KTEE 309 – Vu Thi Phuong Mai (PhD)

Faculty of International Economics

ECONOMETRICS E-mail: maivp@[Link]

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 COURSE ASSESSMENT

No. Assessment Rate

I Class attendance 10%

II Mid-Term 30%

Assignment

III Final term 60%

Essay Short form and multiple-choice tests

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 ASSESSMENT CRITERIA

• Generic criteria for written work

• Paper size A4 (Margins top, bottom, left, right respectively 2.5cm, 2.5cm, 3.5cm and 2cm)
• Font: Times New Roman; size: 13; line spacing: 1,5 lines.

• Formative assessment: Class attendance

• Summative assessment: Mid-term Assignment + Final term

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 MID-TERM ASSIGNMENT
• Form: Essay from 10 to 15 pages
• Content: Each group has to write a report based on the data given by lecturer or
the students have to collect data
• Assessment Criteria:
• The data relates to economic topics and has clear source: 2 points
• Apply the knowledge the students have studied in the course: 5 points
• Attractive subject: 1 point
• Language is clear, quoted, using valid references: 2 points
• Total: 10 points

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 FINAL TEST

• Form: Short form and multiple-choice tests

• Contents: All knowledge the students have studied in the course
• Assessment Criteria:
• Correct answers to the questions: 5 points
• Exactly answer multiple choice questions: 5 points

• Total: 10 points

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 COURSE OBJECTIVES

• Starting from a research question, identify the relevant econometric model, the data
needed and estimate the model
• Use Stata to estimate a model
• Understand and interpret output from a regression in Stata
• Use estimated model to test hypotheses and predict outcomes
• Understand some pitfalls that the model may incur

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 COURSE CONTENTS

• Chapter 1: Introduction to econometrics

• Chapter 2: Nature of regression analysis
• Chapter 3: Two-variable linear regression model
• Chapter 4: Multiple regression analysis
• Chapter 5: Violations of CLRM

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 READINGS & PRACTICES

• Readings:
✓ Class notes
✓ Damodar N, Gujarati. "Basic econometrics." (2004)
✓ Wooldridge, Jeffrey M. Introductory econometrics: A modern approach. Nelson Education, 2016.
✓ Cameron, Adrian Colin, and Pravin K. Trivedi. Microeconometrics using stata. Vol. 5. College
Station, TX: Stata press, 2009.
✓ Baum, Christopher F., and F. Christopher. An introduction to modern econometrics using Stata.
Stata press, 2006.

• Practices:
✓ Stata software

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INTRODUCTION TO
ECONOMETRICS

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 WHY STUDY ECONOMETRICS?

Price Price

Quantity Quantity
• In reality: DEMAND CURVES
✓ Downward or upward sloped?
✓ What is the slope of the line? (Price elasticity)

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 WHY STUDY ECONOMETRICS?

• Econometrics – a bridge between economic theories and reality.

• Econometrics provides the tools needed to see if the theory is correct:

Understand the
relationship between
economic variables
Use mathematic
and statistical
Collect tools
real data
Based on 11
economic
theories
 WHAT IS ECONOMETRICS?

Economics
Econometrics
Metrics

• Econometrics: economic measurements

• But the scope of econometrics is much
broader!!! 12
 WHAT IS ECONOMETRICS?
• Theil, 1971:
“Econometrics is concerned with the empirical determination of economic laws”
• Goldberger 1964:
“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.”
• Intrilligator et al., p.1:
“Econometrics uses economic theory, as embodied in an econometric model; facts,
as summarized by relevant data; and statistical theory, as refined in econometric
techniques, to measure and to test empirically certain relationships among economic
variables, thereby giving empirical content to economic reasoning.” 13
 WHAT IS ECONOMETRICS?

Economic Quantifying
theories relationships

Empirically testing
Mathematics ECONOMETRICS economic theories

Statistics Forecasting

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 METHODOLOGY OF ECONOMETRICS
Economic theory Steps in empirical economic analysis:
1. Statement of Economic theory or hypothesis.
Mathematical model of
theory 2. Specification of the mathematical model of the
theory
Econometric model of theory
3. Specification of the statistical, or econometric,
Collecting data model
4. Collecting the data
Estimation of econometric
model 5. Estimation of the parameters of the
econometric model
Hypothesis testing
6. Hypothesis testing

Forecasting 7. Forecasting or prediction

8. Using the model for control or policy 15

Using model for control or

policy purposes purposes.
 EXAMPLE: STUDY THE RELATIONSHIP BETWEEN
CONSUMPTION AND INCOME OF THE US

Step 1: Statement of Theory or Hypothesis:

• Keynes states that on average, consumers increase their consumption as their income
increases, but not as much as the increase in their income.
• 0 < MPC < 1
• Marginal Propensity to Consume (Rate of change consumption( say in $) by change
in income)

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EXAMPLE: STUDY THE
RELATIONSHIP BETWEEN
CONSUMPTION AND INCOME OF
THE US

Step 2: Specification of the mathematical

model
• The simplest model that can illustrate the
idea is a linear function:

Y =  1 +  2X
where 0 < 2 < 1
Y: income
X: consumption
 2 indicates the MPC
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 Step 3: Specification of Econometric Model

EXAMPLE: • The model that reflect the inexact relationship

STUDY THE between consumption and income is as follows:

RELATIONSHIP
BETWEEN
CONSUMPTION Y = 1 + 2X + u
AND INCOME
OF THE US • Where u is the disturbance/error term.
• U is a random (stochastic) variable.

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 EXAMPLE: STUDY THE
RELATIONSHIP BETWEEN
CONSUMPTION AND
INCOME OF THE US

• Step 4: Collecting data

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 EXAMPLE: STUDY THE RELATIONSHIP BETWEEN
CONSUMPTION AND INCOME OF THE US

Step 5: Estimation of the Econometric Model

Using Ordinary Least Squared method, we obtain the following
estimated function:

𝑌෠𝑖 = −184.08 + 0.7064𝑋𝑖

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 EXAMPLE: STUDY THE RELATIONSHIP BETWEEN
CONSUMPTION AND INCOME OF THE US

Step 6: Hypothesis testing

• to find out whether the estimates obtained in are in accord with the
expectations of the theory that is being tested.
• Estimated  2 = 0.7064 supports Keynes’s theory. Is it a chance
occurrence?
• Test Keynes’s hypothesis: 0 < MPC < 1.
Is it statistically true?
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 EXAMPLE: STUDY THE RELATIONSHIP BETWEEN
CONSUMPTION AND INCOME OF THE US

Step 7: Forecasting or Prediction

• We use the model to predict/ forecast the value(s) of Y on the basis of
the expected/known value(s) of X
• The GDP value for 1997 was 7269.8 billion $, what is the mean
consumption expenditure for 1997?

𝑌෠1997 = −184.08 + 0.7064 ∗ 7269.8 = 4951.3

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 EXAMPLE: STUDY THE RELATIONSHIP BETWEEN
CONSUMPTION AND INCOME OF THE US

Step 8: Use of Model for Control or Policy Purposes

• By appropriate fiscal and monetary policy mix, the government can
manipulate the control variable X to produce the desired level of the
target variable Y.

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 DATA FOR ECONOMETRIC ANALYSIS
• Primary vs. secondary data
• Data sources:
✓ Internet: GSO, ADB, WB, …
✓ Surveys
✓ Experiments

• The Structure of Economic Data

✓ Cross-sectional Data:
✓ Time-series Data
✓ Pool Data
➢ Panel Data
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