chapter one

2. chapter one The Nature and Scopeof Econometrics

3. Methodology • Statement of theory/hypothesis • Collect data • Specify mathematical model • Specify econometric model • Estimate model parameters • Check model specification • Test hypotheses • Use model for prediction/forecasting

4. Example 1: Labor Force Participation • State theory or hypothesis • Discouraged Worker: drop out of labor force as economic conditions worsen • Added Worker: as conditions worsen, new workers get jobs to offset loss on income to main breadwinner in household • Collect data • Labor Force Participation (LFP), Unemployment rate (UNR), Average hourly earnings (AHE)

5. Table 1-1 U.S. Civilian Labor Force Participation Rate (CLFPR), CivilianUnemployment Rate (CUNR), and Real Average Hourly Earnings(AHE82)* for the years 1980-2002.

6. Example • Specify a mathematical model • CLFPR = B1 + B2CUNR • Specify an econometric model • CLFPR = B1 + B2CUNR + u • Estimate model parameters • Use Excel: Table 1-1.xls on S-drive • Check specification • CLFPR = B1 + B2CUNR + B3AHE82 + u • Test hypothesis: B2 > 0, < 0, = 0? • Use model to forecast

7. Figure 1-1 Regression plot for civilian labor force participationrate (%) and civilian unemployment rate (%).

8. Example 2: School Funding & Performance • State theory • Local school funding depends on grants, enrollment, performance, community involvement, and socio-economic status of students • Local school performance is determined by local funding, grants, enrollment, community involvement, and socio-economic status of students • Collect data • See Table 1 in Schooltrans.doc on S-drive

9. Example 2 • Specify a mathematical model • Fi = F(Gi, Ei, Pi, Oi, Zi) • Pi = P(Fi, Gi, Ei, Oi, Zi) • Specify econometric model • See Table 2 in Schooltrans.doc • Estimate parameters • Check specification • Test hypotheses • Use model for prediction