# Econometrics Test 1

 Three major uses for econometrics describing economic realitytesting hypotheses about economic theoryforecasting future economic activity y is a linear function of x. why? the change in y is relative to a change in x is always =   represents what? the marginal effect of change in X_1 on y. Extending the marginal effect that is β_1 in a single variable regression model, how would β_1 and β_2 be interpreted in a multiple variable regression? They're now referred to as partial effects of the change in X_1 or X_2 on y. Remember, all other things are constant in economics. Difference between proportional change and percent change? Percent change is proportional change times 100. This is important because it's where mistakes are made. Think about the difference in GDP - .032 (proportion) compared to 3.2 percent. Could be quite a bit of \$ there. When are quadratic equations helpful? diminishing returns, for example One of the most useful natural logorithm uses to us? can be used to approximate proportionate changes. the natural log of x is typically defined as the power to which the base e must be raised to obtain the number x. properties of the natural logarithm No negatives. Only defined for x > 0ln(x) < 0 for 0 < x < 1 (if x is between 0 and 1, the ln is less than 0)If x = 1, then ln(x) = 0ln(x) > 0 for x >1 when applying the approximation  it generally works best when the change in x is by a smaller amount(expect β_1 to be positive, b/c increasing and β_2 to be negative most of the time) ln (x_1/x_0) is approximately equal to? the proportionate change in x when x changes from x_0 to x_1 To approximate the percent change in x,  we can multiply the ln(x) by... 100 Why is it important that duh. elasticity.  When there is a log of the variable on the left and log of the variable on the right, the coefficients can be interpreted as elasticities exponential function this is the inverse of the natural log function Three main uses of econometrics? 1. describe economic reality (estimating the parameters of a market demand curve)2. test economic hypotheses (is hamburger an inferior good?)3. forecast future economic activity (forecast future housing demand for a region) 7 steps in econometric analysis? 1. formulate a precise question2. develop some kind of model that addresses the question3. convert model to an econometric model4. state the hypothesis in terms of coefficients in the model5. collect data6. estimate the econometric model7. test the hypothesis as stated in 4 experimental data formal experimental processtypically designed by researchersrare, but behaviorial economists are doing it nonexperimental passive collectionresearcher does not design the process that creates datamost common in economicssurvey - for most part cross sectional data collect on indvididuals at a single point in time time series 1 individual across time pooled cross section data on a bunch of individuals at a single point in time, then data on a bunch at different points in timethen pool it together panel dataset some individuals over time, some individuals drop out along the way, and a new individual may enter unbalanced panel individuals that are there don't necessarily exist throughout (different numbers of observations for each individual) why shouldn't we confuse correlation with causation? - omitted variablesreverse causality (student performance can be because of self esteem, or better performance can improve self esteem) Regression analysis, defined a statistical technique that attempts to explain movements in one variable (dependent) as a function of movements in a set of other (independent) variables the purpose of regression analysis to find the betas  is.. the deterministic component of the model What does  do? There's always some randomness we can't control. Epsilon does this.It's the stochiastic (random) error term. It captures variation in the dependent variable that is not captured by movements in the independent variables  captures at least four sources of variation not accounted for by the deterministic model 1. some influence on dependent variable that may not be included in model2. there is likely measurement error in at least one of the variables3. we might have chosen the wrong functional form4. there is randomness in the world we can't account for with measured variables the difference between I and I-hat? e (the residual) e equals I - I-hat (this tells us how accurate the estimate is to actual. we want e to be small) True regression equation includes epsilon or e? epsilon if you use I-hat as your model, do you include e? No. I can be equal to b_0-hat + bx_1 hat + e or I-hat is equal to b-hat + bx-hat, no eso i-hat is equal to all the hats, no e or i (no hat) is equal to all the hats plus e Authorjenmuz ID309148 Card SetEconometrics Test 1 DescriptionEconometrics test 1 Updated2015-10-07T00:55:59Z Show Answers