Econ6034-Econometrics and Business

Statistics
Unit Information

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Teaching staff

I Unit Convenor: Dr.Fazeel Jaleel

Email: [email protected]
Office: 4EaR Room 412
Lecture: Monday 11-12PM ONLINE.
Consultation: Monday 9:00-11:00AM (online)

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Unit Learning Outcomes

I Apply basic statistical techniques to different economic and

business problems.
I Evaluate and use appropriate econometric tools to model,
estimate and forecast economic data.
I Apply research skills to select, compare and utilise
econometric models.
I Utilise appropriate practices involved in today’s working
environment to work effectively in a group.

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Lecture Schedule

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Unit Guide
I Available in iLearn. Go through it
I Read the unit information folder in iLearn

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Tutorial classes

Please register in one of the following tutorials

I Tuesday 11:00-12:00PM (06 EaR306)

I Tuesday 12:00-13:00PM (06 EaR306)
I Thursday 10:00-11:00AM (06 EaR306)
I Thursday 11:00-12:00AM (06 EaR306)
I Wednesday 17:00-18:00 online

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Useful References

I Keller, Gerald (2014) Statistics for Management and

Economics (11th, ed.), Cengage Learning
I Hill, C. H., Griffiths, W. E. and Lim, G. C. (2011) Principles
of Econometrics (4th ed.) Wiley.
I Gujarati, N. G. and Porter, D. C. (2009) Essentials of
Econometrics, 4th Edition, McGraw-Hill
I Stock, J. H. and Watson, M. W. (2015) Introduction to
Econometrics, 3rd Edition (updated), Pearson

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Assessment Tasks

I Class Test 1 (15%) – in week 6 (Online-Date and time will be

announced later)
I Class Test 2 (20%) – in week 10 lecture (Online-Date and
time will be announced later)
I Group Assignment (30%) – due 11:55PM Monday week 13
I Final Examination (35%) University examination period.

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Reminder of Academic Integrity Policy
Acting with academic integrity is important for all staff and
students at MQ, and includes:
I submitting assignments that are your own work
I acknowledging the ideas and information of others by citing
and referencing
I providing accurate and honest data and information to the
university.
Breaches of academic integrity (what is not acceptable
behaviour) includes:
I Contract cheating: having someone else complete your
assignment – paid or not – or exchanging, downloading or
purchasing answers on a file-sharing site and/or social media
platform
I Uploading MQ course materials to file sharing sites: MQ
course materials are protected by copyright and must not be
shared or uploaded to any website or platform
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 I Plagiarism: failing to properly acknowledge sources of
information you use
I Assessment/Exam cheating: copying answers from the
internet or output of algorithms like ChatGPT and submitted
them as your own work, asking someone else to help you do
the exam, or giving answers to someone else
I Collusion: working with other students to produce
assessments assigned as an individual activity
I Deception: providing false or misleading information to the
University.
Note that through the unit iLearn sites, there are links to resources
and services to help you reach your potential while ensuring a high
level of personal integrity as you undertake your studies. If you are
in any doubt about what is and what is not allowed under this
policy, ask your lecturer/tutor immediately.

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Econ6034-Econometrics and Business Statistics

Topic 1:Introduction and descriptive statistics

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What is Econometrics?

I Econometrics is about how we can use theory and data from

economics, business, and the social sciences along with tools
from statistics, to predict outcomes, answer reserach
questions, and test hypotheses.
I ...Econometrics, the result of a certain outlook on the role of
economics, consists of the application of mathematical
statistics to economic data to lend empirical support to the
models constructed by mathematical economics and to obtain
numerical results (Gerhard Tintner, Methodology of Mathematical Economics and
Econometrics, The University of Chicago Press, Chicago, 1968, p.74.)

