Introduction to Econometric

Econometrics is ‘the application of statistical methods to economic data for the purpose of testing

economic theories and of forecasting economic variables.

•There are some that think that econometrics is not that useful as it is limited by the available data.

•The approach we take here is that it is important to be able to know what the available data allows you 
to conclude about hypotheses of interest.

•Examples of how econometrics is used:

Forecasting inflation from past inflation and past values of other variables such as exchange rates

Determining whether older children in the family receive more support for education from parents

Estimating the amount by which imports increase when the income of a country increases

Determining the impact of interest rate changes on the investments of firms

Estimating the impact of import price changes on domestic prices for similar products.

Statistics provides the foundations to econometrics.

The variables that we study can either be qualitative (e.g. industry type) or quantitative (GDP, inflation).

In either case the variables are seen as random variables and a particular outcome is an observation.

Outcomes can be different for reasons such as uncertainty or luck. We think of there having been an

experiment or a process.

A collection of such observations is a  sample.

The group of all possible outcomes is the population

Why are the last three associated with random variables?

Foreign exchange markets: currency trading  involves luck; the exchange rate might not be properly 

measured, etc.

The market for petroleum: the price of petroleum is affected by events such as oil well accidents or

decisions about where to drill; the price might not be properly measured, etc.

The price of food: the supply can be affected by weather and events overseas, demand is not perfectly

predictable, there can be measurement problems,etc