Part I
Getting Started with Econometrics
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In this part . . .
Get familiar with the approach economists use when investigating empirical issues â not controlled experiments that never seem to contradict standard statistical assumptions.
Find out the basic commands you need to work with data files in STATA 12.1, a popular form of econometric software, and discover the syntax structure for executing estimation commands.
Review the probability concepts that are most relevant for your study of econometrics: topics that focus on the properties of probability distributions and their use in calculating descriptive statistics of random variables.
Reinforce your knowledge of statistical inference so you can be better equipped to use surveys and other forms of sample data to test your hypotheses and draw conclusions.
Chapter 1
Econometrics: The Economistâs Approach to Statistical Analysis
In This Chapter
Discovering the goals of econometric analysis
Understanding the approach and methodology of econometrics
Getting familiar with econometrics software
Welcome to the study of econometrics! The Econometric Society, founded in 1930, defines econometrics as a field based on a Ââtheoretical-quantitative and empirical-quantitative approach to economic problems.â This mouthful means that, at times, econometricians are mathematicians and use complex algorithms and analytical tools to derive various estimation and testing procedures. At other times, econometricians are applied economists using the tools developed by theoretical econometricians to examine economic phenomena.
In this chapter, you see that a distinguishing feature of econometrics is its development of techniques designed to deal with data that arenât derived from controlled experiments and, therefore, situations that violate many of the standard statistical assumptions. You also begin to understand that, under these circumstances, obtaining good quantitative results depends on using reliable and adequate data as well as sound economic theory.
And because computers and econometric software are now commonly used in introductory econometrics courses, I also devote a section of this chapter to introducing basic commands in STATA (version 12.1), a popular econometrics software program. This software allows you to immediately apply theoretical concepts and enhance your understanding of the material.
Evaluating Economic Relationships
Economics provides the theoretical tools you use to evaluate economic relationships and make qualitative predictions of economic phenomena using the ceteris paribus assumption. You may recall from your previous courses that the ceteris paribus assumption means that youâre keeping everything else constant. Two examples among numerous possibilities are:
In microeconomic theory, youâd expect economic profits in a competitive market to induce more firms to enter that market,
ceteris paribus. In macroeconomic theory, youâd expect higher interest rates to reduce investment spending,
ceteris paribus. Econometrics ties into economic theory by providing the tools necessary to quantify the qualitative statements you (or others) make using theory. Unknown or assumed relationships from abstract theory can be quantified using real-world data and the techniques developed by econometricians.
The following section explains how econometrics helps characterize the future and describe economic phenomena quantitatively, and then I clarify why an econometrician must always make sensible assumptions.
Using economic theory to describe outcomes and make predictions
One of the characteristics that differentiate applied research in econometrics from other applications of statistical analysis is a theoretical structure supporting the empirical work.
Econometrics is typically used to explain how factors affect some outcome of interest or to predict future even...