BEC 2044: Econometric 1 Lecture 1

Dr. Aye Aye Khin, PhD (Econometric, Modelling and Forecasting Analysis)

Lecturer, Economics Unit, Faculty of Management, Multimedia University Email: ayeaye@mmu.edu.my; ayeaye5@yahoo.com Room No. BR 3012, Office Phone: 03-8312 5637

Date: 13.6.2011

Consultation Hour Monday 3 pm to 5 pm, Tuesday 2 pm to 3 pm

Times and Venues:
BC 371 - Monday 11 am to 1 pm, (FOMCR0003) BC 372 - Wednesday 1 pm to 3 pm (FOMCR0001)

Required Text:
Gujarati, D.N. (2009), Basic Econometrics, 5th edition, McGraw Hill. New York. Wooldridge, J. M., (2009), Introductory Econometrics: A Modern Approach, 4th edition, Cengage Learning. References: Pindyck, R. S. and Rubinfeld, D. L. (1998). Econometric Models and Economic Forecasts. (4th Ed.), McGraw-Hill. New York.

Running with EViews, SPSS, Scientific Calculator.

Course Description
To introduce to the principle tool of empirical inquiry in the social scienceslinear regression analysis. To test hypotheses, make forecasts, or examine public policy impacts use linear regression analysis. The focus of this course is applying econometric techniques, not derivation. To understand model development, specification, testing, data handling, hypothesis formation, model interpretation, and description.

Course Objectives
To provide with many useful examples of basic econometrics, applied econometrics and forecasting and to benefit in preparing you for other courses (e.g., Econometric Modeling and Forecasting with Time Series Data for post graduates). To improve your ability to search and obtain data crucial to economic analysts. To master basic econometric concepts and apply these concepts to economic research problems. To provide you with the tools necessary to solve "real world" problems (e.g., estimate supply, demand and price, forecast sales, determine the impact of crude oil price on Malaysian natural rubber economy and biodiesel impact on Malaysian palm oil economy) that are frequently encountered by firms, governments, and policy makers. To improve your ability to communicate your understanding of econometrics.

Course Assessment
Homework Assignments (10) Tutorial, Computer Lab and Attendance Midterm Examination Final examination 10% 20% 20% 50%

Your final grade will be improved and based on the weighted average of your participation in class, assignments, tutorial, computer lab and attendance, your midterm examination and your final examination. Without informed to the lecturer for your absent of assignments, tutorial, computer lab and attendance about 3 times, you may be failed and grade (F).

Introduction to Econometrics
Lecture 1 Introduction and overview of the course
Definition, scope and methodology of econometrics A review of the simple (bivariate) linear regression model

WHAT IS ECONOMETRICS?
Econometrics means economic measurement. The scope of measurement econometrics is much broader, as can be seen from the following definitions: Consists of the application of mathematical statistics to economic data to lend empirical support to the models constructed by mathematical economics and to obtain numerical results (Gerhard, results 1968). 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 (Goldberger, phenomena 1964). Econometrics is concerned with the empirical determination of economic laws (Theil, 1971). laws Theil,

Econometrics

The measurement of economic measurement/relationships

WHAT IS ECONOMICS?
Economics means the study of how resources are used to need and satisfy the desires of people. people It is concerned with individual and producers as well as with the aggregate of all consumers and producers. Determining efficient the relationships between inputs and outputs, between output and costs and between size and efficiency, all in all the context of on-farm production analysis (Doll and Frank, 1984). on-

ECONOMIC MODELS AND ECONOMETRIC MODELS

The subject deserves to be studied in its own right for the following following reasons: Economic models are based on Economic theory makes statements or hypotheses that are mostly qualitative in nature (the public speaking skill of the groups, the law of demand). It consists of mathematical equations that describe various relationships. This shows there is a significant difference and/or significant relationship among the groups. Example: (ANOVA, Test of hypothesis). Economic statistics is mainly concerned with collecting, processing, and presenting economic data in the form of charts and tables. tables.

ECONOMIC MODELS
What to expect? Test hypothesis No Sig.difference Sig.difference

State the null and alternative hypotheses Ho: 1 = 2 = 3 = (Depands on number of groups) HA: Not all means are equal 1 , 2 , 3 are the groups means.

STATISTICAL INFERENCE

= Mean (Population) X = Mean (Sample) N = Population size n = Sample size 2 = Population variance S2 = Sample variance , S = Standard deviation of Population and Sample
A data series like 1, 2, 3, 6 has a mean average (mu) equal to: = (1+2+3+6)/4=3. The differences from the mean are: -2, -1, 0, +3. The variance (sigma squared) is the measurement of the squared deviations. The variance is calculated as: = {(-2)2 + (-1)2 + 02 + 32}/4=14/4=3.5. Finally, the standard deviation (sigma) is equal to the positive square root of the variance: = SQR(3.5)=1.87. (SQR = Square Root)

WHAT IS MEAN, MEDIAN, MODE AND RANGE?

Mean, median, and mode are three kinds of "averages". The "mean" is the "average" where you add up all the numbers and then divide by the number of numbers. The "median" is the "middle" value in the list of numbers. To find the median, your numbers have to be listed in numerical order, so so you may have to rewrite your list first. The "mode" is the value that occurs most often. If no number is repeated, then there is no mode for the list. So, Mode = 0. The "range" is just the difference between the largest and smallest values.

WHAT IS MEAN, MEDIAN, MODE AND RANGE?

