Chapter 1: Introduction to Econometrics Econometrics Econ. 405 Chapter 1: Introduction to Econometrics

I. Why learning Econometrics ? The economist researcher will be the one to investigate the economic phenomena. The conducted research by the economist should be organized, systematic, and data-based examination. Precisely, investigation should be into a specific problem, undertaken with the purpose of finding answers or solutions to it.

The Seven-Step Process in the Research Method: 1- Identify a broad problem area 2-Define the problem statement ( based on theory) 3- Theory formulation according to previous studies 4- Develop hypotheses (the hypothesis that can be tested to determine if the statement would be supported) 5- Data collection 6-Model (Data) to be tested ( Econometrics model) 7-Interpretation of data analysis

Econometrics as a field is based on: “theoretical-quantitative” & “empirical-quantitative” approach to economic problem.

II. The economist’s Approach to Statistical Analysis Econometrics helps economists to see economics in different light when standard theory just wasn’t helping much. Econometricians are applied economists using tools developed by theoretical econometricians to examine economic phenomena. Econometrics teaches the art of using statistical tools to address important economic policy issues

III. Discovering Goals of Econometrics Analysis Emphasizing a combination of theoretical proofs and practical applications. Making Econometrics accessible, useful, and interesting Getting the data to speak!! Using some econometrics software.

IV. Evaluating Economic Relationships Obtaining good quantitative result counts on using reliable and adequate data as well as a valid economic theory. Economics provides the theoretical tools you use to evaluate economic relationships and make qualitative predictions of economic phenomena using the “ceteris paribus” assumption. What does “ceteris paribus” mean ?

IV. Evaluating Economic Relationships Macroeconomic Theory Microeconomic Theory Recall previous courses in economics: Application (1) Think of an example within the theory? What are the two sides of the relationship? How the “ceteris paribus” works in your example? How can econometrics be applied in the example?

Using economic theory to describe outcomes & make predictions: Applied research in econometrics is differentiated from other applications of statistical analysis (HOW !!) Econometrics connects your interest question to some outcomes or predictions of future events (HOW !!) The econometrics study should be linked to an economic model (obtained from the economic theory).

Economic model should consist of: The outcome of interest (Dependent Variable, Y) Causal factors (Independent variables, Xs) Application (2) - Go back to your selected example, what is the dependent variable and what are the independent variables

Recognizing the importance of data type: The data used to estimate and test your econometrics model is typically classified into one of the three possible types: Cross Sectional Data Time Series Data Panel Data

Cross Sectional Data 2) Time Series Data 3) Panel Data Measurements for individual observations (persons, households, firms, countries, firms…. so on.) at a given point of time. 2) Time Series Data Measurements on one or more variables (GDP, interest rate, unemployment….so on.) over time at a given space (like a specific country or firm). 3) Panel Data Consisting of a time series data for each cross-sectional unit in the sample. Or measurements for individual observations over a period of time ( days, months, quarters, or years).

Remember: You should always be aware of your data type. The type of data used may influence how you estimate your econometrics model. Specialized techniques are usually required to deal with time series and panel data.