variation of dependent variable explained by the variation
of independent variable(s).
20. How do we interpret R2?
lOMoARcPSD|17800309
It indicates the percentage of the variability of endogenous variables explained by variability of

exogenous variables.
21. Write down the formula of R2.

2
2 Su
R =1− 2 where S2u is residual variance and s2y is total variance
S y
22. What is the adjusted R2?

It is used when deciding whether to include another variable into the model. Its value is usually
less than the value of the coefficient of determination.
23. Write down the formula of adjusted R2.

n−1
Ŕ2=1−(1−R 2) where n is number of observations and p is number of estimated
n− p
parameters in the equation
24. What is the residual sum of squares (RSS)?

It is the minimum value of the sum of squares in estimating parameters of a regression model
using OLS.
^y t
y t −¿
¿
¿2
¿
n
u2t =∑ ¿
i=1
n
RSS=∑ ¿
i=1
25. What is the relation among residual sum of squares (RSS), explained sum of squares (ESS)
and total sum of squares (TSS)?
^y t
y t −¿
¿
¿
n
RSS=∑ ¿
i=1
ý❑
^y t −¿
¿
TSS=ESS+RSS where ¿
n
ESS=∑ ¿
i=1
lOMoARcPSD|17800309
yt
¿
ý
−¿
¿
n
TSS=∑ ¿
i=1
26. What is the autocorrelation of residuals? List reasons, consequences and solutions.
Autocorrelation of residues indicates a situation where the residual component of the model is
correlated (dependent) with their lagged and future values. It occurs mainly in modelling the data
in the form of time series, because for the variables with a time arrangement, the correlation with
time is quite normally based on continuous development of most economic variables. The prefix
"auto" is used because correlation takes place within a single time series
Reasons for autocorrelation

- Exclusion of relevant variable from the model
- Inappropriate dynamics of the model
- Inappropriate analytic function form
- Inertia of the data
Consequences of autocorrelation
- Estimates are consistent and unbiased, but not the best
- Standard errors of parameters are distorted, misleading to:
o Problem with statistical verification
o R2 is higher according to tests
Testing for autocorrelation

- Using DW (Durbin-Watson ) test:
 Make hypothesis: H0 = no autocorrelation
 Calculate DW statistics - d∈(0;4)
 Evaluate the test; if d ∈(1,8; 2,2) there is a high probability that there is no
autocorrelation between the residuals
lOMoARcPSD|17800309
- Using BG (Breusch-Godfrey) test:

 Autocorrelation of higher order
 F-test is often used
 It compares the p-value with confidence level α. If (p <α) reject H0
Solution for autocorrelation

- Ignoring but rings HAAC errors (Heteroscedasticity Autocorrelation Consistent)
- Inclusion of logged values of explained variable
- Solutions to inappropriate model specification
27. What is heteroscedasticity?

Heteroscedasticity means that the dispersion is not constant in time.
Reasons for heteroscedasticity

- Usually problem in the case of cross-sectional data
- Inclusion of the irrelevant variable into the model
- Data categorization
Consequences of heteroscedasticity
- Estimates are consistent and unbiased, but they are not the best
- Standard errors of parameters are distorted, misleading to:
o Problem with statistical verification
Testing for heteroscedasticity

- Using BP (Breusch-Pagan) test - to test whether the estimated variance of residues is
dependent on the values of the explanatory variables
 H0: No heteroscedasticity – Homoscedasticity
 Ha: Heteroscedasticity – No homoscedasticity
2
 Model for testing: ut =a1+ a2 x 2 t + …+a p x pt +ε p
lOMoARcPSD|17800309
 H0 : a 1 = … = a p = 0 testing using for example F-test

 Ha : a 1 ≠ … ≠ a p ≠ 0
- Using White test - tests whether the square residues is dependent on the explanatory
variables, their squares and mutual times
 H0: No heteroscedasticity – Homoscedasticity
 Ha: Heteroscedasticity – No homoscedasticity
 Model for testing (2 explanatory variables):
2 2 2
ut =a1+ a2 x 2 t + a3 x 3 t + a4 x 2 t +a5 x 3 t +a 6 ∙ x2 t ∙ x 3t +ε p
Solution for heteroscedasticity

- Ignoring but rings HAAC errors (Heteroscedasticity Autocorrelation Consistent) for testing
parameters significance
- Modelling heteroscedasticity => include other explanatory variable
- Logarithmic transformation
28. How can we test the normal distribution of residual term?

n 1
Using BJ (Jarque-Bera) test: JB= (S 2 + K 2) where S is skewness and K is kurdness
6 4
29. What are the consequences of omitting variable biased?

