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
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Objectives
To provide you with information about
the subject of econometrics and the topics that
we shall cover in the unit
the learning teaching and assessment
arrangements for the unit

To review the simple bivariate linear

regression model
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Learning and Teaching

Lectures and accompanying notes
Problems classes
Computer lab sessions
Office hours and econometrics caf sessions
Text books
Web pages and links
One minute e-mail and FAQs
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Recommended texts
Dougherty, C (2007) Introduction to Econometrics, Third
Edition, OUP
Gujarati, D N (2002) Basic Econometrics, Fourth Edition,
McGraw-Hill
Kennedy, P (2003) A Guide to Econometrics, Fifth Edition,
Blackwell
Koop, G (2008) Introduction to Econometrics, John Wiley &
Sons
And others available in the Library in section 330.0182
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Computer software for the lab classes

The regression tool in Excel

PcGive
EViews

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assessment
end of unit exam (50% weighting)
portfolio of practical solutions (20%
weighting)
assignment/report (30% weighting)

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econometrics

The measurement of economic relationships

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econometrics
the application of mathematical statistics to
economic data to lend empirical support to models
constructed by mathematical economics and to
obtain numerical estimates
(Samuelson et al., Econometrica, 1954)

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aims of econometric modelling

explanation

policy evaluation
forecasting

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types of data
cross-section

time-series
panel

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types of model
simple bivariate linear

non-linear bivariate
multiple regression
dynamic
simultaneous equation
other (e.g. logit and probit)
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Example:
sales-advertising relationship
suppose we wish to test the hypothesis that a firms

sales are dependent upon its advertising

the simplest model is
sales = a + b*advertising + u
where a and b are parameters to be estimated, u is
an unobservable error term - a random disturbance
this is an example of a simple bivariate regression
model
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sales and advertising

time series plot
4000

2000

sales

3000
sales
ads

1000

1957-1

1947-1

1937-1

1927-1

1917-1

1907-1

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sales and advertising

scatter diagram
3500
3000

sales

2500
2000
1500
1000
500
0
0

200

400

600

800

1000

1200

1400

1600

1800

2000

ads
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general notation for the simple

bivariate linear model
Yi

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

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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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assumptions about u
mean zero

constant variance
independent between observations
independent of the X variable

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The role of the disturbance term

Reasons for the disturbance
omitted influences on Y
errors of measurement
errors in variables
non-linearity
random nature of human behaviour
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Econometric problems
Reasons for the disturbance
autocorrelation
heteroskedasticity
bias
multicollinearity

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The unlikely case of control over sample design

Plant
1
2
3
4
5
6
7

X
100
200
300
400
500
600
700

Yi

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

36.43 0.059X i

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