# Econometrics ## Intro ### Introduction What conveys the study of econometrics? \vfill The unification of three main areas: 1. Statistics 2. Economic theory 3. Mathematics \vfill \`\`Econometrics conveys application of mathematical statistics and the tools of statistical inference to the empirical measurement of relationships postulated by an underlying theory." ## The practice of econometrics ### The practice of econometrics Theoretical econometrics vs. applied econometrics \hspace{3cm} This course is designed for the applied economist. \hspace{3cm} Applied econometric methods will be used for estimation of important quantities, analysis of economic outcomes such as policy changes, markets or individual behavior, testing theories, and for forecasting. ## Econometric Modeling ### Econometric Modeling Consider the Keynesian consumption function: $C=f(X)$, where $X$ is disposable income. \vfill Theoretical postulates: $dC/dX$ is positive and $00$ 2. $APC=C/X$ falls with income ### Keynes' Consumption Funcion How do we test this theory? \pause \vfill Estimate the equation $C=\alpha + \beta X$ and test whether $\alpha>0$ and $0<\beta<1$. \vfill Some points to note: 1. Notice the behavioral aspect of the model. 2. The model states an unambiguous and deterministic relationship between the dependent and independent variables. 3. Models are only simplifications of reality; we need an stochastic element. 4. A probabilistic model is less precise but more robust! ### From the Model to the Real World ![](/Users/henriquefonseca/Desktop/temp/Rmarkdown-practice/henriqueveras.github.io/files/Econometrics/Lecture Notes/1/fig 2.1.PNG) ### From the Model to the Real World The next step is to include a random component: $C=F(X,\varepsilon)$ We usually assume an additive relationship. \vfill We also need to consider the wartime period into the empirical model. Here's an empirical model: $$C=\alpha+\beta X+ d_{waryears}\delta_W+\varepsilon$$ ### Another Example How would you model the function $earnings=f(education)$? ### The Big Data Revolution: Into a new paradigm? Traditional econometrics: Measuring and testing theoretical relationships \vspace{1cm} Can Big Data replace theory?