Estimate is biased, consistent, relatively-efficient to estimate the relevant parameters in the model,
estimated standard deviations are biased towards higher values.
30. What are the consequences of the inclusion of irrelevant variable into the model?
Estimate is unbiased, consistent, not the best, estimated standard deviations are biased towards
higher values.
31. For which purposes do we use tests for parameter stability? What are the consequences of
violation of the assumption of parameter stability?
Used to test the stability of estimated parameters. In case of violation is not impartial estimate is
biased.
CONSUMPTION FUNCTIONS
1. What is the difference between consumption and demand?

Demand is intended amount of goods that the consumer is willing to buy at a certain price, being
aware of price of other assets, income and other determinants. Consumption is realized demand.
lOMoARcPSD|17800309
2. What is the difference between a fitted parameter (coefficient) and a calculated elasticity
(assuming linear functional form of the model)? What is this difference in the case of power
function?
Estimated parameter linear functional relation expresses the change of endogenous variable when
exogenous variable changes by one unit. Elasticity expresses the same, but percentages. Power
function estimated parameters simultaneously express elasticity coefficients.
3. Why is it suitable to model the relationship between the consumption and the income using a
nonlinear function?
Linear function expresses the unlimited growth of consumption in relation to income which does
not entirely correspond to the actual consumption trends. This allows non-linear functional
relationship.
4. What is the name of the functions which have the income as the explanatory variable? What
are the requirements on these functions? Which of these functions do you know?
These functions are called Engel functions, which are a subset of Tornquist function.
Requirements:
- It cannot express negative data of consumption and income (valid for all three groups)
- It must be able to show the level of saturation (valid for 1st and 2nd group)
- It must allow to count initial level of individual income (valid for 2nd and 3rd group)
Groups:
1) Necessary goods (bread, water)
2) Non-essential goods (clothes)
3) Luxury goods
5. Write down the functional form of TQ functions and depict them in the figure. In which
interval are the elasticities of these functions? For which types of the goods do we use them?
1st TQ function is used for modelling the necessary goods

2nd TQ function is used for modelling relatively non-essential goods
3rd TQ function is used for modelling luxury goods
lOMoARcPSD|17800309
6. Write down the functional form of the first TQ function. Linearize the first TQ function. What
is the content of the matrix X and vector y for the estimation of linearized 1st TQ function?
xp
1.TQ =a1
a2+ x p
Linearization first TQ can be done following way:
1 a2 + x p a2 1 1 1
= y '1
1
=a ' 1
a2 1
=x ' p
= = ∙ + =a ' 2
y i a1 x p a1 x p a1 yi a1 a1 xp
Linearized form of the 1st TQ function: y ' 1=a ' 1+ a ' 2 x ' p . Matrix X and vector y, needed to
estimate OLS for linearized 1st TQ function contain reciprocal values of the original variables.
7. For which purposes do we use differential coefficient of elasticity? When do we use it?
The differential coefficient of elasticity respects curvature function, i.e. it can be used in the course
of the nonlinear function.
E(r) is coefficient of elasticity
x
x
x
h
(¿¿ i)(n) n
n! where E x is elasticity coefficient of n-th order f.
i
h
(¿¿ i)(2) +…+E¿
2!
(¿¿ i)(1) +E ¿
E( r)=E ¿
h is increase(%) of the independent variable xi
Difference coefficient of elasticity of the 1st order (1st derivative) – slope of the tangent at a given
point. Differential coefficient of elasticity of the 2nd order (2nd derivative) – change.
8. Interpret the direct price elasticity, cross price elasticity and income elasticity. Do other types
of elasticities exist?
Direct price elasticity: the percentage change in demand for the i-th product at a 1% change in the
price of this product. Cross elasticity: the percentage change in demand for the i-th product due to
a 1% change in the price of product j-th. Income elasticity: the percentage change in demand at 1%
change in income. Other types of flexibility: flexibility point, arc (interval) flexibility, the average
coefficient of elasticity.
9. Name the common independent variables in the consumption functions.

