Week 1

Topic 1
Introduction

UBEQ 2013 Basic Econometrics

January 2015/16: Week 1

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1.1 What is Econometrics?
Econometrics is an amalgam (a mixture) of
(i) economic theory,
(ii) mathematical economics,
(iii) economic statistics, and
(iv) mathematical statistics.

UBEQ 2013 Basic Econometrics

January 2015/16: Week 1

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1.2 Why Econometrics?
Economic theory makes statements or hypotheses that are mostly qualitative.
Example:
In theory of demand, a reduction in the price of a commodity is expected to increase quantity demanded of that commodity, ceteris paribus.
Conclusion: price and quantity demanded are inversely related. Weakness: It does not provide any numerical measure of the relationship between two variables.
UBEQ 2013 Basic Econometrics

January 2015/16: Week 1

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1.2 Why Econometrics?
In the example of theory of demand, the theory does not tell by how much the quantity will change as a result of a certain change in the price. Role of econometrics:
It gives empirical content to most economic theory. UBEQ 2013 Basic Econometrics

January 2015/16: Week 1

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1.2 Why Econometrics?
Mathematical economics expresses economic theory in mathematical equations.
Weakness: The equations are made without regard to empirical verification of economic theory. UBEQ 2013 Basic Econometrics

January 2015/16: Week 1

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1.2 Why Econometrics?
Economic statistics concern with collecting, processing, & presenting economic data in the form of charts & tables.
Weakness: The economic statistician does not concern with using the collected data to test economic theories.

UBEQ 2013 Basic Econometrics

January 2015/16: Week 1

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1.2 Why Econometrics?
Mathematical statistics provides many tools in analysis. Weakness: The subject does not give special methods needed to analyze the raw data that are not generated as the result of a controlled experiment. UBEQ 2013 Basic Econometrics

January 2015/16: Week 1

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1.3 What is Econometrics?
“Econometrics may be defined as the social