Lauren Hoehn Velasco Introduction to Econometrics Econometrics
Introduction to Econometrics
Student Notes
Contents
Contents 1
I Introduction to Econometrics 2
II Introduction to Simple Regression Analysis 4
A Why Regression? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
B What does regression do? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
C Key Parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
III Types of Data 6
IV Mathematical and Statistical Tools 8
A Summations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
B Estimators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Based upon materials from Introductory Econometrics by Jeffrey Wooldridge
© 2022 Lauren Hoehn Velasco
Please do not post or share without permission.
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Lauren Hoehn Velasco Introduction to Econometrics Econometrics
I. Introduction to Econometrics
Economists often would ideally like to utilize the scientific method to test theoretical questions with
empirical methods:
• Does education improve earnings? Does it matter if you choose to go to an elite college versus a
state school?
• Does minimum wage affect unemployment?
• Does access to health care improve health outcomes? Does exercise make you healthier?
• etc... etc... etc...
In an ideal world, we would walk through the
scientific method just like a scientist (see diagram
to right)
What is the ideal experimental design?
• Assigning randomized treatment and
control groups, allows you to observe the
’scientific’ counterfactual
What happens to be different/limited/difficult in economics?
• Difficult to design experiment in the economic realm
• Cannot observe the same individuals in both the counterfactual and reality.... we need methods
to deal with this!
Notes:
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Lauren Hoehn Velasco Introduction to Econometrics Econometrics
Definition 1: Causality
How does variable one change if variable two is changed but all other relevant factors are held
constant (ceteris paribus)?
Notes:
Definition 2: Randomized Control Trial
Randomized Control Trial is a study in which:
1. There are two groups, one treatment group and one control group. The treatment group
receives the treatment under investigation, and the control group receives either no treat-
ment (placebo) or standard treatment.
2. Patients are randomly assigned to all groups.
Notes:
Other possible options for studies include:
1. Case Control Study
2. Longitudinal Study
Introduction to Econometrics continued on next page. . . Page 3 of 10
Lauren Hoehn Velasco Introduction to Econometrics Econometrics
II. Introduction to Simple Regression Analysis
A. Why Regression?
Regression is the primary tool in an econometrician’s toolbox
• It is used to find relationships between one or more explanatory variables and a single outcome
variable
• Distinct from correlations, as we trying to explan y using and x variable
• Best attempt in social science to determine effect of one variable on another, ’holding all else
fixed’ (think back to randomized control trial!)
Goal – predict or explain differences in values of the outcome variable with information about values of the ex-
planatory variables
Notes:
B. What does regression do?
The questions addressed by regression analysis take the form of:
‘What explains variation in Y?’
Or more specifically
‘Does X explain variation in Y?’
Before you even start to use regression, you have to decide what your X is and what your Y
Notes:
Introduction to Simple Regression Analysis continued on next page. . . Page 4 of 10
Lauren Hoehn Velasco Introduction to Econometrics Econometrics
C. Key Parameters
From there, primarily interested in the isolating following issues:
1. The direction and strength of the relationships between y and x(’s)
2. Which explanatory variables are practically (and statistically) important and which are not
3. Predicting a value or set of values of the outcome variable for a given set of values of the explana-
tory variables
4. The form of the relationship among the outcome and explanatory variables, or what the equation
that represents the relationship looks like ( we will use linear & log )
Notes:
Scatter-plot and Best Fit Line Using Stata: Linear regression analysis creates a linear best fit line, for
the scatter plot of two variables:
1. Open the gpa1 dataset: bcuse gpa1
2. Create a scatterplot with colGPA and hsGPA:
scatter colGPA hsGPA
3. Now add a best fit line, which map out the linear relationship between increasing hsGPA and its
affect on colGPA:
twoway scatter colGPA hsGPA || l f it colGPA hsGPA
Notes: The lfit adds a best fit line, the two-way tells Stata we want to display both graphs
Notes:
Introduction to Simple Regression Analysis continued on next page. . . Page 5 of 10
Lauren Hoehn Velasco Introduction to Econometrics Econometrics
Example 1: Experimental Design
What do we hold fixed in the following? How would you run an experiment to capture the effect?
1. “By how much will the production of soybeans increase if one increases the amount of
fertilizer applied to the ground”
2. “If a person is chosen from the population and given another year of education, by how
much will his or her wage increase?”
3. “If a city is randomly chosen and given ten additional police officers, by how much would
its crime rate fall?”
4. “How much will unemployment increase if the minimum wage is increased?”
Notes:
III. Types of Data
Concept 1: Types of Data
Different kinds of economic data sets include:
1. Cross-sectional data 3. Pooled cross sections
2. Time series data 4. Panel/Longitudinal data
Notes:
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Lauren Hoehn Velasco Introduction to Econometrics Econometrics
Definition 3: Cross-Sectional Data
A sample of many subjects– individuals, households, firms, cities, states, countries – taken with-
out regard to time
Notes:
Definition 4: Pooled Cross-Sectional Data
Two or more cross sections are combined in one data set
Notes:
Definition 5: Time Series Data
Observations of a variable or several variables over time
Notes:
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Lauren Hoehn Velasco Introduction to Econometrics Econometrics
Definition 6: Panel Data
The same cross-sectional units are followed over time.
Notes:
IV. Mathematical and Statistical Tools
A. Summations
Definition 7: Summation Operator
The summation operator is a useful shorthand for manipulating expressions involving sums of
many numbers:
n
∑ xi = x1 + x2 + · · · + xn−1 + xn
i=1
Notes:
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Lauren Hoehn Velasco Introduction to Econometrics Econometrics
Definition 8: Properties of Summations
For any constants a, b, c:
1.
n
∑ c = nc
i=1
2.
n n
∑ cxi = c ∑ xi
i=1 i=1
3.
n n n
∑ (axi + byi ) = a ∑ xi + b ∑ yi
i=1 i=1 i=1
Notes:
B. Estimators
Definition 9: Estimators
Given a random sample, drawn from the population distribution, that depends on an unknown
parameter θ , an estimator of θ is a rule that assigns each possible outcome of the sample a value
of θ .
Notes:
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Lauren Hoehn Velasco Introduction to Econometrics Econometrics
Definition 10: Unbiased Estimator
An estimator W of θ is unbiased if
E(W ) = θ
for all values of θ .
Notes:
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