i. Economic Theory
ii. Mathematical model for the theory
iii. Specification of the econometric model of the theory
iv. Obtaining data
v. Estimation of econometric model
vi. Hypothesis testing
vii. Forecasting prediction
viii. Using the model for control or policy purposes
Economic Theory
This is the first step which econometricians take when carrying out economic analysis process. It forms the basis of any econometric work hence making it the starting point. For example, in order to estimate a consumption function, one should study the economic theories of consumption for example Keynesian consumption function. Having understood the theory, you can then state your hypothesis.
Mathematical model for the theory
This is the next step and it involves formulation of a linear single equation mathematical model to the theory. For instance, taking Keynesian consumption theory as our theory for the study, the linear single equation mathematical model to the theory will be Y= f(x) such that Y= B1 + B2 X where Y is the dependent variable, X is the income, B1 is the intercept coefficient i.e. the value of Y when X is equal to zero and B2 shows the slope coefficient i.e. change in Y brought about by a change in X.
Specification of the econometric model of the theory
The mathematical model Y= B1 + B2 X assumes that the variables Y and X have an exact relationship that is to say all points in X and Y will lie on the line Y= B1 + B2 X. However, not all points obey such an exact relationship instead there exists an inexact or stochastic relationship among most economic variables. Hence the relevant model is Y= B1 + B2 X + e where ‘e’ represents the error term.
Obtaining data
Data is crucial for economic analysis. Thus, we need to collect data on both variables X and Y if we are to estimate the parameters of interest (B1 and B2). Types of data used in economic analysis are time series, cross section and panel data.
Estimation of the econometric model
Once the data is available, we can then proceed to estimate our parameters B1 and B2. For example, we can estimate the econometric model and get say B1 = -30 and B2 = 0.5 hence the econometric model becomes Y= -30 + 0.5X
Hypothesis testing
The Keynesian consumption theory reminds us that the Marginal Propensity to Consume (MPC) that is B2 obeys the rule 0
Forecasting prediction
If hypothesis testing confirms that our results indeed conform to what economic theory says, we comfortably use our model for forecasts or predictions. For example, given say X= 100, B1 = --30 and B2 = 0.5 we can predict Y as Y= -30 + 0.5 (100) = 20
Using the model for control or policy purposes.
Apart from forecasting and prediction, the econometric model can also be used to control or policy purposes especially in evaluating the impact of a particular fiscal or monetary policy by government.
Dullayo answered the question on April 22, 2018 at 09:22
- What are the problems facing the Kenya’s economy?(Solved)
What are the problems facing the Kenya’s economy?
Date posted: April 21, 2018. Answers (1)
- Discuss Kenya’s economic system(Solved)
Discuss Kenya’s economic system.
Date posted: April 21, 2018. Answers (1)
- Explain briefly the various stages of economic development according to W.W. Rostov(Solved)
Explain briefly the various stages of economic development according to W.W. Rostov.
Date posted: April 21, 2018. Answers (1)
- Discuss the problems associated with using per capita income to compare standard of living over time(Solved)
Discuss the problems associated with using per capita income to compare standard of living over time
Date posted: April 21, 2018. Answers (1)
- Describe the development of money from barter trade system to the digital trade system(Solved)
Describe the development of money from barter trade system to the digital trade system.
Date posted: April 21, 2018. Answers (1)
- In respect to demand for money, discuss the following motives of holding money: a. Transaction motive b.Asset motive c. Speculative motive d.Portfolio motive(Solved)
In respect to demand for money, discuss the following motives of holding money:
a. Transaction motive
b.Asset motive
c. Speculative motive
d.Portfolio motive
Date posted: April 21, 2018. Answers (1)
- State and explain ten reasons that causes most developing countries to find themselves excessively borrowing resulting to a public debt crisis?(Solved)
State and explain ten reasons that causes most developing countries to find themselves excessively borrowing resulting to a public debt crisis?
Date posted: April 17, 2018. Answers (1)
- Critically explain Malthusian theory of population(Solved)
Critically explain Malthusian theory of population.
Date posted: April 16, 2018. Answers (1)
- Define and state the significance of Pareto efficiency
(Solved)
Define and state the significance of Pareto efficiency
Date posted: April 7, 2018. Answers (1)
- Differentiate between positive and normative economics
(Solved)
Differentiate between positive and normative economics
Date posted: April 6, 2018. Answers (1)
- What is the difference between impact and incidence?(Solved)
What is the difference between impact and incidence?
Date posted: April 5, 2018. Answers (1)
- What are the reasons for studying economics of education?(Solved)
What are the reasons for studying economics of education?
Date posted: April 4, 2018. Answers (1)
- Investment planning proposal(Solved)
Investment Planning Proposal
Imagine you are meeting with friends to discuss the importance of investments as part of a retirement plan.
