Econometrics

Macroeconomics is a branch of economic science that studies the behavior of an economy as a whole. Thus, macroeconomists seek to understand economic phenomena by formulating aggregated models (simplified representations of reality). They are aggregated because they assume that the whole is more complex than the sum of its parts, and it is not possible to describe an economy through models for all the companies and individuals within it. Therefore, their concern will always be to analyze aggregated indicators, such as: GDP, unemployment rate, price indexes, among others.

Initial Concepts

• Ceteris paribus -> "all else is constant", that is, nothing changes except the factor or factors being studied
• Endogenous variable -> also called dependent, is the variable whose values ​​are determined in the model
• Exogenous variable -> also called independent, is the variable whose values ​​are determined outside the model
• Flexible prices -> Assumption that prices adjust to equalize supply and demand (long term)
• Sticky prices -> Assumption that in the short term, many prices are sticky, that is, they adjust slowly in response to changes in supply or demand
• Flow -> Economic magnitude of a time interval. EX: GDP (monthly rate)
• Stock -> Magnitude measured at a specific point in time. EX: country's external debt
• Exogenous Variable -> The value is determined outside the model, that is, it is not influenced by the variables of the model itself (independent). Example: In a supply and demand model, the price of an imported input is an exogenous variable because it is determined by external, not internal, factors.
• Endogenous Variable -> The value is determined within the model itself, that is, it is influenced by other variables in the system. Example: In a supply and demand model, the equilibrium price is an endogenous variable because it is determined by the interactions of the model.

Economists, through econometrics (economic theory + statistical mathematics) develop econometric models to study economic phenomena, seeking to quantify, test hypotheses and predict economic behaviors. The economic data used for these models come in a variety of types, and can be:

• Cross-Sections -> Consists of a sample of individuals, companies, countries, among others, taken at a given point in time. Therefore, they are not obtained by a random sample, the data from the units does not need to correspond to the same period and the ordering of the data does not matter for the econometric analysis.

• Time Series -> Observations on a variable or many variables over time (e.g.: stock prices). This structure allows us to determine that past events can influence future events and the chronological ordering of the observations conveys relevant information from one period to another.

• Panel Data -> Consists of a time series for each record of a cross-section, that is, a sample for each set of individuals over a period of time, (Ex: salary history). Therefore, by construction, the units (individuals) of a cross-section are the same for the given period.

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