• Module II: Nature and Scope of Econometrics

1. What is Econometrics?

2. Methodology of Econometrics

3. Structure of Economic data-

4. Cross Sectional

5. Time Series

6. Pooled Cross Sectional

7. Panel Data-

8. Statistical Software for Social Science Research

• Econometrics can also be defined as “statistical
observation of theoretically formed concepts or
alternatively as mathematical economics working with
measured data”
• According to Aris Spanos “Econometrics is concerned
with the systematic study of economic phenomena using
observed data.”
• Nature of Econometrics
• Econometric methods are statistical methods
specifically adopted to the peculiarities of economic
phenomena
• The most important characteristics of economic
relationships is that they contain a random element
• But this element ignored by economic theory and
mathematical economics
•
Econometrics has developed methods for dealing
with the random component of economic
relationships.
• For Example:
• Methodology of Econometrics
• Although there are several schools of thought on
econometric methodology, we take the traditional or
classical methodology, which still dominates empirical
research in economics and other social and behavioural
sciences.
Traditional Econometric methodology precedes the following lines:
(Following are the main steps in methodology of econometrics)
• Statement of theory or hypothesis.

• Specification of the mathematical model of the theory

• Specification of the statistical or econometric model

• Obtaining the data

• Estimation of the parameters of the econometric model

• Hypothesis testing

• Forecasting or prediction

• Using the model for control or policy purposes.

1) Statement of theory or hypothesis
This can be explained with the following example
Keynes stated: “The fundamental psychological law is that
men (women) are disposed, as a rule and on average to
increase their consumption as their income increases but not as
much as the increase in their income.” In short, Keynes
postulated that the marginal propensity to consume (MPC), the
rate of change of consumption for a unit change in income, is
greater than zero but less than 1.
• Specification of the mathematical model of the theory

• Keynes postulated a positive relationship between consumption and

income, he didn’t specify the precise form of the functional
relationship between the two.

• For simplicity, a mathematical economist might suggest the following

form of Keynesian consumption function.

• where Y = consumption expenditure (Dependent Variable)

• X = income (Independent Variable)

• β1 and β2, known as the parameters of the model, are, respectively,

the intercept and slope coefficients.
• The slope coefficient β2 measures the MPC as shown in
figure:

• This is a single equation model

• Y is dependent variable and X is independent or explanatory
• Specification of the statistical or econometric model

• , The purely mathematical model of the consumption

function given above is of limited interest to the econometrician, for
it assumes that there is an exact or deterministic relationship between
consumption and income. But relationships between economic
variables are generally inexact. To allow for the inexact relationships
between economic variables, the econometrician would modify the
deterministic consumption function as
• where u, known as the disturbance, or error, term, is a random
(stochastic) variable that has well-defined probabilistic properties.
The disturbance term u may well represent all those factors that
affect consumption but are not taken into account explicitly.
• Structure of Economic Data

• Economic data are data describing an actual economy, past

or present. These are found in different forms. For

empirical analysis, it is necessary to have the availability of

appropriate data. So generally we use the following types

of data for empirical analysis

• Cross Sectional Data
• Cross sectional data are data on one or more variables
collected at the same point in time, such as the census
of population conducted by the government of India
every 10years, the survey of household consumer
expenditure in India conducted by National Sample
Survey organization (NSSO).
• It covers a cross section of population and information is
collected from this cross section during a given point of
time. It refers to data collected by observing many
subjects at the same point of time
• Time Series Data
• Time series data are the data on one variable
collected at different intervals of time or
successive periods of time.
• . Such date may be collected at regular time
intervals such as daily (weather reports),
weekly(money supply), monthly (consumer price
index) , annually(govt budget) etc.
• Time series data are used heavily in econometric
studies, they present special problems for
econometricians. A time series is stationary if its
mean and variance do not vary systematically over
time.
• Components of the time series
• Time series are usually affected by a multiplicity of
causes. The changes in the value of a variable related to
time can be the result of a change in taste and habits of
the people. Variety of the factors like changes in
population, reduction in the cost of production. These
factors are interconnected and can be distinguished
easily. Effect of these can be classified in some major
categories. These categories or classes are called
components of time series.
• Trend
• Seasonal variations
• Cyclic variations
• Random or irregular movements
•
• Pooled Data
• Pooled data are data on one or more variable
collected at different point of time. Thus it is a
combination of both time series data and
cross section data. It is obtained by collecting
random samples from a large population
independently of each other at different
points in time.
• Panel data
• Panel data is type of data in which data is
collected from same cross sectional unit over
the time. It provides time series observations
for each cross sectional member in the data
set. It follows the same cross sectional units
over time.
• Statistical Software for social science Research

