1. Lecture 1
Basic Econometrics
Rifai Afin SE, MSc

2. Let me introduce myself
Name: Rifai Afin SE, MSc
Education:
- Undergraduate: Airlangga University
- Post Graduate: University of Essex, UK

3. Experience (continued)
Teaching undergraduate level since 2004
National consultant for both international such as The World Bank, ILO, ADB, USAID, AUSAID, and national organization such as Bank Indonesia, Ministry of Finance, Ministry National Development Planning, and local government since 2005

4. Publication (continued)
International seminar: Indonesian Regional Science Association IRSA
National Seminar: Academic Seminar at Economics Post graduate program, University of Indonesia, and Symposium of Indonesian Economist Association.
Journals: ISEI, BEMP, UWP, and JRE

5. Aims of the Course Students completing this course will be able to:
Use the classical linear regression model to examine relationships between variables.
Test hypotheses about the relationships between variables.
Understand the problems that arise when the assumptions of the classical model are violated and overcome them
Estimate different types of econometric models.

6. Course Structure Module 1: Classical Estimation
Introduction to the methodology of econometric research.
Revision of the simple linear regression model.
The Multiple Regression Model
Hypothesis Testing

7. Course Structure
Module 2: Violations of the Classical Error Assumptions
Heteroscedasticity
Autocorrelation
Topics from Stochastic Regressors, Random Walks, Qualitative Dependant Variables, Panel Data

8. Administrative Information
Lecturer in Charge
Rifai Afin SE, MSc
Room: Department of Economics, 2nd Floor Faculty of Economics Building, telephone:
Office Hours: Tuesday or

9. Administrative Information
You need to:
Enrol for tutorials using at least 12 times
In the 8nd week of term you should attend at least two of the computer lab sessions.
In these sessions you will be introduced to the computer package Eviews and Stata

10. Administrative Information
Computer Lab Work:
Most weeks there will be computer work to be completed
Computer Lab Access
Applied econometric lab is the centre of econometric training and the schedule of training will be informed later
Computer assistance will be provided in this lab
Note: You will have computer work to complete for your first tutorial.

11. Administrative Information
Books to Buy:
Basic econometrics by Gujarati (4th edition).
Assessment:
Midterm exam: 40%
Final exam : 60%

12. Econometric Methodology
Objective
Overview of the process of empirical research
What is econometrics?
Economic measurement?
Quantitative analysis of actual economic phenomena?
Empirical determination of “Economic Laws”?
Two main schools of econometric thought
Classical and Bayesian

13. Econometric Methodology
Statement of theory or hypothesis
Specification of mathematical model of theory
Specification of econometric model of theory
Obtaining the data
Estimation of the parameters of the econometric model
Hypothesis testing
Forecasting or prediction
Using the model for control or policy purposes

14. Econometric Methodology
Example:
Keynesian theory of consumption
Statement of theory or hypothesis
Marginal propensity to consume (MPC
0<MPC<1
Specification of the mathematical model
Y=Consumption Expenditure; X=Income

15. Econometric Methodology
=MPC 1  X

16. Econometric Methodology
Specification of the econometric model
mathematical model represents an exact or deterministic relationship between Y and X
Economic relationships are inexact
u is the disturbance or random error term
u is a random (stochastic) variable
Linear regression model

17. Econometric Methodology
Obtaining data
WWW
CDROM
Library

18. Econometric Methodology

19. Econometric Methodology
Estimation of the model
regression analysis
OLS estimates (details next lecture)
On average, a US$1 increase in real income led to an increase of about US72c in consumption expenditure

20. Econometric Methodology
Hypothesis testing
theory: 0<MPC<1
Is 0.72 statistically less than 1?
Forecasting or prediction
Suppose GDP is expected to be $6000 billion, what will consumption expenditure be?

21. Econometric Methodology
Can also work out the Income Multiplier (M)
M=1/(1-0.72)=3.57
Using the model for control or policy purposes
Govt believe expenditure of US$4000 will lead to unchanged unemployment

22. Econometric Methodology
Using the model for control or policy purposes
Govt believe expenditure of US$4000 will lead to unchanged unemployment
What level of income leads to the target consumption expenditure?
Control variable X; target variable Y

23. Summary and Conclusions
Three stages of research
Specification of model
relevant variables, mathematical form, signs and magnitudes of parameters, error terms
Estimation
Data requirements (time series, cross section, panel), level of aggregation(households, regional, national), estimation techniques (OLS, etc)

24. Summary and Conclusion
Model evaluation
a priori beliefs (signs and magnitudes etc), significance of coefficients, degree of fit within sample, forecasting ability beyond sample, nature of residuals