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Gujarati: Basic
Econometrics, Fourth
Edition
Front Matter
Preface
© The McGraw−Hill
Companies, 2004
PREFACE
BACKGROUND AND PURPOSE
As in the previous three editions, the primary objective of the fourth edition
of
Basic Econometrics
is to provide an elementary but comprehensive intro-
duction to econometrics without resorting to matrix algebra, calculus, or
statistics beyond the elementary level.
In this edition I have attempted to incorporate some of the developments
in the theory and practice of econometrics that have taken place since the
publication of the third edition in 1995. With the availability of sophisti-
cated and user-friendly statistical packages, such as Eviews, Limdep,
Microfit, Minitab, PcGive, SAS, Shazam, and Stata, it is now possible to dis-
cuss several econometric techniques that could not be included in the pre-
vious editions of the book. I have taken full advantage of these statistical
packages in illustrating several examples and exercises in this edition.
I was pleasantly surprised to find that my book is used not only by eco-
nomics and business students but also by students and researchers in sev-
eral other disciplines, such as politics, international relations, agriculture,
and health sciences. Students in these disciplines will find the expanded dis-
cussion of several topics very useful.
THE FOURTH EDITION
The major changes in this edition are as follows:
1.
In the introductory chapter, after discussing the steps involved in tra-
ditional econometric methodology, I discuss the very important question of
how one chooses among competing econometric models.
2.
In Chapter 1, I discuss very briefly the measurement scale of eco-
nomic variables. It is important to know whether the variables are
ratio
xxv
Gujarati: Basic
Econometrics, Fourth
Edition
Front Matter
Preface
© The McGraw−Hill
Companies, 2004
xxvi
PREFACE
scale, interval scale, ordinal scale,
or
nominal scale,
for that will determine
the econometric technique that is appropriate in a given situation.
3.
The appendices to Chapter 3 now include the large-sample properties
of OLS estimators, particularly the property of consistency.
4.
The appendix to Chapter 5 now brings into one place the properties
and interrelationships among the four important probability distributions
that are heavily used in this book, namely, the
normal, t, chi square,
and
F.
5.
Chapter 6, on functional forms of regression models, now includes a
discussion of regression on standardized variables.
6.
To make the book more accessible to the nonspecialist, I have moved
the discussion of the matrix approach to linear regression from old Chapter 9
to Appendix C. Appendix C is slightly expanded to include some advanced
material for the benefit of the more mathematically inclined students. The
new Chapter 9 now discusses dummy variable regression models.
7.
Chapter 10, on multicollinearity, includes an extended discussion of
the famous Longley data, which shed considerable light on the nature and
scope of multicollinearity.
8.
Chapter 11, on heteroscedasticity, now includes in the appendix an
intuitive discussion of White’s robust standard errors.
9.
Chapter 12, on autocorrelation, now includes a discussion of the
Newey–West method of correcting the OLS standard errors to take into ac-
count likely autocorrelation in the error term. The corrected standard errors
are known as HAC standard errors. This chapter also discusses briefly the
topic of forecasting with autocorrelated error terms.
10.
Chapter 13, on econometric modeling, replaces old Chapters 13 and
14. This chapter has several new topics that the applied researcher will find
particularly useful. They include a compact discussion of model selection
criteria, such as the
Akaike information criterion,
the
Schwarz information
criterion, Mallows’s C
p
criterion,
and
forecast chi square.
The chapter also
discusses topics such as
outliers, leverage, influence, recursive least squares,
and
Chow’s prediction failure test.
This chapter concludes with some cau-
tionary advice to the practitioner about econometric theory and economet-
ric practice.
11.
Chapter 14, on nonlinear regression models, is new. Because of the
easy availability of statistical software, it is no longer difficult to estimate
regression models that are nonlinear in the parameters. Some econometric
models are intrinsically nonlinear in the parameters and need to be esti-
mated by iterative methods. This chapter discusses and illustrates some
comparatively simple methods of estimating nonlinear-in-parameter regres-
sion models.
12.
Chapter 15, on qualitative response regression models, which re-
places old Chapter 16, on dummy dependent variable regression models,
provides a fairly extensive discussion of regression models that involve a
dependent variable that is qualitative in nature. The main focus is on logit
Gujarati: Basic
Econometrics, Fourth
Edition
Front Matter
Preface
© The McGraw−Hill
Companies, 2004
PREFACE
xxvii
and probit models and their variations. The chapter also discusses the
Poisson regression model,
which is used for modeling count data, such as the
number of patents received by a firm in a year; the number of telephone
calls received in a span of, say, 5 minutes; etc. This chapter has a brief dis-
cussion of multinomial logit and probit models and duration models.
13.
Chapter 16, on panel data regression models, is new. A panel data
combines features of both time series and cross-section data. Because of in-
creasing availability of panel data in the social sciences, panel data regres-
sion models are being increasingly used by researchers in many fields. This
chapter provides a nontechnical discussion of the
fixed effects
and
random
effects
models that are commonly used in estimating regression models
based on panel data.
14.
Chapter 17, on dynamic econometric models, has now a rather ex-
tended discussion of the Granger causality test, which is routinely used (and
misused) in applied research. The Granger causality test is sensitive to the
number of lagged terms used in the model. It also assumes that the under-
lying time series is stationary.
15.
Except for new problems and minor extensions of the existing esti-
mation techniques, Chapters 18, 19, and 20 on simultaneous equation mod-
els are basically unchanged. This reflects the fact that interest in such mod-
els has dwindled over the years for a variety of reasons, including their poor
forecasting performance after the OPEC oil shocks of the 1970s.
16.
