Download to read offline
Uploaded byPawan Kawan
Econometrics and business forecasting
This document discusses the methodology of econometrics. It involves 8 steps: 1) stating an economic theory, 2) specifying a mathematical model, 3) specifying an econometric model, 4) obtaining data, 5) estimating parameters, 6) hypothesis testing, 7) forecasting, and 8) using the model for policy purposes. An example is provided to estimate a model that relates GDP to receipts based on data from 1990-2009. The model finds GDP increases with receipts, supporting the initial economic theory.
More Related Content
Similar to Econometrics and business forecasting
More from Pawan Kawan
Econometrics and business forecasting
- 2. Origin andintroduction of Econometrics Why Econometrics is a separate discipline Methodology of Econometrics Uses of Econometrics
- 3. The Historyof Econometric Ideas covers the period from the late nineteenth century to the middle of the twentieth century. The name Econometrics was first introduced by Norwegian Economist and Statistician Ragnar Frisch in 1962. First learned to harness statistical methods to measure and test the "laws" of economics. First observation concerns the origin of modern econometrics i.e Father of modern econometrics is Henry Moore.
- 4. Econometrics means“economic measurement”. It is the measurement of economic relationship It is derived from two words of Latin origin, ‘economia’ means economy and ‘measure’ means measurement. Econometrics is a set of quantitative techniques that are useful for making "economic decisions". It is mainly interested in the empirical verification of economic theory.
- 5. According toGoldberger 1964“Econometrics may be defined as the social science in which the tools of economic theory, mathematics, and statistical inference are applied to the analysis of economic phenomena” According to T. Haavelmo “Econometrics is defined as a conjuction of economic theory and actual measurements, using the theory and technique of statistical inference as a bridge pier.”
- 6. • The subjectdeserves to be studied in its own right for the following reasons: • Economic theory makes statements or hypotheses that are mostly qualitative in nature (the law of demand), the law does not provide any numerical measure of the relationship. This is the job of the econometrician. • The main concern of mathematical economics is to express economic theory in mathematical form without regard to measurability or empirical verification of the theory. Econometrics is mainly interested in the empirical verification of economic theory. • Economic statistics is mainly concerned with collecting, processing, and presenting economic data in the form of charts and tables. It does not go any further. The one who does that is the econometrician.
- 7. • Statement ofeconomic theory • Specification of the mathematical model of the theory • Specification of the econometric model of the theory • Obtaining the data • Estimation of the parameters of the econometric model • Hypothesis testing • Forecasting or prediction • Using the model for control or policy purposes
- 8. 1. Statement ofeconomic theory – Economic theory or hypothesis should be stated in a precise way. – Eg. “Gross Domestic Product (GDP) increases as receipt increases”. 2. Specification of the mathematical model of the theory – specify models and theoretical prediction in a mathematical language. Y= β1 + β2X……………………. (1.1) where, Y= Gross Domestic Product and (Dependent Variable) X= Receipt (Independent or Explanatory Variable) β1and β2are parameters β1 = the intercept β2 = the slope coefficients
- 9. 3. Specification ofthe econometric model of the theory – The relationship between economic variables is generally inexact. – In addition to receipts, other variables affect GDP. For example, expenditure, revenue, development, foreign grants, foreign loan, etc. are likely to exert some influence on Gross Domestic Product. To allow for the inexact relationship between economic variables, (1.1) is modified as follows: Y= β1 + β2X + U….…………….. (1.2) where, Y= Gross Domestic Product and (Dependent Variable) X= Receipt (Independent or Explanatory Variable) U= Stochastic or random variable
- 10. 4. Obtaining thedata Y= Gross Domestic Product X= Receipt β1= intercept β2= slope coefficients U = disturbance term or error term.
- 11. Year Total GDP at factorcost Receipts Year Total GDP at factor cost Receipts 1990/91 19159.6 1289.47 2000/01 5076.2 5564.7 1991/92 20997.4 1515.65 2001/02 5351.8 5713.16 1992/93 23938.8 1894.17 2002/03 16389.3 6756.89 1993/94 26957 2197.44 2003/04 17490.9 7361.44 1994/95 28979.8 2851.23 2004/05 18337.1 8451.39 1995/96 33001.8 3271.82 2005/06 18878.2 8610.96 1996/97 36625.1 3636.18 2006/07 20439.7 10351.29 1997/98 4444 3834.05 2007/08 20997.5 12794.32 1998/99 4651.1 4158.76 2008/09 22193 16985.73 1999/00 4742.8 4860.55 2009/10 23304 21849.17 Table no. 1 Data Collection
- 12. 5. Estimation ofparameters of econometric model Regression analysis tool Y= 18165.624 + 0. 065X……………………… (1.3)
- 13. 6. Hypothesis testing •Common practice involves conducting tests and experiments to see if a proposed explanation for an observed phenomenon works in practice. • The testers seek to discover evidence that either validates or disproves a given hypothesis. • Confirmation or refutation of economic theories based on sample evidence is object of Statistical Inference (hypothesis testing). • In our example we found increase in receipts leads to increase in GDP means it support the hypothesis.
- 14. 7. Forecasting orprediction • The equation is developed to forecast the outcomes • It is in the form of y=a + bx, • With given future value(s) of X, what is the value(s) of Y. Receipts= Rs. 4987.52 in 2011/12 what is the forecast gross domestic product? Y= 18165.624 + 0. 065 (4987.52) = 18489.8128 • Increase in receipts will eventually lead to increase in gross domestic product
- 15. 8. Using themodel for control or policy purposes • Government can manipulate the control variable X to get the desired level of target variable Y. Suppose, Receipt(X) = 4000 GDP (Y)= 18165.624 + 0. 065(4000) or, Y = 18425.624
- 16. 1. Description • Descriptionof economic reality C=-60.5-0.45P+12.2Yd 2. Hypothesis testing • Testing of alternative theories with quantitative evidence. 3. Forecasting • To predict what is likely to happen next quarter, next year or further in future.