Econometria

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One

The Nature of Econometrics and
Economic Data

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hapter 1 discusses the scope of econometrics and raises general issues that result
from the application of econometric methods. Section 1.3 examines the kinds of
data sets that are used in business, economics, and other social sciences. Section
1.4 provides anintuitive discussion of the difficulties associated with the inference of
causality in the social sciences.

1.1 WHAT IS ECONOMETRICS?
Imagine that you are hired by your state government to evaluate the effectiveness of a
publicly funded job training program. Suppose this program teaches workers various
ways to use computers in the manufacturing process. The twenty-week program offers
coursesduring nonworking hours. Any hourly manufacturing worker may participate,
and enrollment in all or part of the program is voluntary. You are to determine what, if
any, effect the training program has on each worker’s subsequent hourly wage.
Now suppose you work for an investment bank. You are to study the returns on different investment strategies involving short-term U.S. treasury bills todecide whether
they comply with implied economic theories.
The task of answering such questions may seem daunting at first. At this point,
you may only have a vague idea of the kind of data you would need to collect. By the
end of this introductory econometrics course, you should know how to use econometric methods to formally evaluate a job training program or to test a simple economic theory.Econometrics is based upon the development of statistical methods for estimating
economic relationships, testing economic theories, and evaluating and implementing
government and business policy. The most common application of econometrics is the
forecasting of such important macroeconomic variables as interest rates, inflation rates,
and gross domestic product. While forecasts of economicindicators are highly visible
and are often widely published, econometric methods can be used in economic areas
that have nothing to do with macroeconomic forecasting. For example, we will study
the effects of political campaign expenditures on voting outcomes. We will consider the
effect of school spending on student performance in the field of education. In addition,
we will learn how to useeconometric methods for forecasting economic time series.
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Chapter 1

The Nature of Econometrics and Economic Data

Econometrics has evolved as a separate discipline from mathematical statistics
because the former focuses on the problems inherent in collecting and analyzing nonexperimental economic data. Nonexperimental data are not accumulated throughcontrolled experiments on individuals, firms, or segments of the economy. (Nonexperimental
data are sometimes called observational data to emphasize the fact that the researcher
is a passive collector of the data.) Experimental data are often collected in laboratory
environments in the natural sciences, but they are much more difficult to obtain in the
social sciences. While some social experiments canbe devised, it is often impossible,
prohibitively expensive, or morally repugnant to conduct the kinds of controlled experiments that would be needed to address economic issues. We give some specific examples of the differences between experimental and nonexperimental data in Section 1.4.
Naturally, econometricians have borrowed from mathematical statisticians whenever possible. The method ofmultiple regression analysis is the mainstay in both fields,
but its focus and interpretation can differ markedly. In addition, economists have
devised new techniques to deal with the complexities of economic data and to test the
predictions of economic theories.

1.2 STEPS IN EMPIRICAL ECONOMIC ANALYSIS
Econometric methods are relevant in virtually every branch of applied economics. They...