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The Methodology of Econometrics

How do econometricians proceed in their analysis of an

economic problem?
I Creation of a statement of theory or hypothesis
I Specification of the economic model of theory
I Collection of data to test the model
I Specification of the econometric model of theory
I Estimation of the parameters of the model
I Diagnostic checking of the estimation results
I Hypothesis testing and interpretation of the estimation results
I Prediction or forecasting

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Example: Application of the Methodology of
Econometrics
1. Theory: We have two competing theories about the labour
force participation rate.
Discouraged-worker hypothesis
I More people would work if jobs were easy to find - but they
become discouraged in an economic downturn, and do not
search when work is scarce. So participation falls in an
economic downturn.
Added-worker hypothesis
I In an economic downturn, spouses or partners go to work to
compensate for the lost income of main wage-earners who
might be made redundant. So participation rises in an
economic downturn.
2. Collection of data
Time series
Cross sectional
Pooled
Data sources include ABS, RBA, Federal Reserve, the World
Bank, etc. 14 / 53
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3. Mathematical Model

LF P R = β1 + β2 U N R

4. Econometric Model

LF P Rt = β1 + β2 U N Rt + t

β1 and β2 are parameters (or regression coefficients) that

have to be estimated
t is the random error term.
The subscript “t” denotes the period when LFPR and UNR
are observed

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5. Estimation
Choose an estimator (formula) to estimate the econometric
model.
e.g. Ordinary Least Squares estimator

Estimated model:

LF ˆP Rt = 69.46 − 0.58U N Rt

ˆt = LF P Rt − LF ˆP Rt

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6. Diagnostic Checking
Check the behaviour of the residuals to see if the assumptions
are satisfied.
Check if the sign/size of the regression coefficients accord with
theory and common sense.
Consider alternative models, such as

LF ˆP Rt = 81.23 − 0.63U N Rt − 1.44AHWt

where AHW = average hourly wage

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7. Hypothesis Testing and Interpretation
Which hypothesis is supported by the estimation results?
Is UNR an important factor in determining LFPR?
Are the coefficient estimates different from previous findings?
What will happen to LFPR if UNR increases by one percentage
point ceteris paribus?

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 8. Prediction
What will be the expected LFPR when UNR is 5%?

So far we discussed briefly description of the meaning of

econometrics and the types of questions it can be used to answer.

We will review some basic techniques for describing data using

statistics, in the next Topic.

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Some Basic Notation: The Summation Operator

I Let
N = the number of the observations
Xi = the ith observation
I The summation operator is defined as follows:

N
X
Xi = X1 + X2 + . . . . + XN
i=1
I Notice that the following notations are often used

N
X X X
Xi Xi X
i=1

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Example

i 1 2 3 4 5 6 7 8 9 10
Xi 2 5 7 4 2 1 6 5 2 2
Yi 10 8 9 12 10 15 10 5 3 9

i=9
X
Xi = X4 + X5 + X6 + X7 + X8 + X9 = 20
i=4

X
Xi2 = X12 + X22 + · · · + X10
2
= 168

i=10
X
Xi Yi = X1 Y1 + X2 Y2 + · · · + X10 Y10 = 315
i=1

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Some properties of the summation estimator
N
X
a = N a; where a is a constant
i=1

N
X N
X
aXi = a Xi
i=1 i=1

N
X X X
(Xi + Yi ) = Xi + Yi e.g. 36 + 91=127
i=1

N
X X X
(Xi − Yi ) = Xi − Yi e.g. 36-91=-55
i=1
Note: !2
N
X N
X
Xi2 = 168 6= Xi = 1296
i=1 i=1

N N N
! !
X X X
Xi Yi = 315 6= Xi Yi = 3276
i=1 i=1 i=1 24 / 53
Summary of Data

I Extract the essence from the raw data by summarising the

information contained in the data in such a way that a clear
and accurate picture of the data emerges.

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Descriptive Techniques

I Numerical Descriptive Techniques (Ref: Keller Chapter

4-1,4-2,4-3,4-4a,b,c)

I Graphical Descriptive Techniques (Ref: Keller Chapter 2-3)

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Example: ECON6034 anxiety...

I A student enrolled in a Business program is attending the first

class of the required econometrics course. The student is
somewhat apprehensive because he believes the myth that the
course is difficult.
I To alleviate his anxiety the student asks the lecturer about
previous year’s marks.
I The lecturer obliges and provides a list of the final marks.
What information can the student obtain from the list?