Consumption, income, cost and price of substitutes.
MULTIPLE-EQUATION MODELS
lOMoARcPSD|17800309
1. Write down the multiple-equation model
2. Write down the matrix form of multiple-equation model. Define the content and the size of
employed matrices and vectors.
Β y t + Γ xt =ut where
Matrix Β The matrix contains the parameters of the endogenous variables of the model [g x g]
Matrix Γ contains parameters of predetermined variables [g x k]
Vector yt contains the endogenous variables of the model [g x 1]
Vector xt contains the predetermined variables of the model [k x 1]
Vector ut contains a stochastic variable (random component) [g x 1]
3. Explain the difference between structural and reduced form of the model.
Structural form: endogenous variable in the equation can be explained as other endogenous
variables of the model, so predetermined variables (both endogenous and predetermined
variables may occur at the right side of equation) Βyt + Γxt = ut
The reduced form: endogenous variables are explained only predetermined variables (on the right
side of the equation are predetermined variables only) yt = Mxt + vt
4. What is the matrix M of the reduced form. How can we calculate it? What is its content and its
size?
Multipliers matrix contains the parameters of an econometric model in reduced form, ie. Expresses
complex (direct and mediated) links between endogenous and predetermined variables. For very
simple models can be reduced form model to derive a simple substitution. For more complex
models are calculated: M = -Β-1 ·Γ Size of matrix multiplier is [g x k].
5. How can we transform the econometric model from the structural form to the reduced form?
a) substitution. Example:
b) calculating the M matrix
6. Define predetermined variables.
lOMoARcPSD|17800309
They're all delayed endogenous variables, exogenous variables and lagged exogenous variables.
7. What is the identity equation and for what do use it in the model?
Identity equation is deterministic without stochastic component. It increases internal dependence
within the model structure. This equation has been already identified. Because it is a deterministic
relationship, structural parameters are known in advance and may not be estimated.
8. Does the identity equation contain the residual term? (explain your answer).
It does not, it is a deterministic relationship in which the structural parameters are known in
advance and may not be estimated.
9. Describe the process of the identification of an econometric model. Why do we identify

models? Which types of the model do we identify (explain your answer)?
The identification is carried out only for simultaneous models. All the equations of the model must
meet k**≥gΔ – 1 where k** is number of predetermined variables which are not in the eq.
gΔ is number of endogenous variables in the equation
where k** = gΔ equation is exactly identified

k** > gΔ equation is over-identified
k** < gΔ equation is not identified (under-identified)
10. What does it mean if the model is under-identified?

