Cont…

b) Estimation of the Model

 It is the process of obtaining reliable numerical estimates of the

parameters of the model.

 This stage is purely technical stage of econometric analysis which

requires good knowledge of various econometric methods: their
assumptions and their economic implications on estimates of the
parameters

By: Teklebirhan A. 27
 Cont…
 This stage involves the following specific tasks:

a) Gathering appropriate data of the variables included in the model.

• collecting d/t types of data for estimation of a model.

b) Examination of the identification conditions of the function.

• involves a careful investigation of which function we are actually
estimating
c) Examination of the aggregation problems involved in the variables
of the function.

• Aggregation over individuals, commodities, time period,

spatial/geography of data “Aggregation bias” --use index
By: Teklebirhan A. 28
 Cont…
d) Examination of the degree of correlation between the explanatory
variables of the model.

• Known as multi-co linearity

• The case Multivariate econometric analysis

e) Choice of appropriate econometric method/techniques for

estimation.

• Econometric methods are rules (formulae) which govern the best

way of determining the optimal numerical values of the
parameter estimates under various ground realities one actually
confront with. 29
By: Teklebirhan A.
 Cont…
 In econometrics, based on various criteria, it is possible to identify
appropriate econometrics method of estimations.

 Based on the number of equations to be estimated, Econometric

methods are classified into two broad categories as:

a) single equation techniques of estimation

- the cause-and-effect r/nship b/n Y and the X’s is unidirectional
e.g, OLS, Maximum likelihood models
b) simultaneous equation techniques of estimation
- the cause-and-effect r/nship b/n Y and the X’s is bidirectional
- in such models there is more than one equation
e.g, Wage–Price models, Demand-Supply models, etc.
By: Teklebirhan A. 30
 Cont…
 The econometrics techniques to handle simultaneous equations
include
• Indirect Least squares (ILS),
• Full information maximum likelihood,
• Two Stage Least Squares (2SLS),
• Instrumental variable (IV) estimation and so on.
 Based on the nature of the dependent variable (i.e.,
Quantitative/Continuous vs. Qualitative/Discrete), Econometric
methods are classified into two broad categories as:

By: Teklebirhan A. 31
 Cont…
a) Quantitative Response Regression Models:
 Used to estimate models where the regressand is a quantitative
variable as consumption expenditure, income, etc.

• Examples: Ordinary Least Squares (OLS), Two Stage Least

Squares (2SLS), Instrumental variable (IV), etc.
b) Qualitative Response Regression Models:
 Used to estimate models where the dependent variable is a
qualitative/indicator variable as Labor Force Participation, Likert
scale observations (Job/employee Satisfaction, etc).
• Examples: Logit/probit models, Multinomial Logit/Probit, and
Ordered Logit/Probit models.
By: Teklebirhan A. 32
 Cont…
c) Evaluation of the Estimates

 Evaluation of the parameter estimates means determination of the

statistical and theoretical reliability of the parameter estimates
obtained from the application of a particular econometric method.

 At this stage, we need to inspect whether the estimates of the

model are theoretically meaningful and statistically satisfactory

 There are various criteria which we may use to judge on the

reliability of the estimates of an estimated model.

By: Teklebirhan A. 33
Cont…

By: Teklebirhan A. 34
 Cont…
d) Use the Model for Prediction and Decision Making

 The last stage of econometric analysis is to use the estimated

model for prediction and/or forecasting values for the dependent
variable.

 Prediction and forecasting helps to reduce future uncertainty.

By: Teklebirhan A. 35
 Cont…
 Desirable Properties of an Econometric Model

 The ‘goodness’ of an econometric model is judged customarily

according to the following desirable properties.

 Theoretical plausibility.

 Explanatory ability.

 Accuracy of the estimates of the parameters. (est. par vs true par)

 Forecasting ability.

 Simplicity.

By: Teklebirhan A. 36
 1.2 Basic definitions:
 Population: is a totality of things, objects, peoples, etc. about
which information is being collected.
 It is the totality of observations with which the researcher is
concerned.
 Sample: is a subset or part of a population selected to draw
conclusions about the population (evaluation target).

 Parameter: is a value computed from the population estimate.

 The coefficients of the variables in the model are called
parameters.
 Variable: A certain characteristic which changes from object to
object and time to time.
By: Teklebirhan A. 37
 Cont…
 A variable in statistics is any characteristic, which can take on
different values when data are collected.

 A quantitative or qualitative characteristic that varies from

observation to observation in the same group is called a
variable.

 quantitative variables are continuous and qualitative

variables are discrete variables.

