Chapter 1
THE NATURE AND SCOPE OF
ECONOMETRICS
1.1 WHAT IS ECONOMETRICS?
Definition
（ 1） Econometrics,economic measurement.
（ 2） Econometrics,the social science in which the tools of
economic theory,mathematics,and statistical
inference are applied to the analysis of economic
phenomena.
（ 3） Econometrics,the result of a certain outlook on the
role of economics,consists of the application of
mathematical statistics to economic data to lend
empirical support to the models constructed by
mathematical economics and to obtain numerical results.
1.2 WHY STUDY ECONOMETRICS?
1.Economic theory and Econometrics
（ 1） Economic theory makes statements or hypotheses
that are mostly qualitative in nature,But the theory
itself does not provide any numerical measure of the
strength of the relationship between the two.
（ 2） Econometrics gives empirical (i.e.,based on
observation or experiment) content to most economic
theory and provide the numerical estimates that the
economic theory does not do.
1.2 WHY STUDY ECONOMETRICS?
2.Mathematical economics and Econometrics
（ 1） Mathematical economics express economic theory in
mathematical form or equations without regard to
measurability or empirical verification of the theory,
（ 2） Econometrics empirical verification of economic
theory,That is,uses mathematical models proposed by
the mathematical economist to do empirical testing,
1.2 WHY STUDY ECONOMETRICS?
3,Economic statistics and Econometrics
（ 1） Economic statistics is mainly concerned with
collecting,processing,and presenting economic data in
the form of charts,diagrams,and tables,The data thus
collected constitute the raw data for econometric work,
（ 2） Econometrics concerned with using the collected data
to test economic theories.
Because the economics data are nonexperimenal in nature,they
are likely to contain errors of measurement,the econometrician has
to develop special methods of analysis to deal with such errors of
measurement.
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis:
1.Creating a Statement of Theory or Hypothesis
That is to find out what economic theory says on this subject.
2,Collecting Data
Three types of data for empirical analysis:
（ 1） Times series data,collected over a period of time.
Quantitative data
Quantitative data/variables（ dummy or categorical ）
（ 2） Cross-sectional data,data on one or more variables
collected at one point in time.
（ 3） Pooled data,have elements of both time series and
cross-sectional data.
（ 4） Panel data,longitudinal or micropanel data,the same cross-
sectional unit,say,a family or firm,is surveyed over time.
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
3,Specifying the Mathematical Model
Plot the data in a scatter diagram,or scatter gram,draw
a straight line through the scatter points and write the
relationship between the two variables by the mathematical
model:
B1,B2 the parameters of the liner function.
B1 the intercept,the value of Y when X is zero;
B2 the slope,the rate or change in Y for a unit change in X.
ii XBBY 21 ??
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
4.Specifying the Statistical or Econometric Model
Mathematical model assumes an exact,or deterministic,
relationship between the two variables,that is,for a given X,
there is a unique value of Y,But data or variables are
nonexperimentally collected,there may be other forces affecting
Y.
represents the random error term,that is,all those forces
(besides X) that affect Y but are not explicitly introduced in the
model,as well as purely random forces.
）（ 2.121 uXBBY ii ???
u
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
5,Estimating the Parameters of the Chosen Econometric Model
using the method of ordinary least squares (OLS) to estimate
the parameters of the model.
The estimated regression line gives the relationship between
average Y and X,that is,on average how Y responds to a unit
change in X,We use,on the average” because the error term u
is likely to make relationship somewhat imprecise,
ii XbbY 21? ??
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
6,Checking for Model Adequacy,Model Specification Testing
（ 1） Multiple linear regression model
Simple/Two-variable linear regression model,one explanatory variable
Multiple linear regression model,several/multiple explanatory variables.
（ 2） The estimated regression line,uXBXBBY iii ???? 33221
iii XbXbbY 33221? ???
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
7,Testing the Hypothesis Derived from the Model
In regression analysis we may be interested not only in
estimating the parameters of the regression model but
also in testing certain hypotheses suggested by economic
theory and /or prior empirical experience.
Hypothesis testing,find out whether the estimated model
makes economic sense,whether the results obtained
conform with the underlying economic theory.
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
8,Using the Model for Prediction or Forecasting
Use the estimated model for prediction,or forecasting,
Prediction error,the discrepancy between the predicted
value with the actual value.
