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What is Econometrics?

Econometrics is part of economics as a science. It deals with the statistical (empirical) modelling of economic theories (hypotheses) in order to explain, confirm or disprove economic theory empirically. In economic theory, causalities between two (or more) relevant measures are assumed, e.g. the relationship between income (Y) and consumption (C) of a household. Two causalities can be suspected: (1) The consumption of a household depends on its income: C(Y) or (2) the income of a household depends on its consumption: Y(C). Both statements (theory/hypotheses) are not opposed to each other (no contradiction), but are inversely related to each other (inverse causality). Using a sample or total population of households a statistical unit of interest and econometric methods it is possible to test both hypotheses for their internal validity and external validity.

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Scope of Econometrics

Econometrics quantifies the theoretical hypotheses (economic theory) by testing corresponding empirical statements (empirical model). If we hypothesize that the consumption of individual households has a positive relationship with household income, the resulting empirical model should confirm or disprove the positive relationship between consumption and household income in the sample and in the household population.

Exam preparation for Econometrics

We offer exam preparation for econometrics as well as for other fields of economics, e.g. macroeconomics, microeconomics, business mathematics, statistics etc. Our goal is to have a positive and enriching effect on your learning process through professional support. Thus we would like to help you to understand both simple and complex economic methods in the respective subject. Book your personal appointment for exam preparation for Econometrics today. We will accompany your learning process carefully and help you to understand both simple and complex econometric methods.

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How to explain the Omitted Variable Bias

In regression analysis, the omitted-variable-bias is the error that is incurred on partial-effects-coefficients of other explanatory variables in a restricted regression model. Assume a simple regression model, where Variable $y_i$ is explained by the Variable $x_{1i}$ and the error term $e_i$ for $i=[1,2,3, … , n]$ observations:

y_i=\beta_0+\beta_1\cdot x_{1i}+ e_i \,, \forall i=[ 1, 2, 3, …,n]

Then consider the hypothesis, that a Variable $x_{2i}$ explains the dependent variable $y_i$ and can be depicted by the following extended regression model:

y_i=\tilde\beta_0 + \tilde\beta_1 \cdot x_{1i} + \tilde\beta_2 \cdot x_{2i} + v_i

Setting both equations equal and solving for the error term of the simple:

e_i=(\tilde\beta_0-\beta_0)+(\tilde\beta_1-\beta_1)\cdot x_{1i} +\tilde\beta_2 \cdot x_{2i} + v_i

The error term $e_i$ in the simple regression model includes the deviation of $\tilde\beta_0$ and $\tilde\beta_2$ of the extended regression model from the former coefficients. The partial effects of the omitted variables $\tilde\beta_2$ and the error term of the extended regression model $v_i$ are also included in the error term of the simple regression model. Two factors play a role in the quantification of the omitted-variable-bias:

  1. Partial effects of the omitted-variable on the explained variable.
  2. Correlation and Covariance of the omitted variable with the rest of the explanatory variables

Partial effects of Omitted Variable and Correlation with Other Explanatory Variables

Two outcomes are possible: either there is no bias or there is a positive bias or negative bias on the partial effects of other explanatory variables in the restricted model.

A. No Bias Scenario

If the omitted-variable has zero partial effects in the unrestricted model or zero correlation/covariance (independence between explanatory variables) there is no bias incurred on other partial effects in the restricted model.

B. Negative Bias Scenario

Negative (positive) partial effects of omitted-variable and positive (negative) correlation with other explanatory variables simultaneously leads to a negative bias on the partial effects of other partial effects of explanatory variables in the restricted model. In this case the signs are in opposite terms (+ and – ).

C. Positive Bias Scenario

Positive partial effects of omitted-variable and positive correlation with other explanatory variables simultaneously lead to a negative bias on the partial effects of other partial effects of explanatory variables in the restricted model. Similarly, if we simultaneously have negative signs. In this case we have two possible constellations ( + and +) or (- and – ).

More Economic Topics

    Why Diversity Programs Fail.

    Diversity is a societal fact that should be an integral part of our social life in our communities, organizations, public spaces, societal representation, and involvement, among many other social settings.

    Diversity in organizations can fail. Economies and Organizations need a clear strategic plan from their Leaders for implementation of diversity in their society and organizational environment using the following tools:

    • Engagement of organizational and societal members responsible of implementing diversity in the Organization and Economy.
    • Encouraging contact between organizational groups and teams as well as communities and social groups in economies.
    • Designing incentives for social accountability for the implemented diversity within the organization and the economy

    Read why diversity programs fail

    The following article was published on the July–August 2016 issue (pp.52–60) of Harvard Business Review.

