Economics 420

Introduction to Econometrics
Professor Woodbury
Fall Semester 2015
Experiments and Basic Statistics
1. The probability framework for statistical
inference
2. Estimation
3. Hypothesis testing
4. Confidence intervals

1. The probability framework for statistical

inference
a. Population, random variable, distribution
b. Moments of a distribution mean, variance, standard deviation
c.Two random variables joint distributions, covariance, correlation
d. Conditional distributions and conditional means
e. Distribution of a sample of data drawn randomly from a population
Y1, ,Yn

a. Population, random variable, distribution

Population
The group or collection of all possible entities of interest (for
example, school districts)
We will think of populations as infinitely large ( is an
approximation to very big)
Random variable Y
Numerical summary of a random outcome (district average
test score, district STR) may be discrete (finite number of
outcomes, like the roll of a die) or continuous (takes any real
value with probability 0)
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Population distribution (density function) of Y

The probabilities of different values of Y that occur in the

population, for example Pr[Y = 650] (when Y is discrete)
OR

The probabilities of sets of these values, for example,

Pr[640 Y 660] (when Y is continuous).
Note: We will be using mainly discrete random variables think
of a histogram

For example, for a discrete random variable Y, the probability

distribution can be written:
!

pj = Pr(Y = yj), for j = 1, 2, 3, ..., k

A probability density function summarizes what we know about

the outcomes of Y:
!

f(yj) = pj , for j = 1, 2, 3, ..., k

For example, for the roll of a die, this would be:

f(1) = 1/6! ! f(2) = 1/6! ! f(3) = 1/6
f(4) = 1/6! ! f(5) = 1/6! ! f(6) = 1/6
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Or if you want to to be better organized:

Outcome

Y=1

Y=2

Y=3

Y=4

Y=5

Y=6

Probability
f(yi)

0.167

0.167

0.167

0.167

0.167

0.167

Cumulative distribution function

The cumulative probability distribution is the probability that the
random variable is less than or equal to a particular value:
! F(y) = Pr(Y y)
Outcome

Y1

Y2

Y3

Y4

Y5

Y6

Cumulative
probability
F(yi)

0.167

0.333

0.50

0.667

0.833

1.0

The cumulative probability is more useful with continuous

distributions than with discrete distributions, but the idea is the
same (more later)
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b. Moments of a population distribution mean,

variance, standard deviation
mean = expected value (expectation) of Y
= E(Y)
= Y
You can think of this as the long-run average value of Y over
repeated realizations of Y

Key
Concept
2.1
For a discrete
random
variable (one
that takes on a finite or
discrete set of values, like the outcome of rolling a die 1, 2, 3, 4,
5, 6):

Copyright 2003 by Pearson Education, Inc.

2-3

Moments (continued)
variance = E(Y Y)2
2

= Y

= measure of the squared spread of the distribution

standard deviation =
= Y
= measure of the spread of a distribution

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Again for a discrete random variable:

Copyright 2003 by Pearson Education, Inc.

2-4

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Exercise
Let Y be the number of heads that occur when two coins are
tossed.
a. What is the probability density function of Y?
b. What is the cumulative distribution of Y?
c. What are the mean, variance, and standard deviation of Y?

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a. What is the probability density function of Y?

Outcome (number
of heads)

Y=0

Y=1

Y=2

Probability
f(yi)

0.25

0.50

0.25

b. What is the cumulative distribution of Y?

Outcome (number
of heads)

Y0

Y1

Y2

Cumulative
probability F(yi)

0.25

0.75

1.0

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c. What are the mean, variance, and standard deviation of Y?

Y = E(Y) = (00.25) + (10.50) + (20.25)=1.00
var(Y) = [(01)2 0.25] + [(11)2 0.50] + [(21)2 0.25]
!

= (1 0.25) + (0 0.50) + (1 0.25) = 0.50

Y = var(Y) = 0.50 = 0.707

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APPENDICES

Notes on continuous distributions

F I G U R E B . 2 The probability that X lies between the points a and b.
f(x)

When computing probabilities for continuous random variables, it is easiest to work

with the cumulative distribution function (cdf ). If X is any random variable, then its cdf
is defined for any real number x by
F(x)  P(X  x).

[B.6]

Cengage Learning, 2013

726

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