Econometrics:

An Introduction
Assoc. Prof. Boryana Bogdanova, PhD
bpelova@gmail.com
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Outline of topics covered throughout
the course
• What is econometrics? An introduction.
• Review of core statistical concepts:
– Types of data
– Visual representation and descriptive statistics
– Some important probability distributions
– Point estimates and inference
• Correlation and regression analysis
• Two-Variable regression analysis: the
Classical Linear Regression Model
Outline of topics covered throughout
the course
• Assumptions behind the Classical Normal
Linear Regression Model
• Some extensions of the Two-variable linear
regression models
• Multiple regression analysis
• Relaxing the Assumptions of the Classical
Model
 Exam
• Overall weight: 50% (after successful
completion of seminar classes’ exam)
• Midterm: 20% (the date will be additionally
announced)
• Final exam: 20% (the date will be
additionally announced)
• In-class participation: 10%
 What is econometrics?
• Let’s start with several quotes:
– “…econometrics may be defined the quantitative
analysis of actual economic phenomena based on
the concurrent development of theory and
observation, related by appropriate methods of
inference.” (Samuelson, Koopmans & Stone)
– “Econometrics may be defined as the social science
in which the tools of economic theory, mathematics,
and statistical inference are applied to the analysis
of economic phenomena.” (Goldberger)
What is economtrics?

Data Formulas Charts Software application

 Methodology of Econometrics
• Statement of theory or hypothesis
• Specification of the mathematical model
• Specification of the econometric model
• Obtaining data
• Estimation of econometric model’s parameters
• Verification/statistical inference
• Forecasting or prediction
• Use of the model for control or policy purposes
 An illustrative example: The
Keynesian theory of consumption
function
1. Statement of theory

“The fundamental psychological law…is that

men [women] are disposed, as a rule and on
average, to increase their consumption as
their income increases, but not by as much as
the increase in their income.“
 Specification of the mathematical
model
𝑌 = 𝛽1 + 𝛽2 𝑋, 0 < 𝛽2 < 1

where

𝑌 – consumption expenditure
𝑋 – income
𝛽2 - MPC
𝛽1 - an intercept term
 Specification of the econometric
model
𝑌 = 𝛽1 + 𝛽2 𝑋 + 𝑢, 0 < 𝛽2 < 1

where

𝑌 – consumption expenditure
𝑋 – income
𝛽2 - MPC
𝛽1 - an intercept term
𝑢 – disturbance/error term
 Obtaining data
Average p.c. Average p.c.
Average Expenditure on Expenditure on
Consumer Food and Housing and Average income Average income
Expenditure p.c. Beverages Utilities per household p.c.
2004 1519 633 268 4725 1833
2005 1672 680 292 5179 2031
2006 1905 764 331 5863 2342
2007 2291 941 356 7130 2831
2008 2695 1109 442 8353 3368
2009 2771 1133 482 8807 3566
2010 2739 1147 470 8826 3568
2011 2872 1202 493 9086 3714
2012 3315 1282 621 10037 4240
2013 3646 1408 632 11224 4731
2014 3694 1394 605 11489 4740
2015 3827 1405 665 11723 4886
Estimation of model parameters

𝒀 = 𝟏𝟓𝟕. 𝟗𝟏 + 𝟎. 𝟕𝟒𝑿
Statistical inference
Prediction and Control Purposes
• An example: The Income multiplier:

1 1
𝑀= = = 3.88
1 − 𝑀𝑃𝐶 1 − 0.7419

If investment expenditure increase by 1 BGN it

will lead to an increase of 3.88 in income.