Lecture 1_ Introduction

Lecture 1 Introduction to Econometrics Dinh Thi Thanh Binh, PhD Faculty of International Economics, FTU 1 INTRODUCTION • Example: – Statisticians: income (Y) and consumption expenditure (C) go in the same direction – Economists: an increase in income will raise consumption expenditure, other things being equal (Keynesian consumption function) – Econometricians: 1 USD increase in income will result in 0.70 cent increase in consumption expenditure, other things being equal 2 EXPECTED OUTCOMES • Know how to set up econometric models corresponding to real world economic problems • Know how to use Stata to estimate the models • Know how to interpret the estimated results • Know how to use the results for policy purposes Thi Phuong Mai VU- FIE- FTU (2010) 3 DEFINITION • Econometrics is based on the development of statistical methods for estimating economic relationships, testing economic theories, evaluating government and business policies. • What is econometrics for? – Quantifying relationships among economic variables – Empirically testing economic theories: law of demand, money supply and inflation – Evaluating the impact of a change in one variable on another variable: measuring the Return to Education, effect of the Minimum Wage on Unemployment – Forecasting (demand for goods, stock/gold prices,…) 4 ANALYSIS STEPS • Steps in empirical economic analysis 1. Question of interest 2. Economic model 3. Econometric model 4. Data collection 5. Estimation of econometric model 6. Dianosing the model problem (example:Multicollinearity;heteroskedasticity; normality) 7. Hypotheses postulated 8. Result analysis and policy implications 5 Economic theory Results of other research Econometrics model Data collection Estimation of parameters Hypotheses test No If the estimated results are good? Yes Forecast Policy purposes 6