BFI Program

ECONOMETRICS I National Economics University

2020
MA Hai Duong
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INTRODUCTORY
ECONOMETRICS
LET’S START

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LECTURER INFORMATION
MA Hai Duong
Cellphone: 0886 99 19 79
Email: duong79tkt@neu.edu.vn/duong79tkt@gmail.com
Web: www.mfe.edu.vn/nguyenhaiduong
Lecturer of Mathematics and Faculty of Econometrics
Office: Suite 1106, A1 Building, National Economic University, 207 Giai Phong street, HN

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SUBJECT INFORMATION
Econometrics I
The number of the credits: 3
Evaluation:
 Attendance: 10% (Compulsory: attend at least 80% of the class)
 Midterm Test: 20%
 Presentation: 20%
 Final Exam: 50%
Applied Software: EXCEL, EVIEWS, Rstudio (version 8 or higher)

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 WELCOME
This is the first unit of
econometrics and pre-requisite
for most third year units in
econometrics, business analytics
and actuarial studies.

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WHAT IS ECONOMETRICS?
“Metrics” as a suffix means measuring things and analyzing those measurements.
“Econo” tells us that we are talking about measuring and analyzing economic things.
Many examples of quantitative analytics in other fields are biometrics and
psychometrics
Econometric methods are used in economics, finance, marketing and management
Econometrics uses mathematics and statistics.

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 OUTLINE OF UNIT
Week 1: Introduction
Week 2: Review of Statistical Concepts
Week 3: Linear Regression (OLS)
Week 4: More on Linear Regression Analysis
Week 5: Inference and Prediction
Week 6: Regression with Qualitative variables
Week 7: Heteroskedasticity
Week 8: Model Selection
Week 9: Regression with Time Series
Week 10: Serial Correlation
Week 11: Revision
(Topic selection)
(Collecting data including qualitative variables)
(Estimate several functional forms and
interpretation)
(Diagnostic test - Heteroskedasticity)
(Prepare presentation)
(Presentation and discussion)
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INTRODUCTORY ECONOMETRICS –
A MODERN APPROACH

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 COURSEWARE
1. INTRODUCTORY ECONOMETRICS: A MODERN APPROACH (WOOLDRIDGE), 6 th
edition or higher
2. BASIC ECONOMETRICS (GUJARATI), 4th edition or higher
3. USING ECONOMETRICS: A PRACTICAL GUIDE (STUDENMUND), 7th edition or higher
4. USING R FOR INTRODUCTORY ECONOMETRICS (FLORIAN HEISS)
5. Statistics Econometrics software:
1. Microsoft EXCEL
2. EVIEWS version 8 or higher
3. R or Rstudio (https://cran.r-project.org/bin/windows/base/ or https://posit.co/products/open-source/rstudio/ )
4. Stata

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OVERALL GOAL
Evidence based analysis of business and economic problems, so this unit comprises
the following stages:
1. Understanding the problem
2. Formulating an appropriate conceptual model to tackle the problem
3. Collecting appropriate data
4. Looking at data (Descriptive Analytics)
5. Estimating the model, making inference, predictions, and policy prescriptions as
appropriate (Predictive and Prescriptive Analytics)
6. Evaluating, learning and improving each of the previous steps, and iterating until
the problem is solved
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SOCIAL & ECONOMICS
RESEARCH METHODS
Qualitative methods
Quantitative methods
 Univariate analysis: inferential statistics
 Bivariate analysis: inferential statistics and modelling in econometrics
 Multivariate analysis: multivariate statistics and modelling in econometrics

Mixed methods

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TWO PURPOSES OF
ECONOMETRIC MODELLING
(EM)
1. Prediction: To predict a target variable based on available information, e.g.,
 Future return to a stock based on historical returns
 School quality based on the number of high-level professor
 The number of expected accidents based on the number of historical accidents
2. Policy Prescription: To understand the causes of variation in a target variable, so
that we can control that variable with suitable policy prescription, e.g.
 What determines the volatility of stock prices?
 What determines the demand of Iphone 11 Pro?
 How does university education affect earnings?
 What is the effect of greenhouse gases on global temperature?