Under-identified model is not identified, ie. is not identified with economic theory. This means that
the reduced form of the model corresponds to more structural forms - cannot be estimated
parameters.
11. Name the types of the models according to the matrix beta. Define the models.
a) simple models - is the unit matrix
b) recursive models - is a triangular matrix
c) simultaneous models - matrix contains at least one non-zero element above and below the main
diagonal (resp. simultaneous models include simultaneous relationships between endogenous
variables)
12. Which estimation method can we use for the estimation of simple, recursive and
simultaneous model?
a) simple models - ordinary least squares method
b) recursive models - ordinary least squares method
c) simultaneous models
- ordinary least squares method (in case if the model accurately identified)
- direct method (eg. a three-stage least squares method) - estimation of the model is done
in one step, ie. all model parameters are estimated at once, it puts greater demands on the
number of observations
- indirect methods (eg. two-stage least squares method) - parameter estimation is
performed after the equations, the parameter estimates are less efficient, but puts less
demand on the number of observations)
lOMoARcPSD|17800309
13. Describe the way how to estimate the parameters of recursive model using OLS.
The parameters are estimated for each equation separately.
OLSM matrix for the 1st equation
OLSM matrix for the 2nd equation
14. Under which condition can we estimate the simultaneous model using OLS? Describe this
estimate.
Only when the model is accurately identified. In this case, a conventional method can be estimated
by the least squares reduced form parameters and reverse transfer (from the reduced to the
structural shape) can be obtained from the parameters of the structural shape.
15. What is the difference between the methods with full and the method with limited
information?
a) with full information - estimate all equations simultaneously, thus taking into account all the
information contained in all the equations; require a greater number of observations; are
computationally demanding; eg. a three-stage least squares method
b) with incomplete information - not take into account information from other equations, each
equation is estimated separately; not demanding on the number of observations; not
computationally complex, eg. two-stage least squares method
16. What is the content of verification step in the case of multiple-equation models?
The estimated econometric model must be verified prior to its application, ie. Verify that the
parameters estimated in accordance with the underlying economic assumptions and whether the
statistical characteristics:
a) Economic verification - assesses the particular direction and intensity of the explanatory
variables on the variable being explained. Verifies accuracy accents here and the size of the
numerical values of estimated parameters. If the parameters are not obtained in accordance with
the conditions, it is usually necessary to verify the accuracy of the model specification
b) Statistical verification - assess the statistical significance of the estimated parameters, the
individual equations and the entire model. The value: - conformity estimated model with data -
statistical significance of the structural parameters
c) Econometric verification - verify the conditions necessary for the application of specific
econometric methods, tests and techniques, ie. Econometric model assumptions. Includes
example. Autocorrelation test random elements, multicollinearity of explanatory variables…
lOMoARcPSD|17800309
TSLSM – Two Stage Least Square Method
1. Why cannot we estimate the parameters of the structural form of the simultaneous model
using OLS?
Because they contain endogenous variables between the explanatory variables
2. What is the principle of TSLM?
The essence of TSLM reapplication OLSM, first to estimate the theoretical values of the
explanatory endogenous variables in the equation and the second estimate of the structural
parameters of the equation. It is applicable to all accurately identified and predetermined
simultaneous equations model.
3. Declare matrices and vectors for the parameter estimation using TSLM.
y1 – vector od dependant variables in the equation [n x 1]
Y2 – matrix of observations of all explanatory endogous var. in the eq. (on the right side) [n x g Δ -1]
X – matrix of the observations of all predetermined variables in the model [n x k]
X* - matrix of observations of all predetermined variables in the equation [n x k*]
4. What is the content of the first and the second stage of TSLM?
1st stage:
2nd stage:
5. What is the matrix Cii and for what do we use it?
CII is a square matrix, inverse of a matrix K, the number of rows (columns) corresponds to the
estimated number of structural parameters. Used to calculate structural parameters and test the
statistical significance of structural parameters.
6. Write down the submatrices, which creates matrix K, or Cii, respectively, incl. their size.
size
size
size
size
7. What is the difference between the matrices K and Cii?
lOMoARcPSD|17800309
K-1 = Cii
8.What is the relation between OLS and TSLM?

TSLSM contains OLSM. In TSLSM is repeatedly applied OLSM.
9. Describe the process of testing for parameter significance in the case of simultaneous model
estimated by TSLM.
Statistical significance of the different structural parameters is tested by t-test. When calculating
^y t
y t −¿
¿
¿2
the test criterion is used corrected residual variance: ¿
n
∑¿
t=1
2
Ś =¿
u
The elements on the diagonal covariance matrix are the variances of the structural parameters.
First are given variances of endogenous variables (in the order they produce matrix Y 2), followed
variances structural parameters predetermined variables (in the order to produce matrix X *).
Quantifying the standard error of each parameter as the square root of the diagonal elements:
value parameter
S bi =√ S ii . Quantification of t-values: t−value=
estimate error
Comparison of t-value with a tabulated value t-test at the selected level of significance with regard
to the appropriate number of degrees of freedom (when the null hypothesis is rejected for
statistical significance, ie. The parameter estimate is not statistically significant).
PRODUCTION FUNCTION
1. What does the production function represent?

Production function from a microeconomic point of view expresses the relationship of
technological factors - product, ie. Expresses the transformation of one or more factors of
production in the final production y = f (x1 // x2, x3, …, xn)
2. What is the difference between microeconomic PF and sector PF?

The microeconomic production function describes the behaviour of firms (theory of the firm),
while sectoral production function describes the behaviour of the entire sector (micro-aggregation
of production functions in the sector).
lOMoARcPSD|17800309
3. What is the running of neo-classical PF?

Neoclassical production function has progressive-regressive process and represents a typical
course of the production function.
4. Name and interpret the characteristics of PF.

Unit production (AP), also known as average production is defined as the amount of production
that is attributable to each consumed unit of production factor.
Marginal production (MP) is an increase in the quantity of production, which will use the
additional unit factor.
Production elasticity (Ep) is the change in production as a percentage, a change in the amount
used by a factor of one percent.
Optimality criterion is a condition that must be met when the requirement for achieving the
maximum amount of profit. It expresses the point at which the price increase in the consumption
factor on the last unit of production being equal income for the last unit of production.
y δy δy x δy C x
AP= MP= E p= ∙ MP= =
x δx δx ^y δx C y
5. What is the running of MP and AP of the neo-classical PF.
6. Define the stages of neo-classical PF.