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Example: ECON6034 anxiety...

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Example: ECON6034 anxiety...

List of previous
year’s marks. E.g. Class average,
65 proportion of class
71 Summary information receiving F’s,
66 derived about most frequent
79 the class. mark,
65 marks distribution
82 ,etc.
..
.

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Example: ECON6034 anxiety...

Q1: What is the ‘typical mark’ of this course?

I Mean (average mark)=72.67
I Median (mark such that 50% above and 50% below)=72

Q2: Are most of the marks clustered around the mean or are
they more spread out?
I Range = Maximum – minimum = 92 - 53 = 39
I Variance
I Standard deviation

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Example: ECON6034 anxiety...

Q3: Are there many marks below 60 or above 80?

Q4: What proportion are HD, D, Cr, P, F grades?

A graphical technique – histogram – can provide us with this and

other information.

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Numerical Descriptive Techniques

Measures of Central Tendency

Mean, Median and Mode

Measures of Variability
Range, Variance, Standard Deviation

Measures of Relative Standing

Percentiles, Quartiles

Measures of Linear Relationship

Covariance, Correlation, Least Square Line

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Key Statistical Concepts

I Population: the group of all items of interest to a statistics

practitioner (frequently very large or infinite).
E.g. household incomes in Sydney

I Sample: A set of items (data) drawn from the population.

E.g. a sample of 765 households in Sydney.

I Descriptive Measure
Parameter: A descriptive measure of a population.
Statistic: A descriptive measure of a sample.

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Notation

I Population parameters (unobservable) have greek letters:

Average/mean: µ
Variance: σ 2
Standard deviation: σ
I Sample Statistics (observable) have roman letters:
Average/mean:X̄
Variance: S 2
Standard deviation: S
I Number of observations in a population: N
I Number of observations in a sample: n

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Measures of Central Tendency

I The mean (average) is the most popular & useful measure of

central location.

It is computed by simply adding up all the observations and

dividing by the total number of observations.
N
X
xi
i=1
Population mean: µ =
N
n
X
xi
i=1
Sample Mean: x̄ =
n

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Measures of Central Tendency

I The median is the middle observation of the sample.

Rank the observations in ascending order.
Median is the middle observation if n is odd, or the average of
the middle two observations if n is even.

I Mode is the most frequently occurring observation.

A set of data may have one mode (or modal class), or two, or
more modes.
Mode is useful for all data types, though mainly used for
nominal data.

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Measures of Central Tendency

Let’s say we have 2 tutorials, A and B.

We would like to establish which tutorial performed better in a

recent quiz:
I For class A, the mean is 6.75. A B
I For class B, the mean is 6.43. 5 9
6 5
I For class A, the median is 7. 5 6
7 7
I For class B, the median is 6.
8 7
7 6
I For class A, the mode is 8.
8 5
I For class B, the mode is 5, 6 and 7. 8

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Measures of Dispersion/Variability

Let’s say we receive the final grades for the semester for the two
tutorial classes:
A B
75 75
80 100
70 50
77 85
73 65
75 98
90 52
60
Mean 75 75
Median 75 75

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Measures of Dispersion/Variability

I If we measure the mean and median of both classes, we find

that the mean and median are identical (75).

I Yet, clearly the outcomes for the two classes are quite
different, in a way which is not described by the mean or
median.
I Is there another characteristic of the distributions of marks
that we can measure, and compare?
I Variability: Which tutor is more consistent in their teaching
methods.

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Measures of Dispersion/Variability

I How would you quantify the difference in “spread”?

The range is the simplest measure of variability, calculated as:
Range = maximum– minimum

Another good idea is to look at the distance of each

observation from a benchmark...such as mean?