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TWO PURPOSES OF EM: 1.
PREDICTION
Predict using that is correlated with
If there are several variables that are correlated with , there tools will allow us to use
a combination of these predictors to predict
When we have time series data, and today’s value is correlated with yesterday’s
value, these tools allow us to use yesterday’s value to predict today.
Prediction of future values is calling forecasting. The tools we learn allow us to build
forecasting model

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 TWO PURPOSES OF EM: 2.
POLICY PRESCRIPTION
When do you think we can manipulate a target variable by changing a variable ?
 Example 1: CEO’s salary is positively correlated with the company’s share price.
Can we increase the company’ share price by offering a high salary to this company
CEO?
 Example 2: Poor countries have a large number of infant mortality. Does this mean
that the only way to reduce infant mortality is to make country become richer?
We need to have a causal model to enable us to give policy advice.
For example, after taking account for all
confounding factors, we establish that better
sanitation reduces child mortality

 Making advices to poor countries and NGOs to

implement programs to improve living sanitation.
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THE ROLE OF ECONOMICS AND
FINANCE THEORIES
Theories in economics and finance suggest how variables are related to each other.
Hence, they are potentially useful for developing causal and also predictive models.
 Economic theory suggests that quantity of demand is negatively related to own
price, positively related in substitute commodities and income of consumers
 Finance theory suggests that bond prices negatively related on inflation. This
implies that predictors are useful for predicting inflation also help in predicting
bond prices.
In other hand, we can use econometrics to test economics and finance theories. For
example:
 The efficient market hypothesis implies that all important information for next
period’s equity prices is in this period’s price. Hence equity returns should be
unpredictable. If we can find a significant predictor for returns, we can reject this
hypothesis.
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SOME EXAMPLES
What predicts stock returns?
What is the effect of reducing class size to student achievement?
How does another year of education change earnings?
What determines if a person chooses to buy private health insurance?
What is the price elasticity of Macbook Pro 2019?
What is the effect on output growth of a 0.25 percentage point increase in capital?

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ECONOMETRICS ANALYSIS:
DATA
The gold standard for measuring causal effects is using data from randomized control trials
(RCTs), similarly to the way the effectiveness of new drugs or vaccines are measured.
Unfortunately, in business and economics we cannot run experiments to get this kind of data.
Most often econometric analysis has been carried out using observational data (non-
experimental data)
 Returns to education: Data on wage and educational attainment of a sample of
individuals.
Observational data pose major challenges:
 Confounding effects (omitted factors): smarter individuals go to university. University
graduates get high wages. Is this wage differential a return to university education or a
return to smartness?
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ECONOMETRICS ANALYSIS:
STRUCTURE OF DATA
1. Cross-sectional data: observations on one or more variables taken at the same
point in time.
 Example: Observations on infant mortality and GDP per capita in a group of
countries in 2015
2. Time series data: observations on one or more variables taken at different points in
time.
 Example: Monthly observations on returns and volume of trade of IBM shares
from January 2008 to June 2018
3. Panel data (or longitudinal data): observations on the same cross-section units at
different points in time
 Example: Daily returns and volume of trade for HOSE companies from 2/1/2018
to 30/11/2018
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CROSS-SECTIONAL VERSUS
TIME SERIES
Two important differences in the properties:
1. There is no natural ordering of observations in cross-sectional data, i.e., there is no
reason to assume that the characteristics of Helen should be studied before those
Paul and vice versa.
 Conversely, observations in time series data are ordered: There is a natural
ordering in time in the sense that GDP in the first quarter of the year precedes the
second quarter and so on.
2. Cross-sectional data are generally assumed to be independent, i.e., information
collected on individual 1 does not provide any information on individual 2
 Conversely, time series data are generally characterized by some form of temporal
dependence, i.e., an observation on cigarette consumption in July 2018 can be
informative about cigarette consumption in August 2018 19
CROSS-SECTIONAL VERSUS
TIME SERIES
Time series data can be used to accomplish 2 important tasks for which cross-
sectional data are inadequate:
1. Forecast future values of a variable: i.e., stock prices, consumer price index, gross
domestic product, annual criminal rates one or several days/months/quarters/years
ahead.
2. Estimate the dynamic causal effect of variable on another variable : i.e., estimate
the effect on alcohol consumption of an increase in the tax on the alcohol/an increase
in punishment fee with drivers used alcohol are driving a vehicle.

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CROSS-SECTIONAL VERSUS
TIME SERIES: NOTATION
Conventionally, a regression model for cross-section analysis is written as:

where denotes units such as individuals, households, firms, schools, cities,

countries, ...
For time series analysis a similar regression model is written as:

where denotes units in time such as days, months, quarters, years, ...