    Munich University of Applied Sciences & Diversity

    “… but there is more behind it: Diversity means consciously dealing with diversity in society. It is an organizational and socio-political concept that propagates an appreciative, conscious, and respectful approach to diversity and individuality. Diversity is not oriented towards deficits or attempts to find solutions to supposed problems. Rather, diversity is about recognizing people’s diverse achievements and experiences and understanding and using them as potential. … The reduction of discrimination and the promotion of equal opportunities are the central goals. The core dimensions of diversity, which represent the diversity of people, are usually considered to be the following: Age, gender, ethnicity, social origin, sexual orientation, and physical and mental condition. … At universities, diversity means that a variety of university members interact with each other, exchange ideas, influence each other, learn from each other, and with each other and develop further.

    According to the Munich University of Applied Sciences. Visit their blog on diversity.

    Munich University of Applied Sciences is one of the largest universities of applied sciences in Germany. With its wide range of courses, a strong focus on applied research, and practical orientation with partners from business, society, and politics, it offers students excellent opportunities on the job market and in science. The courses offered by the Munich University of Applied Sciences cover the fields of technology, economics, social affairs, and design. The courses are aimed at different target groups: Full-time and part-time students, professionals, and those interested in further education as well as dual students in bachelor, master, and certification programs. In addition to academic qualifications for experts and managers, the program also offers scientific specializations that prepare students for a Doctorate. Cooperation with companies and institutions is an integral part of the program and ensures practical relevance. In addition to professional training, students can develop their individual profiles. They prepare students for the working world shaped by digitization by offers for entrepreneurial, sustainable, and intercultural thinking and acting.

    Promoting Diversity at Albert-Ludwigs University of Freiburg

    The Student Union (StuRa) – at the Albert-Ludwig University of Freiburg has been funding the Autonomous Unit for Gender and Diversity at the University of Freiburg since 2015 (Project 1 of 2017: Diversity Sensitization at the University of Freiburg, granted 41,543.50 € and Project 2 of 2019: Diversity in teaching – Fit for the challenges of a diverse university, granted 65,681.25 €) with the aim of improving the implementation of diversity in the university´s culture.

    “As part of the project competition “Innovative Studies 2015“, the autonomous departments of the student representatives have successfully applied for the project “Diversity Sensitisation at the University of Freiburg” (Innovation Fund). The project started on 15 October 2015 and will run until 15 April 2017. Project coordination is carried out by the Gender and Diversity Unit. … one of the university’s goals is to offer all students the best possible study conditions in a non-discriminatory, open, and respectful environment. An essential contribution to this is made by teaching that is designed to be diversity-sensitive and geared to the needs of all students. In the course of the proposed project Diversity in Teaching – Fit for the Challenges of a Diverse University, (subject-)specific workshops for teachers in all 11 faculties and other teaching institutions of the university are to be designed and carried out. The aim is to sensitize teachers to gender and diversity issues and to show them ways in which they can do justice to the diverse learning strategies, experiences, and needs of the study participants.”

    The Autonomous Unit for Gender and Diversity at Albert-Ludwig-University of Freiburg im Breisgau

    Diversity Management at the Karlsruhe Institute of Technology

    The Karlsruhe Institute of Technology (KIT) has set a stakeholder dependent diversity management platform based on six self-defined dimensions of diversity; (1) Equal opportunities (2) Reconciling work and family life (3) inclusion (4) intercultural-ism (5) professional culture and (6) generation management.

    “… The KIT and all its institutions in research, teaching, and science support areas are committed to a culture of diversity and mutual respect, recognition and appreciation, openness and transparency and see the successful and sustainable fulfillment of structural diversity as an intrinsic goal of their activities. … The concept of diversity is already structurally anchored in the strategy of KIT in various places. This is clearly visible above all in the umbrella strategy “KIT 2025”, in the anchoring in the mission statement, the auditing as a family-friendly university, and the admission to the Best Practice Club “Family in the University”. … KIT’s Diversity Management supports employees and students in an increasingly complex working, research and study environment to deal constructively with the great variety of different life plans and social as well as cultural backgrounds and to integrate them profitably into everyday working life. In order to fulfill an exemplary function as a public institution in society, KIT has set itself the goal of creating a barrier-free and non-discriminatory working, teaching, and learning environment in which cooperation is possible. … Diversity Management serves as a central platform for those institutions at KIT that deal with the diversity of employees and students, promotes the comprehensive exchange, and initiates joint projects. … The individual diversity of KIT’s employees and students is particularly emphasized in the sense of a positive appreciation and thus a productive overall atmosphere. The focus is not on the minority itself, but on all employees and students in their differences and similarities. At KIT, a number of institutions dealing with the diversity of employees and students. Diversity Management offers these institutions a platform for mutual exchange, for interdisciplinary discussion and for joint action.

