Introduction to Econometrics, Spring

2025
B.Sc Eco 2023 Section A,
Instructor: Sunaina Dhingra
Lectures: Monday ( 12.20-1.50 Pm) & Thursday (10.40- 12:10 pm)
Office Hours & Mode: Online on MS Teams (Mutually convenient time to be worked out & by
appointment in FOB, Office No.1B in south on 7th Floor)
TA: SAHAJ
Email-id: sunaina@jgu.edu.in
Lecture Material: UMS
Credits: 4.5
 Course Description
• This is the first part in the Econometrics sequence offered at the undergraduate level to
B.Sc. Economics students.
• The course is designed to provide an introduction to basic econometric concepts and
techniques.
• Students will learn classical linear regression techniques that they would use in analyzing
data across multiple disciplines such as economics, political science, finance, business
etc.
• The course will introduce basic statistical concepts and then delve in to classical linear
regression model, multiple linear regression model, hypothesis testing and prediction.
• Students will learn the concepts of parameter estimation and techniques to handle
common errors that arise due to omission, inclusion, mis-specification and selection
bias.

Prerequisites
Basic statistics, measures of central tendencies, hypothesis testing
 Readings
Most of the lecture material will be drawn from
• Wooldridge, J. M. (2009). Introductory Econometrics: A modern approach, 5th edition. (JW)
• Some of the examples will be drawn from:
• Introduction to Econometrics, 3rd edition, by James H. Stock and Mark W. Watson. (SW)

https://economics.ut.ac.ir/documents/3030266/141
00645/Jeffrey_M._Wooldridge_Introductory_Econom
etrics_A_Modern_Approach__2012.pdf

• You are free to use any published materials (e.g., another textbook) in preparing assignments or for learning
the material more generally. You are also strongly encouraged to work with others in your class. This is
particularly helpful for learning to program. Each person must turn in their own problem set solution.
 Course Outline & Curriculum: This will be
tentatively followed
• Week 1. Nature of Econometrics and Economic Data: JW: Chapter 1
• Week 2 & 3. Classical Simple Linear Regression Model: JW: Chapter 2
• Week 4 & 5. Classical Multiple Linear Regression Model : JW: Chapter 3
• Week 6. Assessment 1 (tentatively)
• Week 7 & 8. Hypothesis Testing: JW: Chapter 4
• Week 9. MID TERM (tentatively)
• Week 10. Functional Forms and other issues: JW: Chapter 6
• Week 10 or 11. Assessment 2 (tentatively)
• Week 11 & 12. Functional Forms, dummy variables and other issues: JW: Chapter 6
• Week 13. Stata; Make – up assessment (tentatively)
• Week 14 & 15: Review
Learning Outcomes
Learning outcomes: There are four basic objectives of the course. Students will demonstrate understanding of:
1. The Classical Linear Regression Model, its maintained assumptions and optimal properties. This model is
by far the most frequently used by economists to analyze economic data.
2. How to apply the Classical Linear Regression Model to economic data for the purposes of hypothesis
testing and prediction.
3. How to determine, vis-à-vis diagnostic statistics, when the maintained assumptions of the Classical
Linear Regression Model are violated and how to address the violations so that correct statistical inferences
can be drawn.
4. The basics of the STATA computer program frequently used by economists to analyze economic data.

Broadly, you will be able to interpret the results and critique the methods used in a typical empirical
research article on economics. In particular, you will be able to interpret and comment on tables of
estimated coefficients from a wide range of econometric models.
Grading and Assignments
Student performance in this course will be determined as follows:
Evaluation is comprised of two components: internal (50%) and external (50%) assessments.
Internal evaluation
1. 4 Assessments (In-class tests/quizzes/midterm) 50%.
There will be only one makeup for the Assessment 1 and 2 but not for the midterm exam.
Class participation 5%
Assessment 1 10%
(Quiz/TakeHome/InClass or combination)

Assessment 2 10%
Quiz/TakeHome/InClass or combination)

Assessment 3/Mid-Term Exam 25%

External evaluation
1. End term examination (in – class) 50%

There will be a final exam (50% of your grade) which will be held according to the University schedule.

Attendance Policy: As per University policy.

Communication
• The best way to reach me out is on email; whatsapp common group
or after the class.
• If you email me, I will try to be as quick as possible. But my
commitment is to get back to you within 48 hours. Exception is a
emails done on Friday. I may not be able to answer them until
Monday.
• I will primarily be using whatsapp group to
communicate important announcement.
• Academic Integrity: Academic Honesty, Cheating, and
Plagiarism as per University policy.

