Fundamentals of Econometrics and Regression

Sep 18, 2024

Introduction to Econometrics

Overview

  • Purpose of Lecture: Introduce econometrics and econometric analysis.
  • Topics Covered:
    • Definition of econometrics
    • Basics of econometric data
    • Goals of econometrics
    • Simple linear regression

What is Econometrics?

  • Definition: Application of statistical methods in economics.
  • Key Concept: Regression analysis
    • Examines relationship between independent variables and a dependent variable.
    • Example: Dependent variable (y) influenced by independent variables (x1, x2, ... xn).

Importance of Econometrics

  • Estimating relationships between economic variables.
  • Testing economic theories and hypotheses.
  • Forecasting economic variables.
  • Evaluating government or business policy.

Example

  • Relationship between wage and factors like education and experience.
    • Labor economists study how education and experience affect lifetime wages.

Types of Economic Data

  1. Time Series

    • Observations over time.
    • Example: GDP of Canada over 10 years.

  2. Cross-Sectional

    • Observations across subjects at a specific time.
    • Example: Annual GDP of various countries in a specific year.

  3. Panel Data

    • Observations over time and individuals.
    • Example: Annual GDP of certain countries from 2000 to 2005.

Simple Linear Regression

  • Focuses on one independent variable.
  • Supports the estimation of the linear relationship between the dependent variable (Y) and the independent variable (X).

Equation of Simple Linear Regression

  • Standard form: Y = mx + b
    • Y: Dependent variable
    • m: Slope
    • x: Independent variable
    • b: Intercept

Including the Error Term

  • Extended form: Y = β0 + mx + u
    • β0: Constant (intercept)
    • u: Error term
    • Error term represents the distance from the fitted line to each individual data point.

Causality in Regression

  • Economists look for causal relationships:
    • How does Y change if X changes while holding other variables constant?
    • In multiple regression, other independent variables (x2 to xn) are held constant.

Conclusion

  • Summary of key points:
    • Understanding of econometrics and its goals.
    • Types of data: time series, cross-sectional, panel data.
    • Basics of simple linear regression and its components.
  • Next Steps: Further exploration of simple linear regressions and interpretation of coefficients in upcoming videos.