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ECONOMETRIC ANALYSIS:
MODELLING
The fundamental step is to think of all variables as random variables (variables with
several possible outcomes that has a probability distribution).
Equally as important is to remember that with no information, the best prediction of
a variable is the center of its distribution (typically its mean).
 Example: If we have a random sample of weekly wages in Vietnamese labors
and based on that want to predict the wage of a random Vietnamese labor (not in
our sample), what do we do?
If we group the population of Vietnamese labor by a characteristic of them
(maybe age), the center of the wage distribution for different ages will not be the
same.
To learn about mean of wage for each age, what should we do?

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ECONOMETRIC ANALYSIS:
MODELLING –INTERACTION
OF THEORY AND PRACTICE
Distribution of wage conditional on different values of age

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ECONOMETRIC ANALYSIS:
MODELLING –INTERACTION
OF THEORY AND PRACTICE
Distribution of wage conditional on different values of age

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ECONOMETRIC ANALYSIS:
MODELLING –INTERACTION
OF THEORY AND PRACTICE
Keep in mind that, calculating the average wage for each age in our sample is not
feasible (our sample may not have all ages in it)
The problem is reduced to estimating the intercept and slope of the conditional
expectation line from the data
Find the best fitting (regression) line to the scatter plot of the data
We study the regression line and establish why it is the best we can do

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ECONOMETRIC ANALYSIS:
MODELLING –INTERACTION
OF THEORY AND PRACTICE
There are other predictors of wage, like education and IQ
In the theory universe, we generalize the model to:

In population, we find the combination of Age, Education and IQ that fits the Wage
data
How to include Qualitative, i.e. : Gender and Occupation in our model

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ECONOMETRIC ANALYSIS:
MODELLING – THE MAIN
FOCUS
We study regression modelling in this unit, which is a powerful tool for empirical
analysis. We learn how to estimate regression models, how to interpret them, and
how to make inference, predict and provide policy advice on the basis of these
models

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METHODOLOGY – AN
EXAMPLE
1. Statement of theory or hypothesis:
Keynes stated: “Consumption increases as income increases, but not as much as the
increase in income”. It means that “The marginal propensity to consume (MPC) for a
unit change in income is greater than zero but less than unit”.
2. Specification of the mathematical model of the theory.

Where is intercept (Autonomous Consumption) and is slope coefficient (MPC)

Keynes’s theory: and
= Consumption expenditure
= Disposable income
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METHODOLOGY – AN
EXAMPLE
3. Specification of the econometric model of the theory.

The researcher can test Keynes’s hypotheses with observational data.

is the random error, this component will be repeated in next lectures.

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METHODOLOGY – AN
EXAMPLE
4. Obtaining Data (Ex: Table I.1, page 6, Basic Econometrics – Gujarati)

Year
1982 3081.5 4620.3
= Personal consumption expenditure
1983 3240.6 4803.7
1984 3407.6 5140.1 = Gross Domestic Product all in Billion
1985 3566.5 5323.5 US Dollars
1986 3708.7 5487.7
1987 3822.3 5649.5
1988 3972.7 5865.2
(Source: Economic Report of the
1989 4064.6 6062 President, 1998)
1990 4132.2 6136.3
1991 4105.8 6079.4
1992 4219.8 6244.4
1993 4343.6 6389.6
1994 4486 6610.7
1995 4595.3 6742.1
1996 4714.1 6928.4
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METHODOLOGY – AN
EXAMPLE
5. Estimating the Econometric Model

Interpretation about estimated coefficients will be considered in future lectures

6. Hypothesis Testing
Are the estimators according with the expectations of the theory that is being tested?
Is MPC < 1 statistically? If so, it may support Keynes’ theory.
Confirmation or refutation of economic theories based on sample evidence is object
of Statistical Inference (hypothesis testing)

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METHODOLOGY – AN
EXAMPLE
7. Forecasting or Prediction
With given future value (s) of , what is the future value (s) of ?
GDP = $7269.8 Bill. in 1997, what is the forecast consumption expenditure?
(bill. USD)
8. Using model for control or policy purposes

MPC = 0.71, an income of $7197 Bill will produce an expenditure of $4900 Bill. By
fiscal and monetary policy, US government can manipulate the control variable to
get the desired level of target variable .