• Use of Technology: As a courtesy to your instructor and fellow

colleagues you are expected not to use your mobile phone/laptops/
electronic devices for any purposes, unless explicitly asked to use in
class.
• We will be using Stata for which you will receive prior notification to
bring your laptops. Phones are expected to be on silent mode or
switched off mode.
• Please make sure all of you install STATA on your laptops.
• Food: Whatever food or drink you require to get you here and keep
awake is OK to bring to class. You will not be asked to share. Just get
here on time and stay awake. Also, please be good citizens, throw away
your trash and clean up your mess.
How to succeed in this class
1. Participate! Ask questions, offer suggestions, take notes.

2. Read the methods sources as well as the papers carefully

3. Work together…but work toward understanding, not just answers.

4. Study hard and take the assignments seriously.

5. Start learning Stata asap.

6. Be flexible.

7. Take care of yourself.

Common Questions

• What did we cover in last week: It’s on UMS

• What’s your late assessment submission policy: It’s in the
syllabus
• When are your office hours: It’s on Syllabus
• How will my grades be computed: It’s on Syllabus
• What methods you will use for announcements? Whatsapp group
and a class CR
Econometrics

The use of statistical methods using quantitative data to

develop theories, test existing hypotheses or to estimate
economic models
Two motivating questions
1. What is the value of a particular parameter?

Elasticity
Coefficient of risk aversion
Optimal tax rate

2. What is the effect of A on B?

Insurance on risky behavior

Preschool on educational attainment
Racial discrimination on employment
𝑌 = 𝛽0 + 𝛽1 𝑋1 + 𝛽2 𝑋2 + 𝜀
𝑌 = 𝛽0 + 𝛽1 𝑋1 + 𝛽2 𝑋2 + 𝜀

Data
𝑌 = 𝛽0 + 𝛽1 𝑋1 + 𝛽2 𝑋2 + 𝜀

Data
Parameters
𝑌 = 𝛽0 + 𝛽1 𝑋1 + 𝛽2 𝑋2 + 𝜀

Data
Parameters
Error term
A model, by definition, is not a full or
perfect representation of the real thing
There is no single way to model a
phenomenon of interest
Week 1-2. Review of statistical inference &
Nature of Econometrics and Economic Data:
• References: Lecture Notes & Chapter 1 of JW
 Lecture1
Defining Econometrics, Economic Models, and Econometric Models

Applied Econometrics - An Introduction

BAPP. 2022, Fall 2024
Instructor: Sunaina Dhingra
Email-id: sunaina@jgu.edu.in
Lecture Date: 6th August ( 3.40 pm)
 Econometrics and Its Applications

• Econometrics: based on the development of statistical methods for estimating

economic relationships, testing economic theories, and evaluating and
implementing government and business policy
• Analyzing micro and macro variables and estimating relationships between
different variables
• Forecasting macroeconomic variables
• Cobb-Douglas model of production
• Asset pricing model
• Effects of fertilizer use on crop yields
• Impact of school spending on student performance
 Economic Model
• Economic model consists of mathematical equations that describe various
relationships
• Consider an example of utility maximization model
𝑚𝑎𝑥𝑦1……,𝑦𝑛 u(𝑦1,……., 𝑦𝑛 ) subject to σ𝑁
𝑖=0 𝑦𝑖 ≤ 𝑚

𝑦𝑖 ≥0 for all i
• Max U() subject to budget constraints
Economic Model (contd.)

y=f (𝑥1 , 𝑥2 , 𝑥3 , 𝑥4 , 𝑥5 )

where ,
y = quantity of pizza
𝑥1 = price of pizza
𝑥2 = price of substitute good
𝑥3 = price of complimentary good
𝑥4 = income
𝑥5 = characteristics that affect taste
Economic Model (contd.)

Let’s consider another example of an equation that we can derive using informal
reasoning
wage = f(educ, exper, training)
Or y = f(𝑥1 , 𝑥2 , 𝑥3 )

where,
y = hourly wage
𝑥1 = years of formal education
𝑥2 = years of workforce experience
𝑥3 = did the employee receive any job training (yes-1; no-0)
 Econometric Model

Let’s consider a complete econometric model for example

wage = β0 + β1 educ + β2 exper + β3 training + μ

where,
β0 , β1 , β2 , and β3 = parameters of econometric model
μ = error term that contains unobserved factors
 Goals of Econometric Model

Two main goals

• Estimating parameters in the model
• Testing hypotheses
Types of Datasets
 Types of Economic Data

• The success of any analysis depends on the availability of

appropriate data.
• The three common types of economic data
• Cross-sectional data
• Time series data
• Pooled cross-sectional data
• Panel/longitudinal data
 Cross-Sectional Data
• For example, the table gives data of 526 working individuals for the year 1976.
The variables included in the table are:
• Observation number obsno wage educ exper female married
1 3.10 11 2 1 0
• Wage 2 3.24 12 22 1 1

