Econometrics

Course Instructor: Dr. Zahoor Khan

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What is Econometrics?
Economic Measurement….
However, the scope is much broader…
Econometrics may be defined as the social science in which the tools of
economic theory, mathematics, and statistical inference are applied to
the analysis of economic phenomena (Arthur S. Goldberger,
Econometric Theory..)
Econometrics is concerned with the empirical determination of economic
laws (Theil, Principles of Econometrics)
It is an amalgamation of Economic theory,
Statistics and Mathematics
It is different from all the three disciplines
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Why to study Econometrics?
To apply economic and Finance theories to
real world data sets
An empirical analysis uses data to test a theory
or to estimate a relationship
An existing formal economic model can be
tested
Theory may be ambiguous as to the effect of
some policy change – can use econometrics to
evaluate the program
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Types of Data – Cross Sectional
Cross-sectional data is a random sample

Each observation is a new individual, firm,

etc. with information at a point in time

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Types of Data – Time Series
A variable or group of variables for which
the different observations are collected
along the time scale.
Examples
GDP of Pakistan from 2000-2014
GDP, Aggregate Consumption from 2000-
2014

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Types of Data – Time Series
Time series data has a separate observation
for each time period – e.g. stock prices

Trends and seasonality will be important

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Types of Data- Panel data
A combination of cross sectional and time
series data
A panel may be static
A panel may be dynamic
A Panel may be balanced or unbalanced

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The health of Economic Models
Simply establishing a relationship between
variables is rarely sufficient.
If we have truly controlled for enough other
variables, then the estimated ceteris paribus
effect can often be considered to be causal
Can be difficult to establish causality

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Example: Returns to Education
A model of human capital investment implies
getting more education should lead to higher
earnings
In the simplest case, this implies an equation like

Earning   0  1education  u