By: Teklebirhan A. 38
 Cont…
 Random variable: is a variable whose value is unknown or a
function that assigns values to each of an experiment's outcomes.

 A random variable can be either discrete (having specific

values) or continuous (any value in a continuous range).

By: Teklebirhan A. 39
 1.7 Nature and Sources of Econometrics Data
 Data are the foundations of Economic Research.

 The success of any econometric analysis ultimately depends on the

availability of the appropriate data.

 Therefore, proper data collection, retention, and sharing are vital

to the research enterprise.

 Data refers to any group of facts, measurements, or observations

used to make inferences about the problem of investigation.

By: Teklebirhan A. 40
 Cont…
A) Nature of Econometrics Data

 Four major types of data may be available for empirical analysis:

• Time series data,

• Cross-sectional data,

• Pooled data, and

• Panel data.

By: Teklebirhan A. 41
 Cont…
 Cross-Sectional Data
 This data set consists of a sample of individuals, households, firms,
cities, countries or variety of any other unit, taken at a given point
in time. - information gathered only at one point in time;

 This data sets record a single or various attributes of all members of

the cross-sectional unit at a specific time.

 In a pure cross-sectional analysis, we would ignore any minor

timing differences in collecting the data;

 For example, if a set of families were surveyed during different

weeks of the same year, By: Teklebirhan A. 42
 Cont…
 Cross-sectional data set are widely used in economics and other
social sciences.

 It is closely connected with micro -analysis (micro management

research )

 For example

 Management problems of public enterprises (a case of METEC)

 Impact of product quality on sales volume of an organization (a

case study of East African bottling company)

 Salaries and wages administration as a tool for improving

employee’s performance in an organization. By: Teklebirhan A. 43
 Cont…
Table: 1.1: Monthly Household Consumption Expenditure (Y) and
Total Monthly Household Income (X) for 20 sample observations.

Observations Observations
1 2500 3000 11 3000 4000
2 4000 5000 12 3000 4000
3 4000 6000 13 4000 6000
4 1000 1600 14 7500 10000
5 7000 9000 15 7200 11000
6 1600 2000 16 1200 1500
7 2250 3000 17 4000 6000
8 4000 6500 18 4200 6000
9 2000 2500 19 8000 12000
10 7800 12000 20 4000 6000

By: Teklebirhan A. 44
 Cont…
 Time Series Data

 A time-series data set consists of observations on a variable or set of

variables over time.

 Time series data is collected at regular time intervals as on

 monthly (e.g., unemployment rate, CPI)

 quarterly (e.g., GDP),

 semi-annually and annually (e.g., GDP, government budgets).

 Unlike cross-sectional data set, the chronological ordering of

observations in a time-series conveys important information
(why?). By: Teklebirhan A. 45
 Cont…
Table: 1.2: Annual Data on Real Gross Domestic Product (Y), Real Government
Expenditure (G), and Broad Money Supply (M2), from 2010-2016, all in Billions of Birr.

Year 2016 2017 2018 2019 2020 2021 2022

RGDP (Y) 466.2 517 568 627 692 747 1,577

Government Spending (G) 3.8 124.4 153.9 185.5 230.5 272.9 329.3

Money Supply (M2) 145.4 189.4 235.3 297.7 371.3 445.2 145.4

 In economics, time series data sets are closely linked with macro-
analysis (macro management research ).

By: Teklebirhan A. 46
 Cont…
 For instance, to investigate questions like

 determinants of current inflation in Ethiopia;

 how inflation affects the short and long-run economic growth

of the country;

 what is the effect of devaluation on the trade balance of the

country;

 how government expenditure and money supply affects growth

of a country;

 what are the possible effects of financial market liberalization in

Ethiopia By: Teklebirhan A. 47
 Cont…
 Pooled Data

 Pooled or combined data combines the elements of both time series

and cross-section data.

 An example is a data set where a number of firms are randomly

selected, say in 2009, and another sample is selected in 2010. (I.e.,
data consist of two different random samples.). If in both samples
the same features are measured, combining both years forms a
pooled data.

 Usually the interest is whether there are some important changes

between the time points.
By: Teklebirhan A. 48
 Cont…
 Panel Data (Longitudinal Data):

 This is a special type of pooled data in which the same cross-

sectional unit (say, a household or a firm) is surveyed over time.

 Panel data contain observations of multiple phenomena obtained

over multiple time periods for the same firms or individuals.

 By interviewing the same household periodically, the panel data

provides very useful information on the dynamics of household
behavior.