• Number of years of education 3 3.00 11 2 0 0

4 6.00 8 44 0 1
• Experience earned 5 5.30 12 7 0 1
. . . . . .
• Indicator for gender . . . . . .
. . . . . .
• Marital status 525 11.56 16 5 0 1
526 3.50 14 5 1 0
 Time Series Data
• For example, the table gives data of Puerto Rico for 38 years. The variables
included in the table are:
• Observation number obsno year avgmin avgcov prunemp prgnp

• Year 1 1950 0.20 20.1 15.4 878.7

2 1951 0.21 20.7 16.0 925.0

• Minimum wage
3 1952 0.23 22.6 14.8 1015.9
• Coverage rate
. . . . . .
• Unemployment rate . . . . . .

• Gross national product 37 1986 3.35 58.1 18.9 4281.6

38 1987 3.35 58.2 16.8 4496.7

 Pooled Cross-Section Data

• For example, the table gives data of 520 houses. The variables included in the
table are:
• Observation number obsno year hprice proptax sqrft bdrms bthrms
1 1993 85,500 42 1600 3 2.0
• Year 2 1993 673,00 36 1440 3 2.5
3 1993 1,34,000 38 2000 4 2.5
• House price . . . . . . .
. . . . . . .
• Property tax . . . . . . .
250 1993 2,43,600 41 2600 4 3.0
• Square feet 251 1995 65,000 16 1250 2 1.0
252 1995 1,82,400 20 2200 4 2.0
• Bedrooms 253
.
1995
.
97,500
.
15
.
1540
.
3
.
2.0
.
. . . . . . .
• Bathrooms . . . . . . .
520 1995 57,200 16 1100 2 1.5
 Panel/Longitudinal Data

• Special type of pooled cross-section data

• Same cross-sectional units are surveyed over time
• Example: Census data
• Advantages of panel data
• Useful in establishing causality
• Ability to analyze behavioral lags or the outcome of decisions
Nature of Variables in
Empirical Analysis
 Types of Variables

• The different types of variables encountered in datasets used for

economic analysis are:
• Ratio scale
• Interval scale
• Ordinal scale
• Nominal scale
 Ratio Scale Variables

The three main properties of ratio scale variables are:

• Ratio of two variables (𝑦1 /𝑦2 )
• Distance between two variables (𝑦2 - 𝑦1 )
• Ordering of variables (𝑦2 ≥ 𝑦1 or 𝑦2 ≤ 𝑦1 )
 Interval Scale Variables

• Properties satisfied by interval scale variables

• Distance between two variables
• Ordering of variables
• Examples of interval scale variables
• Temperature scale
• Calendar years
 Ordinal Scale Variables

• The properties satisfied by ordinal scale variables

• Ordering of variables
• Examples of ordinal scale variables
• Grading systems in educational institutions: Grade A, Grade B,
Grade C, etc.
• Income classification: low income, middle income, and high
income
 Nominal Scale Variables

• They do not satisfy any of the properties of ratio variables

• Also referred to as categorical
• Special types are known as dummy/binary variables
• Examples of nominal scale variables
• Gender
• Marital status
• Religion
• Mode of transportation
 Discrete Variables

• Finite or countably infinite number of values

• Cannot take decimal or fractional values
• Example of discrete variable
• Number of books in the library
 Continuous Variables

• Infinite number of possible values

• Can take decimal or fractional values
• Examples of continuous variables
• Height of children in cm
• Test score in an exam
• Body temperature of those who have the flu
 Lecture 2
Relationship between variables

Applied Econometrics - An Introduction

BAPP. 2022, Fall 2024
Instructor: Sunaina Dhingra
Email-id: sunaina@jgu.edu.in
Lecture Date: 12th August ( 3.40 pm)
 Thinking About Two
Variables Simultaneously
 Probability Density Function of wage(y)
Histogram: f(y) or f(wage)
The STATA command used:

The STATA command used:

 Probability Density Function of education(x) Histogram:
f(x) or f(education)
The STATA command used:

The STATA command used:

Scatter Plot: wage(y) Against education(x)

The STATA command used:

 Conditional Distributions: PDF of y When
x=10,x=16 : f(y/x=10), f(y/x=16)

The STATA commands used:

 Joint Distributions: PDF of y and x,
f(x,y)

The STATA command used:

 Conditional Distribution: Using Expectation
Notation
• Expected value of a random variable x, E(x)=μ𝑥
• E(wage| education=10) = 3.8
• E(wage| education=16)=16
 Independence Between Variables
f(x,y)= f(x) f(y)

The STATA commands used: