Econometrics - History of Economic Thought - Lecture Slides, Slides of Economics

Download Econometrics - History of Economic Thought - Lecture Slides and more Slides Economics in PDF only on Docsity! Econometrics docsity.com What is Econometrics? • Econometrics literally means ‘economic measurement’. • Here is how Ragnar Frisch (1895 – 1973), one of the founders of the subject, defined econometrics: – Thus, econometrics is by no means the same as economic statistics. Nor is it identical with what we call general economic theory, although a considerable portion of this theory has a definitely quantitative character. Nor should econometrics be taken as synonymous with the application of mathematics to economics. Experience has shown that each of these three viewpoints, that of statistics, economic theory, and mathematics, is a necessary, but not by itself sufficient, condition for a real understanding of the quantitative relations in modern economic life. It is the unification of all three that is powerful. And it is this unification that constitutes econometrics. (‘Editorial’, Econometrica, vol. 1, 1933, p. 2) docsity.com What is Econometrics? • The goal of econometric analysis is to make reliable quantitative predictions of the likely responses of the economy to alternative economic policies and shocks. • Such predictions, if available, would be a useful guide for policymakers. docsity.com Application: Supply and Demand • Let us take the familiar theory of supply and demand and see how it might be tested using observed data docsity.com Application: Supply and Demand • The supply-demand theory consists of three assumptions: – Demand: The quantity of a product that is demanded by buyers is inversely related to the product’s price, assuming all other factors that also affect buyers’ decisions are unchanged. – Supply: The quantity of a product that is supplied by sellers is directly related to the product’s price, assuming all other factors that also affect sellers’ decisions are unchanged. – Equilibrium: The product’s price is always at the level that makes the quantity supplied equal to the quantity demanded. docsity.com Application: Supply and Demand • For example, they would be able to use the estimates to predict the extent to which the price paid by buyers, the price received by sellers, consumers’ surplus, and producers’ surplus will be affected by a tax. docsity.com Regression Analysis • The most important statistical method in econometrics is regression analysis. • This technique was originally used to derive meaningful results from experimental data in the natural sciences. • Economists typically cannot do controlled experiments. • So, they rely on historical or observed data docsity.com Regression Analysis • Historical data may be subject to omitted- variable bias and other problems that must be addressed statistically using regression models. • The adaptation of regression techniques, which were originally developed for experimental data, for use with historical data has been a major focus of research in econometrics. docsity.com