• Software is a collection of instructions and data that tell the computer how to
work. There are different software available now a days that can help companies
with organizing, analysing and interpreting data. The biggest advantage of this
application is that it offers fact- based data suitable for business and project. Some
of the best packages suitable for social science research are explained below:
• SPSS

• Stata

• R

• SAS (Statistical Analysis Software).

• MATLAB (MATrix LABoratory)

• Mini-tab

• ATLAS.ti
• SPSS : Statistical Package for the Social Science is the most widely

used statistics software package for social science research. SPSS is a

windows based program that can be used to perform data entry and

analysis and to create tables and graphs. It is designed for both interactive

and non-interactive uses. SPSS is the most widely used powerful

software for complex statistical data analysis. It easily

compiles descriptive statistics, parametric and non- parametric

analysis as well as delivers graphs and presentation ready reports to

easily communicate the results. More accurate reports are achieved here

through estimation and uncovering of missing values in the data sets.

SPSS is used for quantitative data analysis

• Stata : Stata is also a widely used software
that enables to analyze, manage, store and
produce graphical visualization of data.
Coding knowledge is not necessary to use it. It
is generally used by researchers in the field of
economics, social sciences and bio-medicine
to examine the data patterns. Stata is used
for quantitative data analysis
• R : R’ software is widely used free statistical
software that provides statistical and graphical
techniques including linear and non-linear
modeling.
• It provides interactive reports and applications,
leverage large amount of data and is complaint
with security practices and standards. R is used
for quantitative data analysis.
• SAS (Statistical Analysis Software) : It is a cloud
based platform that provides ready to use
programs for data manipulation, information
storage and retrieval. It is primarily used for
statistical modeling, observing trends and
patterns in data and aiding in decision-making by
business analysts, statisticians, data scientists,
researchers and engineers. Coding can be
difficult to those new to this approach.
• MATLAB (MATrix LABoratory) : MATLAB stands for MATrix LABoratory.
MATLAB is software that provides an analytical platform and
programming language. It expresses matrix and array mathematics,
plotting of functions and data, implementation of algorithms, creation
of user interfaces. It is widely used by engineer and scientist.
• Mini-tab: Mini-tab offers both basic as well as fairly advanced
statistical analysis tools.It can analyze all kinds of data sets, automates
statistical calculations, creations of stunning visualization. Mini-tab
helps to look at current and past data to discover trends and patterns,
uncover hidden relationships between variable, allowing users to
focus more on data analysis.It makes it simpler to get the insights of
the data.
• ATLAS.ti : It is a leading software for qualitative analysis and has
incorporated Ail technology as it has evolved.This is best for research
organization, corporations and academic institutions. As it be
expensive for individual research. It is more powerful, boating both
sentiment analysis and auto coding. It offers the possibility to work in
any language or character set.
 • GRETL
• It is a free software useful for Econometric Analysis.
• It is an open source statistical package, mainly for econometrics.
• G-Gun (it is an open source licence)
• R- Regression
• E-Econometrics
• T- Time series
• L-Library
• It is an econometrics package, including a shared library, a command –line client
program and a graphical user interface.
• Some of the common advantages of Gretl are ;
• 1)User-friendly
• 2) flexible
• 3)Cross-platform
• 4)Open source
• 5)Extensible
• 6) Accurate
• 7)International
• It is the first complete econometrics package to be released under the GNU software