Ep > 1 irrational stage
Ep ∈ (0; 1) rational stage (the optimal amount of production factor)
Ep < 0 irrational stage
lOMoARcPSD|17800309
7. Describe the steps of modelling PF.

Cobb-Douglas function (excessive restrictions):
Translogarithmic function (flexible):
Perform linearization function and then estimate the parameters using OLSM
8. Write down the characteristics of 2-factor PF.

Production function expressing more current influences (in this case two) variable factors, the
general form it can be written as y = f (x1, x2 // x3, …, xn)
Total production (TP) represents the value of production (y) for each combination of many factors
x1 and x2.
Unit production (AP) is the amount of production per each unit of factor x 1, respectively x2.
Maximum unit output is at a point where the first derivative of the production unit is zero if the
second derivative is also a unit of production is negative.
Marginal production (MP) is the rate of change of production to gain relevant factor. For maximum
production limit applies similar relations as a unit for maximum production.
Production elasticity (Ep) acquires, for each point of the surface of the production of two values, x 1
factor production flexibility and production flexibility factor of x2.
Optimality criterion for two-factor production functions must also pay for the factor x 1 and x2. To
achieve the maximum amount of profit must pay:
lOMoARcPSD|17800309
9. Show graphical representation of 2-PF

Graphical representation of two-factor production function is the production surface. Two-factor
production function is usually progressive-regressive course.
ISOQUANT RELATION F-F
1. Which function can we use for the derivation of isoquant function?

Isoquant can be derived from a two-factor production function:
2. Define isoquant function.

Isoquant function is representative of any combination of factors x 1 and x2, while maintaining
unchanged the level of total production. Isoquant is the relationship factor - factor.
3. For what do we use isoquant function?

Isoquant can be used to derive the company's costs and minimize them.
4. Show the typical running of isoquant function.

The typical course isoquant is decreasing and convex to the origin.
lOMoARcPSD|17800309
5. What is MRFS?
Marginal rate of substitution factor expresses change in the level of factor x 1 and x2 factor changes
in the amount (if still the same production). This ratio indicates how many units will change the
range of factors x1, x2 factor in changing the unit.
6. What are isoclines?

Isocline is a function of connecting to different iso. points with the same degree of confusion
factor.
7. Show in the figure the rational and irrational region of factor substitution.
lOMoARcPSD|17800309
Irrational (positive) region: there is no confusion factors but also for filling at a higher level, results
from an excess of a factor in relation to the second threshold and the negative output of one of the
factors. Rational (negative) area: The area substitution factors, where increased use of one factor
leads to savings on the second factor (section corresponds to the second stage of the production
function).
8. Write down the criterion of optimality for isoquant function. What do we minimize in this
case?
Optimality criterion is given equal marginal rate of substitution and factor price ratio inverted
negative factors. The criterion based on the relationship isoquant and isocost line. Minimizing the
costs.
9. Show the graphical solution of optimization problem.
10. Define isocost function.

Isocost line represents a combination of the amount of production factors (x1 and x2), whose
acquisition still represents the same cost. Isocost line, or Isocost is derived from the cost function
11. What is the substitution effect?

Phenomenon where due to changes in the price of the product increases the level of production
through increased use of production factors, and it changed in proportion. Changing the optimal
proportions factor in increasing the optimum production characterized Isocline = curve expansion.
12. What is the effect of expansion?

As a result of the price reduction factor occurs after editing a combination of factors to reduce costs.
ISOQUANT RELATION P-P
1. Define the isofactor function.
lOMoARcPSD|17800309
Isofactor function expresses the relationship of the product - the product. Expresses all the
combinations of different amounts of output y1 and y2, which can be produced from a given
(constant) quantity of production factor x1 common to both sectors (products).
2. Show the derivation of isofactor function.

Isofactor function can be derived from production functions for each sector(s).
3. Define MRPS.
Marginal rate of substitution product represents a change in the production y 2 caused by a unit
change in output y1.
According to the course isocfactor curves can be divided relationships between sectors at
competitive relationships, supportive and complementary. If relations between sectors competing
- MRPS is negative (constant, increasing or decreasing), when relations support MRPS is positive, at
additional zero
4. For which purposes do we use isofactor function?