THE NATURE AND SCOPE OF
ECONOMETRICS
1.1 WHAT IS ECONOMETRICS?
Definition
（ 1） Econometrics,economic measurement.
（ 2） Econometrics,the social science in which the tools of
economic theory,mathematics,and statistical
inference are applied to the analysis of economic
phenomena.
（ 3） Econometrics,the result of a certain outlook on the
role of economics,consists of the application of
mathematical statistics to economic data to lend
empirical support to the models constructed by
mathematical economics and to obtain numerical results.
1.2 WHY STUDY ECONOMETRICS?
1.Economic theory and Econometrics
（ 1） Economic theory makes statements or hypotheses
that are mostly qualitative in nature,But the theory
itself does not provide any numerical measure of the
strength of the relationship between the two.
（ 2） Econometrics gives empirical (i.e.,based on
observation or experiment) content to most economic
theory and provide the numerical estimates that the
economic theory does not do.
1.2 WHY STUDY ECONOMETRICS?
2.Mathematical economics and Econometrics
（ 1） Mathematical economics express economic theory in
mathematical form or equations without regard to
measurability or empirical verification of the theory,
（ 2） Econometrics empirical verification of economic
theory,That is,uses mathematical models proposed by
the mathematical economist to do empirical testing,
1.2 WHY STUDY ECONOMETRICS?
3,Economic statistics and Econometrics
（ 1） Economic statistics is mainly concerned with
collecting,processing,and presenting economic data in
the form of charts,diagrams,and tables,The data thus
collected constitute the raw data for econometric work,
（ 2） Econometrics concerned with using the collected data
to test economic theories.
Because the economics data are nonexperimenal in nature,they
are likely to contain errors of measurement,the econometrician has
to develop special methods of analysis to deal with such errors of
measurement.
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis:
1.Creating a Statement of Theory or Hypothesis
That is to find out what economic theory says on this subject.
2,Collecting Data
Three types of data for empirical analysis:
（ 1） Times series data,collected over a period of time.
Quantitative data
Quantitative data/variables（ dummy or categorical ）
（ 2） Cross-sectional data,data on one or more variables
collected at one point in time.
（ 3） Pooled data,have elements of both time series and
cross-sectional data.
（ 4） Panel data,longitudinal or micropanel data,the same cross-
sectional unit,say,a family or firm,is surveyed over time.
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
3,Specifying the Mathematical Model
Plot the data in a scatter diagram,or scatter gram,draw
a straight line through the scatter points and write the
relationship between the two variables by the mathematical
model:
B1,B2 the parameters of the liner function.
B1 the intercept,the value of Y when X is zero;
B2 the slope,the rate or change in Y for a unit change in X.
ii XBBY 21 ??
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
4.Specifying the Statistical or Econometric Model
Mathematical model assumes an exact,or deterministic,
relationship between the two variables,that is,for a given X,
there is a unique value of Y,But data or variables are
nonexperimentally collected,there may be other forces affecting
Y.
represents the random error term,that is,all those forces
(besides X) that affect Y but are not explicitly introduced in the
model,as well as purely random forces.
）（ 2.121 uXBBY ii ???
u
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
5,Estimating the Parameters of the Chosen Econometric Model
using the method of ordinary least squares (OLS) to estimate
the parameters of the model.
The estimated regression line gives the relationship between
average Y and X,that is,on average how Y responds to a unit
change in X,We use,on the average” because the error term u
is likely to make relationship somewhat imprecise,
ii XbbY 21? ??
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
6,Checking for Model Adequacy,Model Specification Testing
（ 1） Multiple linear regression model
Simple/Two-variable linear regression model,one explanatory variable
Multiple linear regression model,several/multiple explanatory variables.
（ 2） The estimated regression line,uXBXBBY iii ???? 33221
iii XbXbbY 33221? ???
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
7,Testing the Hypothesis Derived from the Model
In regression analysis we may be interested not only in
estimating the parameters of the regression model but
also in testing certain hypotheses suggested by economic
theory and /or prior empirical experience.
Hypothesis testing,find out whether the estimated model
makes economic sense,whether the results obtained
conform with the underlying economic theory.
1.3 THE METHODOLOGY OF ECONOMETRICS
Procedures of econometrics analysis
8,Using the Model for Prediction or Forecasting
Use the estimated model for prediction,or forecasting,
Prediction error,the discrepancy between the predicted
value with the actual value.