Find the mean, median, mode, and range for the following list of values: 13, 18, 13, 14, 13, 16, 14, 21, 13 The mean is the usual average, so: (13 + 18 + 13 + 14 + 13 + 16 + 14 + 21 + 13) 9 = 15 Note that the mean isn't a value from the original list. This is a common result. You should not assume that your mean will be one of your original numbers. numbers. The median is the middle value, so I'll have to rewrite the list in order: value, 13, 13, 13, 13, 14, 14, 16, 18, 21 There are nine numbers in the list, so the middle one will be the (9 + 1) 2 = 10 2 = the 5th number: 13, 13, 13, 13, 14, 14, 16, 18, 21 14, So the median is 14. 14. The mode is the number that is repeated more often than any other, so 13 is the other, mode. The largest value in the list is 21, and the smallest is 13, so the range is 21 13 = 8. 8. mean: 15 median: 14 mode: 13 range: 8

ECONOMETRIC MODELS
Econometric models are applied and based on Economic theory. They come into play the empirical analysis uses data to test a theory or to estimate a relationship (Quantitative (Quantitative Analysis). Analysis). Econometric models is mainly interested in the empirical verification of economic theory (Regression Models such as simple linear regression, supply function, demand function, forecasting models and so on).

Aims of econometric modelling

explanation policy evaluation forecasting

ECONOMETRIC MODELS
To specify the production, consumption and price models/equations St = f (Pt-1, T, eti ) Dt = f (Pt-1, Pt t-1, T, eti) Pt = f (It It-1, Dt-1, T, eti) It = f (It-1, St-1 Dt-1) where S = Supply of commodity D = Demand of commodity P = The output price Pt = The substitute product price I = Inventory of commodity (Stock) T = Time trend eti = Error terms

Natural Rubber Supply Model

Average FOB monthly price of SMR20 (US$/tonne) (P)

Total production of Natural Rubber (Total Supply) (S) (000 tonnes)

A dummy, taking the value of 1 in production increased monthly and 0 otherwise (D (0 or 1)

Time trend, 1990 Jan: to 2006 Dec:

WHAT IS A MODEL?
A model is a set of equations that describe the relationships between a set of variables.
Specification of the Mathematical Model of Consumption (single(singleequation model) Y = 1 + 2X 0 < 2 < 1 Y = consumption expenditure and (dependent variable) (dependent X = income, (independent, or explanatory variable) 1 = the intercept 2 = the slope coefficient The slope coefficient 2 measures the Direction (Positive or Negative Relationship) and Strength/Magnitude (Low or Moderate or High).

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General notation for the simple bivariate linear model

Yi = 0 + 1 X i + ui

for i = 1,2,.n With time series data we tend use t rather than i as the subscript and T as the sample size

Types of model
simple bivariate linear non-linear bivariate multiple regression dynamic simultaneous equation other (e.g. logit and probit) panel

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What is a forecast?
A forecast is any statement about the future. Such statements may be well founded, or luck any sound basis; they may be accurate or inaccurate on any given occasion, or on average; precise or imprecise; and model-based or informal (Clements and Hendry,2004).

Data Collection

Data Processing

Data Analysis

Data Dissemination

Principles of Forecasting

Forecasting is the use of an estimated econometric model to forecast quantitative values of certain variables beyond the sample of the data actually observed. Three basic principles of forecasting are. Forecasts are rarely perfect, Forecasts are more accurate for grouped data than for individual items and Forecast are more accurate for shorter than longer time periods.

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Why forecast?
In management and administrative situations the need for planning is great because the lead time for decision making ranges from several years to a few days or hours to a few seconds. In such situations, forecasting is needed to determine when an event will occur or a need arise, so that appropriate actions can be taken. Therefore, forecasting is an important aid in effective and efficient planning (Makridakis, wheelwright and Hyndman, 1998).

Econometric Modeling (Forecasting or Prediction)

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Types of data
cross-section time-series panel

Model specification
the equation(s) variables and functional form a priori restrictions on parameters stochastic assumptions (assumptions about the disturbance term)

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Actual Data Forecasting or Predicting Data

Past Data and Future Forecasts

20 15 10 De m a nd 5 0 -5 -10 -15 -20 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 Period 73 1 5 9
Past Data Future forecast Now

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Assumptions about u
mean zero constant variance independent between observations independent of the X variable

Econometric problems
Reasons for the disturbance autocorrelation heteroskedasticity bias multicollinearity

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The Simple Linear Regression (sample design)

Plant 1 2 3 4 5 6 7 X 100 200 300 400 500 600 700 Y 40 50 50 70 65 65 80 FITTED Y 42.32 48.21 54.11 60.00 65.89 71.79 77.68
Plant size/mineral input relationship
100 80 60 40 20 0 0 200 400 600 800

Yi

= 36.43 + 0.059 X i

WHAT IS MEAN, MEDIAN, MODE AND RANGE?

Find the mean, median, mode, and range for the following list of values: 8, 9, 10, 10, 10, 11, 11, 11, 12, 13 The mean is the usual average, so: (8 + 9 + 10 + 10 + 10 + 11 + 11 + 11 + 12 + 13) 10 = 105 10 = 10.5 The median is the middle value. In a list of ten values, that will be the (10 + 1) 2 = 5.5th value; that is, I'll need to average the fifth and sixth numbers to find the median: (10 + 11) 2 = 21 2 = 10.5 The mode is the number repeated most often. This list has two values that are repeated three times. The largest value is 13 and the smallest is 8, so the range is 13 8 = 5. mean: 10.5 median: 10.5 modes: 10 and 11 range: 5

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