It is used to maximize sales.
5. Show the typical running of isofactor function.

Isofactor function is concave downward course to start.
6. Write down the criterion of optimality for the isofactor function. What do we maximize in this case?
Optimality criterion is given equal value MRPS and perverse negative relative prices of production.
The optimal combination can be derived from the relationship isofactor features and functions
isosales. The challenge is to find a combination of products that lead to maximize revenue.
7. Show the graphical solution of the maximisation problem.
lOMoARcPSD|17800309
The optimal solution is the point at which the function isosales tangent to isofunction function, ie.
The slope isofunction function equals the slope function isosales.
8. Define the isorevenue function.

Isosales lines represent all possible combinations of two products (industry), which would lead to
the same level of sales.
COST FUNCTION
1. What does the cost function represent?

The cost function is a plot of the total cost on the size of production, the cost is monetising amount
of production inputs and production is expressed in physical units. The cost function represents
the relationship of the product - factor.
2. What is the relation between production and cost function?

The cost function is the inverse of the production function, assuming that the price factor does not
vary with the scale of production.
3. Show the cost function in the figure.

The course of the cost function is degressive-progressive.
4. Name the characteristics of the cost function and depict them in the figure.
The total cost (TC) consist of fixed costs (the extent of the changes in production volume
unchanging) and variable costs (the extent of the changes in the volume of output variable).
Unit costs (AC), known as the average cost, the average cost incurred per unit of total production.
Marginal cost (MC) are designed increase the costs incurred in achieving each additional unit of
production.
lOMoARcPSD|17800309
TC δTC
TC = FC + VC AC= MC=
x δx
5. Derive the criterion of optimality for cost function.

The maximum amount of profit is achieved when a quantity of production, which is determined by
equality of marginal revenue and marginal cost. Taking in conditions of perfect competition, the
marginal revenue is equal to the cost of production (P).
6. Derive the supply curve of the firm.

Tender function consists of a growing part of the marginal cost. In the short term it is a growing
branch of the marginal cost of minimum AVC, in the long term from a low AC (in the long run, only
fixed costs). Minimum AC stands for point of closure of the company
lOMoARcPSD|17800309
7. Explain the difference between cost function in the short-run and in the long-run.
In the short term, at least one of the factors fixed, in the long run all factors are variable.
8. Describe the steps of modelling the cost function.
FORECAST
1. Define the term forecast (prognosis)

The forecast is probabilistic statement about the forecast phenomenon related to the future,
which is derived using the (scientific) methods. Prognosis is an objective statement about the
future with a relatively high degree of probability, while the prediction is a kind of conditional
forecast, from which a probability measure is not required. A hypothesis is a common statement
about a phenomenon that has not been scientifically demonstrated to the satisfaction
2. What is the ex-post forecast?

Predicts a negative prognostic horizon (past) - we already know the value. Ex-post forecast is used
to validate the prognostic properties model to estimate RMSF and to compare predictive models to
each other.
3. What is the ex-ante forecast?

Predicts positive predictive horizon (the future).
4. What types of forecast do you know?

a) according to the length of the forecasting horizon
- short
- medium
- long term
b) by subject forecasting
- microeconomic
- macroeconomic
c) Prognosis:
- Event Outcome forecast (predicted outcome)
- Event timing forecast (predict when something happens)
- Time series forecast (predicts the value of something that evolves over time)
d) by the time perspective
- ex-post
lOMoARcPSD|17800309
- ex-ante
5. What types of forecasting methods do you know?

a) subjective methods
- comparative
- analysis of documents
- normative methods
- methods of interrogation (Delphi, brainstorming)
b) objective methods (based on the findings of Statistics and Applied Mathematics)
- Trend analysis functions
- Regression Analysis
- structural analysis
- Mathematical Programming
- methods of network analysis
c) system
6. What is the point and interval forecast?

Point predicts prognosis value. Interval forecast predicts the interval at which the value will
fluctuate with some probability.
7. How can we verify the forecasting properties of the model?

