Ecotrix

Group 8:

Srijita Agarwal (5)Schuyler D’souza (9)Chandana Rayachoti (41)Danish Shaikh (52)

Operational Research Presentation

Ecotrix

What is Ecotrix?

Definition 1: Economic Measurement Definition 2: Application of the mathematical statistics to economic data in order to lend empirical support to the economic mathematical models and obtain numerical results (Gerhard Tintner, 1968)

Definition 3: The quantitative analysis of actual economic phenomena based on concurrent development of theory and observation, related by appropriate methods of inference

(P.A.Samuelson, T.C.Koopmans and J.R.N.Stone, 1954)

What is Ecotrix?

Definition 4: The social science which applies economics, mathematics and statistical inference to the analysis of economic phenomena (By Arthur S. Goldberger, 1964)

Definition 5: The empirical determination of economic laws (By H. Theil, 1971)

What is Ecotrix?

Econometrics

Economic Theory

MathematicalEconomics

Economic Statistics

Mathematic Statistics

Why a separate discipline?

Economic theory makes statements that are mostly qualitative in nature, while econometrics gives empirical content to most economic theory

Mathematical economics is to express economic theory in mathematical form without empirical verification of the theory, while econometrics is mainly interested in the later

Economic Statistics is mainly concerned with collecting, processing and presenting economic data. It does not being concerned with using the collected data to test economic theories

Mathematical statistics provides many of tools for economic studies, but econometrics supplies the later with many special methods of quantitative analysis based on economic data

Why a separate discipline?

Economic Theory makes statements or hypotheses

- Theories do not provide• the necessary measure of strength of relationship (numerical estimate of the relationship) & • the proper functional relationship between variables

Why study Ecotrix?

- Example: Law of Demand• A reduction in price of a commodity is expected to increase

the quantity demanded of that commodity

To provide empirical verification of theories

Formulation of econometrics models for:

- estimating the economic relationship - testing the validity of economic theories or hypotheses - evaluating government policy

Use the models for:

- predicting, forecasting - assess impacts of certain decisions & policy recommendation

Objectives of Ecotrix

Economic Model v/s Ecotrix Model

An economic model is a set of assumptions that approximately describes the behaviour of an economy

Example: Law of Demand

An econometric model consists of the following:

1. A set of behavioural equations derived from the economic model

2. A statement of whether there are errors of observation in the observed variables

3. A specification of the probability distribution of the “disturbances”

What Constitutes a Test of an Economic Theory

To report

- the signs of the estimated coefficients in an econometric model - the significance test of each variables / regression

To confirm economic theories

- whether the estimated coefficients carried the expected sign - the statistical significance of the variables - the fitness of the model

Methodology of Econometrics

1) Economic Theory

2) Mathematical Model of Theory

3) Econometric Model of Theory

4) Obtaining Data

5) Estimation of Econometric Model

6) Hypothesis Testing

7) Forecasting or Prediction

8) Using the Model for control or policy purposes

Economic Theory

Mathematic Model Econometric Model Data Collection

Estimation

Hypothesis Testing

Forecasting

Applicationin control or

policy studies

(1) Statement of theory or hypothesis:

Keynes stated: ”Consumption increases as income increases, but not as much as the increase in income”. It means that “The marginal propensity to consume (MPC) for a unit change in income is greater than zero but less than unit”


(2) Specification of the mathematical model of the theory

Y = ß1+ ß2X ; 0 < ß2< 1Y= consumption expenditureX= incomeß1 and ß2 are parameters; ß1 is intercept, and ß2 is slope

coefficients


(3) Specification of the econometric model of the theory

Y = ß1+ ß2X + u ; 0 < ß2< 1;Y = consumption expenditure; X = income; ß1 and ß2 are parameters; ß1is intercept and ß2 is slope coefficients; u is disturbance term or error term. It is a random or stochastic variable


(4) Obtaining Data

Y= Personal consumption expenditure

X= Gross Domestic Product (all in Billion US Dollars)


(4) Obtaining Data

Year X Y

198019811982198319841985198619871988198919901991

2447.12476.92503.72619.42746.12865.82969.13052.23162.43223.33260.43240.8

3776.33843.13760.33906.64148.54279.84404.54539.94718.64838.04877.54821.0


(5) Estimating the Econometric Model

Y^ = - 231.8 + 0.7194 X MPC was about 0.72 and it means that for the sample

period when real income increases 1 USD, led (on average) real consumption expenditure increases of about 72 cents

Note: A hat symbol (^) above one variable will signify an estimator of the relevant population value


(6) Hypothesis TestingAre the estimates accord with the expectations of the theory that is being tested?

Is MPC < 1 statistically? If so, it may support Keynes’ theory.

Confirmation or refutation of economic theories based on sample evidence is object of Statistical Inference (hypothesis testing)


(7) Forecasting or Prediction

With given future value(s) of X, what is the future value(s) of Y?

GDP=$6000Bill in 1994, what is the forecast consumption expenditure?

Y^= - 231.8+0.7196(6000) = 4084.6

Income Multiplier M = 1/(1 – MPC) (=3.57). Decrease ( or increase) of $1 in investment will eventually lead to $3.57 decrease ( or increase) in income


(8) Using model for control or policy purposes

Y=4000= -231.8+0.7194 X X 5882

MPC = 0.72.


Conclusion & Inference: An income of $5882 will produce an expenditure of $4000. By fiscal and monetary policy, Government can manipulate the control variable X to get the desired level of target variable Y

Thank You!

Ecotrix

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