Welcome to Economics 20

What is Econometrics?

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Why study Econometrics?

Rare in economics (and many other areas without labs!) to have experimental data Need to use nonexperimental, or observational, data to make inferences Important to be able to apply economic theory to real world data
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Why study Econometrics?

An empirical analysis uses data to test a theory or to estimate a relationship A formal economic model can be tested
Theory may be ambiguous as to the effect of some policy change can use econometrics to evaluate the program
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Types of Data Cross Sectional

Cross-sectional data is a random sample
Each observation is a new individual, firm, etc. with information at a point in time

If the data is not a random sample, we have a sample-selection problem

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Types of Data Panel

Can pool random cross sections and treat similar to a normal cross section. Will just need to account for time differences.
Can follow the same random individual observations over time known as panel data or longitudinal data
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Types of Data Time Series

Time series data has a separate observation for each time period e.g. stock prices Since not a random sample, different problems to consider
Trends and seasonality will be important
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The Question of Causality

Simply establishing a relationship between variables is rarely sufficient Want to the effect to be considered causal If weve truly controlled for enough other variables, then the estimated ceteris paribus effect can often be considered to be causal Can be difficult to establish causality
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Example: Returns to Education

A model of human capital investment implies getting more education should lead to higher earnings In the simplest case, this implies an equation like

Earnings 0 1education u
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Example: (continued)
The estimate of 1, is the return to education, but can it be considered causal? While the error term, u, includes other factors affecting earnings, want to control for as much as possible Some things are still unobserved, which can be problematic
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