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ECO220Y1 SW11

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Jennifer Murdock

ECO220Y1 Textbook Notes SW11  Econometrics: the science and art of using economic theory and statistical techniques to analyze economic data. 1.1 Economic Questions We Examine  Question #1 “Does reducing class size improve elementary school education?” o Reducing class sizes involves the need to hire more teachers and to possibly build more classrooms. o Decision maker contemplating hiring more teachers must weigh the costs against the benefits.  They must have a precise quantitative understanding of the likely benefits.  Will smaller classes actually result in better performance or will it have no effect? o Data gathered from 420 California school districts in 1999 showed that students in smaller classes performed better than those in bigger classes.  But was it because the classroom was smaller or because of some other variable?  I.e. smaller classes in a region will typically imply the area is wealthy meaning students have more opportunities to learn outside of school  Multiple regression analysis must be used to isolate the effects of changes in class size from changes in other factors.  Question #2 “Is there racial discrimination in the market for home loans?” o By law, U.S. lending institutions cannot take race into account when deciding to grant or deny a request for a mortgage (identical applicants with different races should be equally treated). o Researchers at the Federal Reserve Bank of Boston found (using data from the early ‘90s) that 28% of black applicants are denied mortgages, while only 9% of white applicants are denied.  These data must be examined more closely to see if there is a difference in the probability of being denied for otherwise identical applicants and, if so, whether the difference is large/small.  To quantify the effect of race on the chance of obtaining a mortgage, other applicant characteristics besides race must be held constant.  Question #3 “How much do cigarette taxes reduce smoking?” o The percentage change in the quantity demanded resulting from a percentage increase in price is the price elasticity of demand. o In order to come up with a numerical value of the price elasticity of demand, data on cigarette consumption and prices needs to be analyzed. o Data regarding cigarette sales, prices, taxes, and personal income for U.S. states in the ‘80s and ‘90s show that states with low taxes (thus low prices) have high smoking rates and vice-versa.  Analysis of these data is complicated because causality runs both ways:  Low taxes -> high demand  High demand -> local politicians keeping taxes low to satisfy their smoking constituents  Question #4 “What will the rate of inflation be next year?” o Professional economists who rely on precise numerical forecasts use econometric models to make those forecasts. o A forecaster’s job is to predict the future using the past, and econometricians do this by using economic theory and statistical techniques to qua
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