Validation of prognostic characteristics of each equation can be assessed indirectly based on an
analysis of:
- economic interpretability of calculated parameters
- multicollinearity
- Leak depending endogenous and explanatory variables
- the statistical significance of the parameters
- autocorrelation residues by DW test
- standard deviations
Verification of prognostic characteristics econometric model:
a) standard deviation
b) ex-post forecasts (end time series)
→ error forecasts => the smaller, the better
8. Define the normative deviations and describe the way how to use them for verifying the
forecasting properties of the model.
Standardized deviation percentage deviations from the true value of a balanced deviation and
standard deviation.
theoretical value of the i-th endogenous variables at time t

the actual value of the ith endogenous variables at time t
lOMoARcPSD|17800309
standard deviation of the ith endogenous variables calculated from the square root of the
total variance
the same result can be derived when we replace the average theoretical value yi
outcome prognosis is worse than if it was replaced by the average
prognosis coincides with the fact
The standard deviation can be calculated as averages of squared standardized deviation for each
endogenous variable model for each year of the time series and for the entire model.
Standardized deviation for the ith endogenous variable of the model:
The standardized deviation for each period of time series:
Standardized deviation for the entire model
9. Describe the way how to derive the (point) forecast from the trend function.
When deriving forecasts of the trend function is selected such regression function that best
describes its process (linear, power, semi-log, hyperbolic). Then an estimate parameters using OLS.
Following predict the development of independent variables and build their own prognosis
10. Describe the way how to derive the (point) forecast from the econometric model.
Where
forecasted values of each of the endogenous variables in period T + h
forecasted values predetermined variables in period T + h
11. Which form of the simultaneous model do we use for deriving the forecast?
Use reduced form model.
Point forecast
Interval forecast
Where M is matrix of multipliers and RMSFE is Root Mean Square Forecast Error
lOMoARcPSD|17800309
12. Describe the way how to derive the interval forecast from the econometric model.

Econometrics Ora

Uploaded by

Copyright:

Available Formats

You might also like

Econometrics Ora

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Econometrics Ora

Uploaded by

Copyright:

Available Formats

lOMoARcPSD|17800309

Econometrics (Ceska zemedelska univerzita v Praze)

Studocu is not sponsored or endorsed by any college or university

1. What is Econometrics (definition)? What is the use and subject?

3. What is the difference between econometric and economic model?

4. What is stochastic (residual) term of econometric model?

LRM – Linear Regression Model

2. What is the content of LRM? (define variables and parameters)

4. Name specification assumptions of LRM.

6. What is the OLS criterion? (show it in the figure)

X – predetermined matrix variables and random components (n x k)

X–nxk y–nx1 γ–kx1 u–kx1

9. What is the difference between actual y and theoretical y.

11. Define the terms: best, unbiased and consistent estimation.

13. What is the content of statistical verification of econometric model?

14. What is the content of econometric verification of econometric model?

15. For what do we use t-test? For what do we use F-test?

16. Describe the process of testing parameter significance.

1) Calculate the testing matrix

18. What is the p-value and for what do we use it?

19. What is the R2 (coefficient of determination)?

20. How do we interpret R2?

It indicates the percentage of the variability of endogenous variables explained by variability of

21. Write down the formula of R2.

22. What is the adjusted R2?

23. Write down the formula of adjusted R2.

24. What is the residual sum of squares (RSS)?

Reasons for autocorrelation

Testing for autocorrelation

- Using BG (Breusch-Godfrey) test:

Solution for autocorrelation

27. What is heteroscedasticity?

Reasons for heteroscedasticity

Testing for heteroscedasticity

 H0 : a 1 = … = a p = 0 testing using for example F-test

Solution for heteroscedasticity

28. How can we test the normal distribution of residual term?

29. What are the consequences of omitting variable biased?

1. What is the difference between consumption and demand?

1st TQ function is used for modelling the necessary goods

9. Name the common independent variables in the consumption functions.

1. Write down the multiple-equation model

b) calculating the M matrix

6. Define predetermined variables.

9. Describe the process of the identification of an econometric model. Why do we identify

where k** = gΔ equation is exactly identified

10. What does it mean if the model is under-identified?

The parameters are estimated for each equation separately.

OLSM matrix for the 1st equation

OLSM matrix for the 2nd equation

TSLSM – Two Stage Least Square Method

5. What is the matrix Cii and for what do we use it?

7. What is the difference between the matrices K and Cii?

8.What is the relation between OLS and TSLM?

1. What does the production function represent?

2. What is the difference between microeconomic PF and sector PF?

3. What is the running of neo-classical PF?