    Diversity Management at Karlsruhe Institute of Technology (KIT)

    Similar Topics about Economics and Management

    Our Credentials for Economic Consultancy

    Economic consultancy deals with both local and global issues that affect the decision-making of organization, individuals, interest groups, society, governments and other societal settings. The Aim of economic consultancy is to offer methodology of understanding, structuring and resolving those issues that affect the society from different angles. If you are a local company being affected by global issues e.g. international trade policy in your businesses export destinations, you would like to know which strategies to apply in order to improve the sustainability of your local business.

    Economic Expert from the Freiburg School of Economics

    Our economic expertise originates from the Albert-Ludwig-University of Freiburg im Breisgau in Germany. At the Faculty of Economics and Behavioral Sciences we graduated with Master (M. Sc.) and Bachelor (B. Sc.) of Science in Economics in 2015 and 2012 respectively.

    “Risk Sharing and Mobile money: Economic Impact of Mobile Money Technology in Africa.”

    James E. Njoroge (M. Sc. Economics) (2015) Master Thesis at the Institute for Economic Research, Department for International Policy (Supervisor: Prof. Dr. Günther G. Schulze)

    Announcements (1) Basics of Economics (7) Behavioral Economics (5) Business Administration (2) Coaching (1) Cooling Systems (1) COVID19 Coronavirus (5) Diversity (1) Econometrics (3) Economic Blog (17) Economic Consultancy (4) Economic Policy (1) Economic Research (1) Economics (3) Economics of Pandemics (5) English (11) Events (1) Financial Accounting (1) Financial Markets (3) Freiburg im Breisgau (3) Global Crises (4) Globalization (8) Health Economics (5) Health risks (1) International Economics (5) Leadership and Management (2) Macroeconomics (7) Markets (5) Microeconomics (5) Personal Finance (1) Public Policy (1) Scientific Writing (2) Social Distancing (1) Technology (1)

    Importance of Economics as Science

    Economics is the interdisciplinary science of decision-making that aims to explain:

    • The decisions made by economic subjects,
    • Content (what) , process (how), context (where) of decisions made,
    • Interconnections to other fields of study

    … etc.

    So why is economics such an important science? Human beings (or any organism) are confronted with the need to make decisions and have choices about certain alternatives in their existence or life. Think about the needs you had today and the choices you had to make today. How satisfied were you with your decisions and outcomes? Economics formally describes such social events and settings within normative and positive theoretical models and verifies their real life applicability through empirical analysis.

    My inspiration for Economics

    Economics is my third field of inspiration after (Aeronautical) Engineering and Architecture, followed by Psychology and Sociology. I enjoy viewing issues from an interdisciplinary perspective and this is what makes Economics interesting. When you start learning economics, you may ask yourself; why some analysis seems to be common sense, but still has to be formalized in an economic model. Economics coexists with other Scientific fields. My encounter with economics started back in my home country, Kenya -where I did my primary and secondary education- before continuing with my Bachelor and Masters degree (full time studies abroad) in Germany. In a practical way, my Mother taught me household economics by endorsing me to manage finances at home at the age of about 10. This means that I learned about budget allocation and expenditure optimization at an early age. It’s a skill that young people should be taught at an early age. I thank my Grandmother for her unforgettable support, patience, faith and guidance throughout my studies in Germany. Without her endurance and sacrifice, I would not have had the opportunity to embark on this journey. We function as a team. My topic for the master thesis “mobile money and risk sharing: social-economic impact of mobile money adoption in Africa” was inspired by her. I wanted to find the roots of generosity, selflessness, charity (issues that shape the coexistence of people of different social environments).

    More inspiration

    The Economic Concept of Opportunity Costs

    The economic concept of opportunity costs is the most fundamental issue of economics as a social science. It explains the decision-making and behavior of economic subjects. Economic subjects are private households, firms, and the government as a public household. While explaining the economic concept of opportunity costs, focus on the question: why do people choose to do, consume, or even spend time and resources on what they do? How do you make your choices and decisions?

    Definition of Opportunity Costs

    Opportunity costs are defined as costs incurred by a forgone alternative (opportunity). A foregone opportunity can either be the opportunity to incur costs, the opportunity to gain revenues, earn profits or cause losses. Economic subjects constantly get involved in decision-making processes, where choices have to be made. Take the following examples:

    • Example 1: non-monetary opportunity costs – the reason why a student would attend high school (an institution of education) is determined by the opportunity cost incurred if the student would not attend the school e.g. the impression of the parents about their daughter or son. Such opportunity cost are not measurable in monetary units.
    • Examples 2: mental accounting – whenever you act or choose not to act in certain manner, you are weighing alternative options and therefore intrinsically accounting for cost that would be incurred by alternative mode of behavior.
    • Example 3: relative costs – a job-seeker may prefer a job that pays less, but offers a better work-life balance, at the cost of a better paying job under worse work-life balance.
    • Example 4: Specialization and relative cost/benefit advantage – the opportunity cost of Germany producing autos are the cost incurred for not producing other goods that Germany prefers to import from other countries, e.g. Coffee from Kenya.
    What are opportunity costs?
    What are opportunity costs? (C) Evansonslabs

    Literature

    The following Literature will help you to expand the spectrum of knowledge in this Field:

    • Varian, H. R. (2020). Intermediate Microeconomics: A modern approach ; media update (Ninth Edition, International Student Edition). New York, London: WW Norton et Co.

