INTRODUCTION

Gujarati, 4e, Introduction

WHAT IS ECONOMETRICS?
 Literally interpreted, econometrics means
“economic measurement.”
 Although measurement is an important part
of econometrics, the scope of econometrics is
much broader.
 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 (Tintner, 1968)

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  . . . econometrics may be defined as the
quantitative analysis of actual economic
phenomena based on the concurrent development
of theory and observation, related by appropriate
methods of inference (Samuelson, e.t al., 1954)

 Econometrics may be defined as the social science

in which the tools of economic theory,
mathematics, and statistical inference are applied
to the analysis of economic phenomena
(Goldberger, 1964)

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  Econometrics is concerned with the empirical
determination of economic laws (Theil, 1971).
 The art of the econometrician consists in finding
the set of assumptions that are both sufficiently
specific and sufficiently realistic to allow him to
take the best possible advantage of the data
available to him (Malinvaud, 1990)

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  Econometricians . . . are a positive help in trying
to dispel the poor public image of economics
(quantitative or otherwise) as a subject in which
empty boxes are opened by assuming the
existence of can-openers to reveal contents which
any ten economists will interpret in 11 ways
(Darnell & Evans,1990)
 The method of econometric research aims,
essentially, at a conjunction of economic theory
and actual measurements, using the theory and
technique of statistical inference as a bridge pier
(Haavelmo,1944)

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WHY A SEPARATE DISCIPLINE?

 Econometrics is an amalgam of economic

theory, mathematical economics, economic
statistics, and mathematical statistics.
 The subject deserves to be studied in its own
right for the following reasons:
 Economic theory makes statements or hypotheses
that are mostly qualitative in nature 
econometrics gives empirical content to most
economic theory.

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  The main concern of mathematical economics is
to express economic theory in mathematical form
(equations) without regard to measurability or
empirical verification of the theory 
Econometrics is mainly interested in the empirical
verification of economic theory.
 Economic statistics is mainly concerned with
collecting, processing, and presenting economic
data in the form of charts and tables. But the
economic statistician does not go any further, not
being concerned with using the collected data to
test economic theories.

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  Although mathematical statistics provides many
tools used in the trade, the econometrician often
needs special methods in view of the unique
nature of most economic data, namely, that the
data are not generated as the result of a
controlled experiment. The econometrician, like
the meteorologist, generally depends on data that
cannot be controlled directly.

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METHODOLOGY OF
ECONOMETRICS
 Traditional econometric methodology proceeds
along the following lines:
1. Statement of theory or hypothesis.
2. Specification of the mathematical model of the theory
3. Specification of the statistical, or econometric, model
4. Obtaining the data
5. Estimation of the parameters of the econometric model
6. Hypothesis testing
7. Forecasting or prediction
8. Using the model for control or policy purposes.

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Anatomy of econometric modeling.

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Choosing among Competing
Models
 Clive Granger ( 1999), suggest that in the
future, when you are presented with a new
piece of theory or empirical model, you ask
these questions:
1. What purpose does it have? What economic
decisions does it help with? and;
2. Is there any evidence being presented that
allows me to evaluate its quality compared to
alternative theories or models?

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 The eight-step classical econometric
methodology discussed above is neutral in
the sense that it can be used to test any of
these rival hypotheses.
 Is it possible to develop a methodology that
is comprehensive enough to include
competing hypotheses?

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TYPES OF ECONOMETRICS

Categories of econometrics

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 Theoretical econometrics
 concerned with the development of appropriate methods
for measuring economic relationships specified by
econometric models.
 In this aspect, econometrics leans heavily on mathematical
statistics.
 For example: least squares.
 Theoretical econometrics must spell out the assumptions of
this method, its properties, and what happens to these
properties when one or more of the assumptions of the
method are not fulfilled.

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 In applied econometrics we use the tools of
theoretical econometrics to study some
special field(s) of economics and business,
such as
 the production function,
 investment function,
 demand and supply functions,
 portfolio theory, etc.

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MATHEMATICAL AND
STATISTICAL PREREQUISITES
 the basic concepts of
 statistical estimation
 hypothesis testing

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THE ROLE OF THE COMPUTER

 Regression analysis, the bread-and-butter

tool of econometrics, these days is
unthinkable without the computer and some
access to statistical software.
 ET, LIMDEP, SHAZAM, MICRO TSP, MINITAB,
EVIEWS, SAS, SPSS, STATA, Microfit, PcGive, and
BMD
 Gretl

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 [email protected]
 [email protected]
 08161358667

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