By: Teklebirhan A. 49
 Cont…
Table: 1.3: Hypothetical Panel Data

Person Year Sex Age Income/Year Saving/Year Owned House

1 2000 Male 20 30000 6000 No
1 2005 Male 25 48000 18000 No
1 2010 Male 30 144000 72000 Yes
2 2000 Female 22 24000 8400 No
2 2005 Female 27 72000 30000 Yes
2 2010 Female 32 120000 60000 Yes
3 2000 Male 18 48000 19200 No
3 2005 Male 23 72000 24000 No
3 2010 Male 28 72000 30000 Yes

By: Teklebirhan A. 50
 Cont…
 Dummy variable(s) data

 These variables are constructed by econometricians themselves.

 When the variables are qualitative in nature, which are difficult to

measure quantitatively, then researcher records the data in the
form of indicator/dummy/ variable.

 The values of the variables do not reflect the magnitude of data.

 They reflect only the presence/absence of a characteristic.

By: Teklebirhan A. 51
 Cont…
 For example, in the analysis of the determinants of wage; along
with relevant quantifiable variables, non-quantifiable variables
such as sex, race and religious background are also important
variables which possibly explain wage variation across workers.

 But these variables cannot be measured quantitatively and hence

impossible to get quantitative data of such important variables for a
particular cross-sectional unit.

 The variable `sex’ takes two values - these values can be

represented as ‘1’ represents male and ‘0’ represents female.

By: Teklebirhan A. 52
 Cont…
B) Sources of Data for Econometrics Analysis
 Data for econometrics analysis can be acquired from two sources:

 Secondary sources of data include data which has been collected by

someone else.
 Some examples include:
 The labor force survey of Central Statistical Agency,

 Quarterly financial sector reports of the National Bank of Ethiopia,

 Ethiopian economy databases of the Ethiopian Economic Association,

 Annual data of the Ethiopian Revenue and Customs authority,

 Data from international agencies (e.g., the International Monetary Fund (IMF),
the World Bank (WB), World Trade Organization (WTO), …etc.
By: Teklebirhan A. 53
 Cont…
 Primary sources of data are a fresh collected by the researcher or
team of researchers for the first time (original).

By: Teklebirhan A. 54
 1.5. Measures of Central Tendency
 When we want to make comparison between groups of numbers it
is good to have a single value that is considered to be a good
representative of each group.

 This single value is called the average of the group

 Averages are also called Measures Central Tendency.

 The Objectives of measuring central tendency are:

 To comprehend the data easily.

 To facilitate comparison.

 To make further statistical analysis.

By: Teklebirhan A. 55
 Cont…
 These are the measures of central tendency;

 The Mean (Arithmetic, Geometric and Harmonic)

 The Mode

 The Median

 Quantiles (Quartiles, deciles and percentiles)

 The choice of these averages depends up on which best fit the

property under discussion.

By: Teklebirhan A. 56
 1.5. Measures of Dispersion (Variation)
 The scatter or spread of items of a distribution is known as
dispersion or variation.

 In other words the degree to which numerical data tend to spread

about an average value is called dispersion or variation of the data.

 Measures of dispersions are statistical measures which provide

ways of measuring the extent in which data are dispersed or spread
out.

By: Teklebirhan A. 57
 Cont…
 Objectives of measuring Variation:

 To judge the reliability of measures of central tendency

 To control variability itself.

 To compare two or more groups of numbers in terms of their

variability.

 To make further statistical analysis.

By: Teklebirhan A. 58
 Cont…
 The most commonly used measures of dispersions are:

 Range and relative range

 Quartile deviation and coefficient of Quartile deviation

 Mean deviation and coefficient of Mean deviation

 Standard deviation and coefficient of variation.

By: Teklebirhan A. 59
 Assignment -1
 Suppose that you are an econometrician working for XYZ Research
Institute. As a Researcher of the institute, suppose you are
interested to answer the following research questions using
Econometrics research technique. Thus, briefly explain the
econometrics methodological steps you going to apply to conduct
your research?

1) Determinants of Employees' Turnover Intention: the case of AAU

2) Market Chain Analysis of Avocado in Southern Ethiopia

3) The Effect of Marketing Strategy on Organizational Profitability

in the case of XYZ company By: Teklebirhan A. 60
 Cont…
4) Effect of Salaries and Wages Administration as A Tool for
Improving Employee’s Performance in CBE
5) Role of Flexible Working Hours’ Arrangement on Employee Job
Performance & Retention in Manufacturing Industries in Addis
Ababa

6) The effects of transformational leadership on employee creativity:

Moderating role of intrinsic motivation

7) The Effects Of Perceived Organization Justice On Organizational

Citizenship Behaviour of Addis Ababa University Employees

8) Factors affecting overall job satisfaction and Turnover Intention in

CBE. By: Teklebirhan A. 61