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METHODOLOGY – ALL STEPS
Anatomy of econometrics modelling

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SUMMARY
The GOAL of econometric modelling is either to predict or to prescribe policy.
The data available in business and economics are often observational data.
Observational data sets are either cross-sectional, or time series or panel
(longitudinal) data sets.
Regression modelling is a powerful tool for econometrics analysis
Methodology: Econ. Or Fin. Theories  Modelling  Data  Estimate 
Prediction and Policy Prescription

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QUOTES BY PETER DRUCKER
Peter Drucker was an Austrian-born American management consultant, educator, and
author, whose writings contributed to the philosophical and practical foundations of
the modern business corporation. He has been described as “the founder of modern
management”

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EVIEWS VERSION 8
Install software  Desktop icon
Structure of data in Eviews:
File  New  Workfile
Workfile structure type:
 Unstructured / Undated
 Dated – regular frequency
 Balanced panel
Date specification: Multi-year/Annual/Semi-annual/Quarterly/Monthly/ Bimonthly /
Weekly/Daily: 5-day week /Daily: 7-day week/…
Quarterly: yyyyQx
Monthly: yyyyMxx and so on
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EVIEWS – SOME REPORTS
FROM SOFTWARE
Research issue: Poverty and Inequality
Data from the World Bank Development Indicator (WDI) data set
Countries with highest and lowest under-5 mortality rates (per 1000 live births) in 2015

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EXERCISE 1
Suppose you were to develop an economic model of criminal activities, say, the
hours spent in criminal activities (e.g., selling illegal drugs). What variables would
you consider in developing such a model? See if your model matches the one
developed by the Nobel laureate economist Gary Becker.

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EXERCISE 2
Use data in PelicanStore.xlsx and 2011Movies.xlsx with the link:
https://drive.google.com/drive/folders/18h6xHUMnrR4aAChUkQvjtk7b7k8XBEWd?
usp=sharing
Build up suitable models with two data sets and explain these models can be applied
to Prediction or Policy Prescription.

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 EXERCISE 3
Data of productivity (VA/L) and average real wage(W) in 13 Indian industries, 1958.
(Industry) (VA/L) (W)
Wheat flour 40.34 19.33
Sugar 32.44 17.34
Paints and varnishes 54.62 22.55
Cement 38.90 20.84
Glass/glassware 25.33 17.68
Ceramics 28.27 19.58
Plywood 30.90 16.92
Cotton textiles 27.54 21.95
Woolen textiles 33.32 20.26
Chemicals 48.54 21.99
Aluminum 41.72 21.94
Iron and Stee 43.45 25.17
Bicycles 38.87 22.25

a. Plot productivity of these industries against their real wage

b. Comment generally about the behavior of productivity against real manufacturing wage 40
EXERCISE 4
A data set contains data on births to women in the UK. Two variables of interest are
the dependent variable, infant birth weight in grams (bwght), and an explanatory
variable, average number of cigarettes the mother smoked per day during pregnancy
(cigs)

a) Interpret the coefficient on cigs.

b) Does this simple regression necessarily capture a causal relationship between the
child’s birth weight and the mother’s smoking habits? Explain.
c) The proportion of women in the sample who do not smoke while pregnant is
about 0.91. Does this help reconcile your finding from question b)?

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EXERCISE 5
If we want to ascertain whether class size has a causal effect on academic
performance within the class, for which we analyze children in their sixth elementary
grade.
Suppose that, considering all the groups in their sixth elementary grade in London,
we find a negative correlation between class size and academic performance. State
whether each of the following assertions is true, justifying your answer:
a) We can infer that the smaller the class size, the better the academic performance of
children.
b) The fact that certain children are in classes of smaller size can be reflecting other
factors, like family income, parent´s education, or school quality.
c) Class size has a positive causal effect on academic performance of children.
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COMPUTER EXERCISES
(EXCEL OR EVIEWS – VER. 8
OR HIGHER)
Link download Eviews version 8: Slide no. 4
C2 (page 15 – Introductory Econometrics: A modern approach –Wooldridge)
C5 (page 16 – Introductory Econometrics: A modern approach –Wooldridge)
C7 (page 17 – Introductory Econometrics: A modern approach –Wooldridge)

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THANK FOR YOUR
ATTENDANCE - Q & A

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