Professional Documents
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Session 1
2016
Understanding Econometrics
A case of Simple Regression
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Understanding Econometrics
1
vv
v
y
3
x
Algebraic Signs of the Quantities (yi y ) and (xi x )
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Quadrant
yi -y
xi - x
(yi y) (xi x)
Understanding Econometrics
Fail to capture
40
30
Y
20
10
X
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
The data:
Y
1
14
25
34
41
46
49
50
49
46
41
34
25
14
1
50
-10
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Understanding Econometrics
-5
0
X
10
X1
10
8
13
9
11
14
6
4
12
7
5
Y2
9.14
8.14
8.74
8.77
9.26
8.1
6.13
3.1
9.13
7.26
4.74
X2
10
8
13
9
11
14
6
4
12
7
5
Y3
7.46
6.77
12.74
7.11
7.81
8.84
6.08
5.39
8.15
6.42
5.73
X3
10
8
13
9
11
14
6
4
12
7
5
Y4
6.58
5.76
7.71
8.84
8.47
7.04
5.25
12.5
5.56
7.91
6.89
X4
8
8
8
8
8
8
8
19
8
8
8
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Understanding Econometrics
10
12
10
10
12
14
12
14
Y2
Fitted values
Fitted values
10
10
12
12
14
Y1
10
X2
X1
10
12
14
10
Y3
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Y4
Fitted values
Understanding Econometrics
15
20
X4
X3
Fitted values
Validate assumptions
OK?
Yes
Evaluate the fitted
model
No
Ok?
Yes
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Stop
Understanding Econometrics
9.5
10
10.5
11
11.5
12
Bank wage
Sctatter: A starting point
10
15
20
EDUC
Correlation: 0.6967
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Understanding Econometrics
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Understanding Econometrics
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Understanding Econometrics
10
Steps involved
1. Statement of theory: Labour
Economics: Salary depends on
education Y = f ( X )
Step 2: Econometric Model
log( salary ) = y = 1 + 2 education + u
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Understanding Econometrics
12
Statistical Inference(step 4)
4. Next task is to estimate the parameters of the
model so that we can say show relative increase in
salary due to one year of additional education.
To obtain a fitted line
Y = b1 + b2 X
Where y=log(salary) and X=education
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13
True model : Y = 1 + 2 X + u
Fitted line : Y = b1 + b2 X
Yn = b1 + b2 X n
Yn
Y1
b1
b2
Y1 = b1 + b2 X 1
X1
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Xn
Understanding Econometrics
14
14
True model : Y = 1 + 2 X + u
Fitted line : Y = b1 + b2 X
en
Yn = b1 + b2 X n
Yn
Y1
e1
b1
b2
e1 = Y1 Y1 = Y1 b1 b2 X 1
Y1 = b1 + b2 X 1
.....
en = Yn Yn = Yn b1 b2 X n
X1
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Xn
Understanding Econometrics
15
16
9.5
10
10.5
11
11.5
12
10
15
20
EDUC
y
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Fitted values
Understanding Econometrics
16
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Understanding Econometrics
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Y12 + b12 +
b22 X 12
2b1Y1
2b2 X 1Y1 +
2b1b2 X 1
b22 X n2
2b1Yn
2b2 X nYn +
2b1b2 X n
+ ...
+
Yn2 + b12 +
b1 = Y b2 X
RSS
= 0 2b2 X i2 2 X iYi + 2b1 X i = 0
b2
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19
b1 = y b2 x
b2
( y y )( x x )
=
(x x)
i
b2
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X Y n XY
=
X nX
i
i
2
i
Understanding Econometrics
19