1. EED 401: ECONOMETRICS COURSE OUTLINE
Meaning and purpose of econometrics
Methodology of econometric research
Correlation analysis and single equation models; simple linear & multiple linear regression models
Functional forms of the regression model
Special models in regression analysis; dummy variables, RTO.

2. COURSE OUTLINE CONT’D
Problems of single equation models; autocorrelation, heteroscedasticity, multicolinearity, errors in variables
Simultaneous equation models and estimation
Qualitative choice models
Time series analysis

3. SOME REFRENCES
A. KOUTSOYIANNIS (2003). THEORY OF ECONOMETRICS. 2ND EDITION. PELGRAVE
JEFFREY M. WOOLDRIDGE. INTRODUCTORY ECONOMICS- A MODERN APPROACH
DAMODAR N. GUJIRATI. BASIC ECONOMETRICS. FOURTH EDITION.
ETC, ETC.

4. WHAT IS ECONOMETRICS?
The word ‘econometrics’ is derived from two Greek words, oikovoμia (economy), and μetpov (measure)
Definition: the social science in which the tools of economic theory, mathematics and statistical inference are applied to the analysis of economic phenomena (Arthur Goldburger, 1964).

5. WHAT IS ECONOMETRICS? CONT’D
Thus, econometrics is an amalgam of economics, mathematics and statistics
The uniqueness of econometrics lies in the inclusion of a random element in models
ILLUSTRATION (economic model of crime)
Based on economic reasoning (theory) time spent on criminal activity by an individual will depend on, hourly ‘criminal wage’ ( ),

6. WHAT IS ECONOMETRICS? CONT’D
Hourly wage in legal employment,
Income other than from crime or employment,
Probability of getting caught,
Probability of being convicted if caught,
Expected sentence if convicted,
Age,

7. WHAT IS ECONOMETRICS? CONT’D
The above depicts an exact relationship ie the time spent on crime is completely dependent on 7 factors
This is stated mathematically as: Or

8. WHAT IS ECONOMETRICS? CONT’D
This still leaves us with a deterministic relationship
But there are other factors that influence crime apart from the 7. eg. health, vengeance, religion, etc.
Econometrics introduces a random factor (stochastic term) which takes care of these ‘other’ factors

9. Econometric representation of the crime model

10. Econometric representation of the crime model CONT’D.
U is the random factor encapsulating all other random factors that affect time spent on crime
PROCEDURE FOR TESTING ECONOMIC THEORY

11. Economic theory
Mathematical expression of theory or maintained hypothesis
Confrontation of model with data
Accept theory if compatible with data
Reject if incompatible with data
Revise theory if incompatible with data
Confrontation with new data

12. Reading assignment
Establish the superiority of econometrics to mathematical economics and statistics

13. Branches of econometrics
Two main branches:
-Theoretical econometrics –dev’t. of appropriate methods for the measurement of economic relationships
-Applied econometrics: application of econometrics to specific fields of economic theory ( demand, supply, investment, production) for the analysis of economic phenomena and forecasting economic behaviour

14. Purpose of econometrics
Policy-making: Provide numerical values for the parameters of economic relationships (elasticities, propensities, marginal values) for decision making
Analysis: Empirical verification of economic laws/theories
Forecasting: determining future values of economic magnitudes based on numerical estimates

15. METHODOLOGY OF ECONOMETRIC RESEARCH
Generally, econometric research involves 4 stages:
1. Formulation of the maintained hypothesis: ie. The specification of the model
2.Testing of maintained hypothesis: estimation of the model by appropriate econometric method
3. Evaluation of estimates: decide on the basis of certain criteria whether the estimates are satisfactory & reliable.

16. METHODOLOGY OF ECONOMETRIC RESEARCH CONT’D.
4. Testing the forecasting validity of the model 1&3 are the most important for any econometric research. Require strong knowledge in the functioning of economic systems 2&4 are technical & require a deep understanding of econometrics

17. Formulation of the maintained hypothesis
It involves determining
Dependent and explanatory variables
The a priori theoretical expectations about the signs & the size of the parameters of the function to form the basis for the evaluation of the model
The mathematical form of the model: single vs. simultaneous equation; linear vs. nonlinear functional forms

18. Reasons for incorrect specification of economic models
Looseness/ imperfection of statements in economic theories
Limitation of our knowledge about factors which are operative in a particular situation
Problems associated with large data requirements of large models. Errors of specification- omission of variables, equations, & wrong mathematical form of functions

19. 2. Estimation of the model
The estimation process involves the ff. Stages:
Gathering data-: cross-sectional, time series & panel data
Examination of the identification condition of the function
Examination of the aggregation problems of the function (aggregation over individuals, commodities, time,& space)
Examination of the degree of correlation among the explanatory variables

20. 5. Choice of the appropriate econometric technique:- i
5. Choice of the appropriate econometric technique:- i. Single equation techniques:- Classical Least Squares (CLS) OR ordinary Least Squares(OLS) method, Indirect Least Squares (ILS) or reduced-form technique, 2SLS, Limited information maximum likelihood method,etc. ii. Simultaneous equation techniques:- 3SLS, FIML

21. 3. Evaluation of estimates
Are the parameters theoretically meaningful and statistically satisfactory?
We use 3 criteria for the evaluation;
Economic ‘a priori’ criteria: are the parameters of the correct signs and the right size?
Statistical criteria: first-order tests- usually by using the correlation coefficient & the standard deviation (error)

22. 3. Econometric criteria: second-order test (test of the statistical tests). This may involve tests of consistency, efficiency, unbiasedness, assumptions, identification, etc.

23. 4. Evaluation of the Forecasting Power of the Model
Forecasting is one of the major objectives of econometrics.
Given data on personal consumption (Y) and GDP (X) from in billions of dollars the estimated consumption function is given by:
We can forecast the mean consumption
expenditure for 1997 given GDP= billion dollars as

24. Actual consumption for 1997 was 4913.3 billion dollars
Forecast error is billion dollars
Question is: is the error large or small?

25. Properties of econometric models
Econometric models are judged based on
Theoretical plausibility
Explanatory ability
Accuracy of the estimates of the parameters
Predictive power
simplicity

26. GOD BLESS YOU!