Read the following summaries of the financial situation and goals of two of your friends:
Kathy
Kathy is a 28-year-old, single mother of twin boys. She has been working as a public relations media specialist for three years, having worked at the same company where she started out answering the phones. She has her B.A. in Communications and a student loan of USD20,000 she has not yet begun to pay off. Her job pays USD70,000 a year. She receive no financial support from the father of her twins. Her costs include paying for childcare, credit cards, and a mortgage. She is able to set aside between USD200-325 a month in a savings account. Her financial goals are to pay off the remaining USD1,000 of her credit card debt, and to begin contributing to a retirement plan. Her employer offers a 401k with a 3% match, and she is not yet enrolled in that plan.
Jackson
Jackson is a recently graduated 44-year-old, single man. He earned his B.S. in Criminal Justice and just recently started a job at the local police department earning USD45,000 a year. Jackson pays child support for one child from a previous marriage. His student loans total USD30,000, and he has no other debt at this time. He expects to have $200 a month to contribute toward his goals of owning a home and having a more secure retirement.
Choose one friend and write an APA-formatted, 3- to 4-page proposal advising a friend about investing for the future. The text of your proposal should be a minimum of 700 words. You may add any graphics or illustrations that support your proposal.
Address the following in your proposal:
Why is investment planning important?
How would you suggest your friend start retirement planning? What steps should he/she take to start?
What investment strategy would you suggest? Why? (Note: Your strategy should explain how money could be invested in stocks, bonds, mutual funds or a mix of all.)
Of what risks and rewards of investing should your friend be aware?
How could your friend minimize the risks associated with investing risk?
Provide two to three resources you would offer to your friend to continue learning more about investments and retirement planning and discuss how these can help.
Your paper must cite two to three academic resources (only one source can be your class textbook).
Submit your proposal.
Date posted: April 4, 2018. Answers (1)
- a)In each of the following three situations, use the binomial, poisson, or normal distribution depending on which is the most appropriate.
In each case,...(Solved)
In each of the following three situations, use the binomial, poisson, or normal distribution depending on which is the most appropriate.
In each case, explain why you selected the distribution and draw attention to any feature which supports or casts doubt on the choice of distribution.
Situation 1:
The lifetimes of a certain type of electrical components are distributed with a mean of 800 hours and standard deviation of 160 hours.
Required:
Identify situation 1. (2 marks)
If the manufacturer replaces all components that fail before the guaranteed minimum life time of 600 hours, what percentage of the components have to be replaced?
(3 marks)
If the manufacturer wishes to replace only 1% of the components that have the shortest life, what value should be used as the guaranteed lifetime? (3 marks)
What is the probability that the mean lifetime of a sample of 25 of these electrical components exceeds 850 hours? (2 marks)
Date posted: April 2, 2018. Answers (1)
-
a)Explain briefly the application of calculus to economic models, especially in the context of maximizing contribution and minimizing costs.
b)Company A...(Solved)
a)Explain briefly the application of calculus to economic models, especially in the context of maximizing contribution and minimizing costs.
b)company A sells all its output to company B for Sh. 200 per unit. The cost of the sales per week in company A are given by the function C = 2q2 + 40q + 80 where q is the value of weekly sales. Company B uses the output of company A to manufacture a product whose demand is dependent on the sale price. The revenue per week of company B is given by the function:
R = 1000q – 16q2 and the cost per week of company B excluding cost of the products bought from company A are given by the function.
C = 2q2 + 80q + 400
Company A can restrict the weekly supply of its product to company B, but cannot raise the unit price above Sh. 200. The two companies are considering whether to merge together into a single company.
Required:
i)At what weekly sales would company A maximize its profits? What would be the profit or loss of company B if company A were able to supply a profit maximizing quantity of its product each week?
ii)At what level of weekly sales would company B maximize its profits?
iii)If the two companies merge into one, what would be the profit maximizing output per week and what would be the weekly profit?
Date posted: April 2, 2018. Answers (1)
- Describe the limitations of the CVP (Cost, Volume and Profit) Analysis(Solved)
Describe the limitations of the CVP (Cost, Volume and Profit) Analysis.
Date posted: April 1, 2018. Answers (1)
- Describe the competitive strategy by Michael Porter(Solved)
Describe the competitive strategy by Michael Porter.
Date posted: April 1, 2018. Answers (1)
- Describe the BCG matrix as used as a corporate business portfolio analysis tool(Solved)
Describe the BCG matrix as used as a corporate business portfolio analysis tool.
Date posted: April 1, 2018. Answers (1)
- Give the factors which determines the gains from international trade(Solved)
Give the factors which determines the gains from international trade.
Date posted: April 1, 2018. Answers (1)
- Describe the various gains from trade(Solved)
Describe the various gains from trade.
Date posted: April 1, 2018. Answers (1)