Empirical analysis - uses data to test theory or relationship

It is important to start with careful formulation of question

of interest (your economic or political theory?)
economic/political model (e.g. crime)
i.e. y = f ( x1, x2, x3, x4, x5, x6, x7)
where:
y = house spent in criminal activities
x1 = wage for an hour spent in criminal activity
x2 = hourly wage in legal employment
x3 = income other than from crime or employment
x4= probability of getting caught
x5= probability of being convicted
x6 = age
underlying theory utility maximization
Individuals make choices to maximize their well-being, subject to resource
constraints
empirical analysis
formal economic modelling as starting point
BUT... you can also rely on intuition

Crime B0 + B1wage + B2ethnic + B3frequent + b

Cross sectional data

Sample of individuals, etc. at a sample given point in time.
It may not necessarily correspond to the same time period. It ignores minor timing
differences.
Data obtained is random, there is random sampling.
*open
Time series data
Consists of observations on a variable or several variables over time (stock price,
money supply, sales figures)

Chronological ordering of observations convey potentially important information.

Pooled cross section
Combing two or several time periods. Good for analyzing effects of policies. Good
for analyzing effects of policies.
Panel or Longitudinal
This consist of time series for each cross sectional member in dataset. Same cross
sectional units (individuals, provinces, states) are followed over a given period of
time.
Causality
Where econometrics differ from statisticians. Finding an association is okay, but
unless there is a causality it is rarely something.
Ceteris paribus all other things held constant. Effect while holding all else fixed.
Note: except in rare cases, it is not possible to literally hold all else equal.
Simple regression equation
y = B0 + B1x + u
*a certain phenomenon is being caused by factors = x.
*u = the unobserved, can be conveniently assigned (an assumption), considered as
errors.
y
dependent
Response
predicted
regressed

x
independent
Control
predictor
regressors

Hypothesis testing
-

You may get it from your intuition.

If its recurring, it may not be an accident.
A hypothesis is a statement about a population based on what you observed.
It is usually a prediction that a parameter describing some characteristic of a
variable takes particular numerical value r falls in a certain range of values.
An informed, theoretically driven guess about the relationship between your
independent and dependent variable.

Median voter Theorem there is no difference between the mainstream political

party members with respect to the bills that they support (bills they vote for).

Significance test

Null hypothesis (H0) statement that a parameter takes a particular value

(usually 0 or no effect). What you are observing right now is purely
accidental. It has always been there even the observation you made is
something you think is different.
Alternative hypothesis (Ha) represents an effect of some type. This is YOUR
RESEARCH HYPOTHESIS.
Spurious relationship kalokohan, walang basehan, no bases. (null
hypothesis lmao).
Indirect testing (proof by contradiction) - we test whether the data
contradicts the null. Hence, suggesting that Ha is true.
We presume that the null is true.
If the data observed is very unusual veers from the null then the evidence
supports the alternative hypothesis. (You are correct, null is wrong).
Hypothesis is formulated before collecting or analyzing data.

Ceosal1.dta
What is the effect of return on equity (roe) on CEO salary?
Model: What is the effect of return on equity (roes) on CEO salary?
Salary = B0 + B1roe + u model function
Command: reg salary roe
Salary = 963.191 + 18.501roe regression function
B0 = constant, _cons
B1roe = re
*OLS regression wala na ang u.
*salary is in thousands so 963,191.
Change in y = (coefficient) (change in X) if change in u = 0.
A 1% change in roe changes salary by 18, 501.
Wage1.dta
Write a model explaining wage as a factor of education: Educ = B 0 + B1wage + u
Wage as a result of education: wage = B0 + B1educ + u
Estimate the OLS function.
Wage = -.904816 + .5413593educ + u
The effect of 1 year of education: Change in wage = Change in education x 1 (1 = 1
year of education) which yields .54 cents. The relationship is positive. If change,
ignore the constant and just use the slope.
Predictive wage of a person with 8 years of education: wage^ = -0.90 + 0.54(8)
which is 3.42 per hour.

Log (salary) = log(salary)