Chapter 21 is a substantial revision of old Chapter 21. Several concepts
of time series econometrics are developed and illustrated in this chapter. The
main thrust of the chapter is on the nature and importance of stationary
time series. The chapter discusses several methods of finding out if a given
time series is stationary. Stationarity of a time series is crucial for the appli-
cation of various econometric techniques discussed in this book.
17.
Chapter 22 is also a substantial revision of old Chapter 22. It discusses
the topic of economic forecasting based on the
Box–Jenkins (ARIMA)
and
vector autoregression
(VAR) methodologies. It also discusses the topic of
measuring volatility in financial time series by the techniques of
autoregres-
sive conditional heteroscedasticity
(ARCH) and
generalized autoregressive con-
ditional heteroscedasticity
(GARCH).
18.
Appendix A, on statistical concepts, has been slightly expanded. Ap-
pendix C discusses the linear regression model using matrix algebra. This is
for the benefit of the more advanced students.
As in the previous editions, all the econometric techniques discussed in
this book are illustrated by examples, several of which are based on con-
crete data from various disciplines. The end-of-chapter questions and prob-
lems have several new examples and data sets. For the advanced reader,
there are several technical appendices to the various chapters that give
proofs of the various theorems and or formulas developed in the text.
Gujarati: Basic
Econometrics, Fourth
Edition
Front Matter
Preface
© The McGraw−Hill
Companies, 2004
xxviii
PREFACE
ORGANIZATION AND OPTIONS
Changes in this edition have considerably expanded the scope of the text. I
hope this gives the instructor substantial flexibility in choosing topics that
are appropriate to the intended audience. Here are suggestions about how
this book may be used.
One-semester course for the nonspecialist:
Appendix A, Chapters 1
through 9, an overview of Chapters 10, 11, 12 (omitting all the proofs).
One-semester course for economics majors:
Appendix A, Chapters 1
through 13.
Two-semester course for economics majors:
Appendices A, B, C,
Chapters 1 to 22. Chapters 14 and 16 may be covered on an optional basis.
Some of the technical appendices may be omitted.
Graduate and postgraduate students and researchers:
This book is a
handy reference book on the major themes in econometrics.
SUPPLEMENTS
Data CD
Every text is packaged with a CD that contains the data from the text in
ASCII or text format and can be read by most software packages.
Student Solutions Manual
Free to instructors and salable to students is a Student Solutions Manual
(ISBN 0072427922) that contains detailed solutions to the 475 questions
and problems in the text.
EViews
With this fourth edition we are pleased to provide Eviews Student Ver-
sion 3.1 on a CD along with all of the data from the text. This software is
available from the publisher packaged with the text (ISBN: 0072565705).
Eviews Student Version is available separately from QMS. Go to
http://www.eviews.com for further information.
Web Site
A comprehensive web site provides additional material to support the study
of econometrics. Go to www.mhhe.com/econometrics/gujarati4.
ACKNOWLEDGMENTS
Since the publication of the first edition of this book in 1978, I have received
valuable advice, comments, criticism, and suggestions from a variety of
people. In particular, I would like to acknowledge the help I have received
Gujarati: Basic
Econometrics, Fourth
Edition
Front Matter
Preface
© The McGraw−Hill
Companies, 2004
PREFACE
xxix
from Michael McAleer of the University of Western Australia, Peter Kennedy
of Simon Frazer University in Canada, and Kenneth White, of the University
of British Columbia, George K. Zestos of Christopher Newport University,
Virginia, and Paul Offner, Georgetown University, Washington, D.C.
I am also grateful to several people who have influenced me by their
scholarship. I especially want to thank Arthur Goldberger of the University
of Wisconsin, William Greene of New York University, and the late G. S.
Maddala. For this fourth edition I am especially grateful to these reviewers
who provided their invaluable insight, criticism, and suggestions: Michael
A. Grove at the University of Oregon, Harumi Ito at Brown University, Han
Kim at South Dakota University, Phanindra V. Wunnava at Middlebury Col-
lege, and George K. Zestos of Christopher Newport University.
Several authors have influenced my writing. In particular, I am grateful to
these authors: Chandan Mukherjee, director of the Centre for Development
Studies, Trivandrum, India; Howard White and Marc Wuyts, both at the
Institute of Social Studies in the Netherlands; Badi H. Baltagi, Texas A&M
University; B. Bhaskara Rao, University of New South Wales, Australia;
R. Carter Hill, Louisiana University; William E. Griffiths, University of New
England; George G. Judge, University of California at Berkeley; Marno
Verbeek, Center for Economic Studies, KU Leuven; Jeffrey Wooldridge,
Michigan State University; Kerry Patterson, University of Reading, U.K.;
Francis X. Diebold, Wharton School, University of Pennsylvania; Wojciech W.
Charemza and Derek F. Deadman, both of the University of Leicester, U.K.;
Gary Koop, University of Glasgow.
I am very grateful to several of my colleagues at West Point for their sup-
port and encouragement over the years. In particular, I am grateful to
Brigadier General Daniel Kaufman, Colonel Howard Russ, Lieutenant
Colonel Mike Meese, Lieutenant Colonel Casey Wardynski, Major David
Trybulla, Major Kevin Foster, Dean Dudley, and Dennis Smallwood.
I would like to thank students and teachers all over the world who have
not only used my book but have communicated with me about various as-
pects of the book.
For their behind the scenes help at McGraw-Hill, I am grateful to Lucille
Sutton, Aric Bright, and Catherine R. Schultz.
George F. Watson, the copyeditor, has done a marvellous job in editing a
rather lengthy and demanding manuscript. For that, I am much obliged to
him.
Finally, but not least important, I would like to thank my wife, Pushpa,
and my daughters, Joan and Diane, for their constant support and encour-
agement in the preparation of this and the previous editions.
Damodar N. Gujarati
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