I Variance
The variance of a population is:
XN
(xi − µ)2
i=1
σ2 =
N
N
X
(Xi − X̄)2
i=1
The variance of a sample is: s2 =
n−1

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Sample Variance: Calculation

A B
75 75
80 100
70 50
77 85
73 65
75 98
90 52
60
Mean 75 75
n 8 7

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 A B
(Xi − X̄)2 0 0
25 625
25 625
4 100
4 100
0 529
225 529
225
n
X
(Xi − X̄)2 508 2508
i=1
Variance 72.57 418

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Standard Deviation

I The standard deviation is simply the square root of the

variance, thus:
√
Population standard deviation: σ = σ2
√
Sample standard deviation: S = S2

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Descriptive statistics:Using EXCEL
I Install the Analysis Toolpak as an Add-in in
Excel
I Select the Data tab/ Analysis/ Descriptive
Statistics/ Summary Statistics

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Measures of Relative Standing

I We discussed measures of dispersion or variability of data.

I We now focus on measures of relative standing.
I Measures of relative standing are designed to provide
information about the position of particular values relative to
the entire data set.

Percentile: divide the data into hundredths, and report the

observation at the boundaries of the subsets.

I Suppose you scored in the 60th percentile on the GMAT that

means 60% of the other scores were below yours, while 40%
of scores were above yours.

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Measures of Relative Standing

Calculating the pth Percentile

1. Arrange the data in ascending (least to greatest).
2. Use the following formula to find the approximate place or
position of the percentile
p
Lp = (n + 1)
100
Lp = Location of the pth percentile.
n = sample size.
3. if Lp is an integer, then the percentile position in your data is
the integer value.
4. Otherwise, we need to interpolate the observation to find the
percentile.

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Measures of Relative Standing

Example:

0 0 5 7 8 9 12 14 22 33

I Where is the location of the 25th percentile? That is, at

which point are 25% of the values lower and 75% of the
25
values higher? L25 = (10 + 1) 100 = 2.75
I The 25th percentile is three-quarters of the distance between
the second (which is 0) and the third (which is 5)
observations.
I Three-quarters of the distance is: (.75)(5 – 0) = 3.75
Because the second observation is 0, the 25th percentile is 0
+ 3.75 = 3.75

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Measures of Relative Standing

I What about the 75th percentile?

75
L75 = (10 + 1) 100 = 8.25
I It is located one-quarter of the distance between the eighth
and the ninth observations, which are 14 and 22, respectively.
I One-quarter of the distance is: (.25)(22 - 14) = 2, which
means the 75th percentile is at: 14 + 2 = 16

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Measures of Relative Standing

We have special names for the 25th, 50th, and 75th percentiles,
namely quartiles.
I The first (lower) quartile: Q1 = 25th percentile.

I The second quartile (median): Q2 = 50th percentile.

I The third (upper) quartile: Q3 = 75th percentile.

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Interquartile Range

The quartiles can be used to create another measure of variability,

the interquartile range, which is defined as follows:

Interquartile Range (IQR) = Q3 – Q1

I The interquartile range measures the spread of the middle

50% of the observations.

I Large values of this statistic mean that the 1st and 3rd
quartiles are far apart indicating a high level of variability.

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Using Excel ...

I Quartile EXCEL has three different formulas

=quartile.(range, quart)
=QUARTILE.EXC(range, quart) # this formula align with
our manual calculation method explained above.

I Percentile

=percentile(range, k)

I Maximum and Minimum

=max(range)

=min(range)

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Box Plots
I The box plot is a technique that graphs five statistics:
I The minimum and maximum observations, and
I The lines extending to the left and right are called whiskers.
Any points that lie outside the whiskers are called outliers.
The whiskers extend outward to the smaller of 1.5 times the
interquartile range or to the most extreme point that is not an
outlier.

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Excel Help

I Load the Analysis ToolPak, Click the Microsoft Office Button,

and then click Excel Options.
I Click Add-ins, and then in the Manage box, select Excel
Add-ins.
I Click Go.
I In the Add-Ins available box, select the Analysis ToolPak
check box, and then click OK.
I Tip: If Analysis ToolPak is not listed in the Add-Ins available
box, click Browse to locate it.
I If you are prompted that the Analysis ToolPak is not currently
installed on your computer, click Yes to install it.

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