January 17, 2004
Economics vs. Statistics
We will study statistics to understand the practical, empirical side of economics.
Economics features lots of graphs with straight and curved lines. Reality features numbers that rarely line up.
We can explain data that does not line up by introducing shifts in the economics curves. Statistics explains the situation in terms of error terms that push the data points away from an underlying straight line.
The picture on the right is known as "linear regression." The equation can easily be expanded to include more than one right-hand side "explanatory variable," giving linear regression an advantage over two-dimensional diagrams.
We will be interested in testing the "null hypothesis" that the coefficient of a variable like "left-handed" is zero against the alternative hypothesis that it is not.
One of our Stata projects will examine over 100,000 observations from the Current Population Survey, which contains information on income, education, and other variables.