    Read more about Economics

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    What is Economics?

    What is Economics, and how can students define economics as a science? Therefore, our motivation in this article is to find a general definition of economics. In much of economic literature, there is also consensus and conflict on some description of economics as a science. So how do we start? To neatly define economics in lectures, we need a broad view of the term economics.

    Consequently, Economics can be defined as an interdisciplinarysocial, and behavioral science. Therefore, economic research focuses on explaining the behavior of decision-makers. Economics also explains the implications of the behavior of the decision-makers that affect society at the microeconomicmacroeconomic, and political levels. Such an analysis of different decision-makers consequently needs an interdisciplinary approach. Decision-makers in economics are in particular private households, firms, and governments. 

    Microeconomic level

    At the microeconomic level, economics explains the human nature of making both individual rational and irrational decisions, social interactions, and behavior under risk. Individuals, organizations, and governments make allocation and distribution decisions daily, which economic subjects would like to evaluate. Economics derives the rules of determining; how efficient or optimal the decisions of economic subjects are. It, therefore, determines the necessary rules and coordination mechanisms usable in decision-making processes. Some of the coordination mechanisms include market, government, private, entrepreneurial coordination in an economy. An economy is the environmental unit of economic analysis. 

    Macroeconomic level

    Economics is also an environmental dimension of macro-environment analysis in the PESTEL-Framework in strategy management. Other PESTEL dimensions include the political, social, ecological, technological, and legal environment. At the macroeconomic level, economics discusses the aggregated effect at the level of the whole economy using the six macroeconomic objectives (magic hexagon).

    Policy Level

    At the political level, economics deals with the implication of economic decisions of different interest groups in an economy and derives policy recommendations to help maximize social welfare. Consumers, entrepreneurial, government interests are not always similar. Employees’ and employers’ political interests also differ. Therefore, economic policies are essential and help in balancing the different interests as well as maximizing the welfare of society.

    Economics deals with Rational and Irrational Behavior

    Evident in all economic literature is the issue of rational and irrational behavior as the central point of discussion. In economic theory, the economist tries to explain how people should make decisions depending on their goals and restrictions they face. Rational decisions are those decisions that respect the restrictions and goals of an individual, while irrational behavior could e.g. incur either a higher cost (not respecting restrictions) or lower utility (not respecting the goals) as compared to the rational decision. Rational decision is influence by the cost of opportunities.

    Economics is about the Maximum and the Minimum Principle

    Economists derive two principles of decision-making that drive the process of making decisions within economic subjects. The maximum principle and the minimum principle.

    The Maximum Principle

    The maximum principle suggests the following: Attain the maximum output with a predefined amount of inputs.

    What is economics?
    Photo by Artem Beliaikin on Pexels.com

    The Minimum Principle

    The minimum principle suggests the following: Utilize the minimum input to attain a predefined amount of output.

    Photo by Pixabay on Pexels.com

    How to research about Economics

    Find a detailed definition of Economics in the International Encyclopedia of the Social & Behavioral Science (2001, Pages 4158-4159) via Science Direct.

    Understanding the definition of Economics

    In order to understand Economics, it is essential to differentiate between decision-making from three different perspectives: private consumption and income decisions, public consumption and revenue generation, entrepreneurial production and supply of goods and services in an economy. As discussed above, economics is the science of rational decision-making. Firstly, economists try to explain how economic subjects make rational decisions, the limitations of rational decision-making, human interactions and their outcomes. Secondly, economists try to capture the limits of rational behavior and explain how decision-making takes place under imperfect environment conditions; e. g. information asymmetries, uncertainty, imbalance in power between decision-makers … etc.

    Economic subjects

    The concept of economic subjects is the notion of viewing people in an economy as (1) private households, (2) as firms (or organizations) and as (3) the government (also a form of organization). In general, this means that there are three economic subjects;

    • Private Households
    • Firms (private and public organizations)
    • Government (Public household and organization)

    What is an Economy?

    An economy is the analytical unit of interest for all economic analysis and includes the people, biosphere and all resources available e.g. a political unit (e.g. Germany, China, France, Ghana) or a unit specified by certain characteristics such as a continent, a supranational unit, an international coalition of nations, etc.

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