Saturday, February 19, 2011

BTR 3 - Basic Econometrics by D. N. Gujarati

The third book in the series is
Basic Econometrics by D. N. Gujarati
This book is also very easy to understand book. Before reading this book all you need to know is simple statistics. Any basic level of statistics would be good in order to comprehend this book. Some advanced statistical techniques that a reader may not have had in his basic course on statistics but are needed to comprehend the book thoroughly; has been provided in the Appendix of the book.
The book contains all the basic necessary econometrics concepts in order to prepare its readers for graduate level econometrics courses. As the name suggests it’s a basic econometrics book but it certainly does not leave out any important concepts. However more rigorous proofs may have been omitted sometimes.
The book begins with the introduction to econometrics and linear regression and proceeds to non-linear regression, time-series and econometric models. The book has several examples related to theories of economics. It also has a number of problems at the end of each chapter.
In all this is a nicely written book on basic econometrics and recommended for beginners.

Saturday, February 12, 2011

Decision of saying “I love you”: An economic interpretation

Valentine day special
Did you ever think that there can be an economic analysis of saying ‘I love you’ to a girl/guy? Well… here I’m trying to build up a model which determines the cases under which a girl/guy will say these magic words to a guy/girl.
Suppose that person ‘A' is going to say these magic words to person ‘B’ then ‘A’ can expect one of the two replies; either a ‘yes’ or a ‘no’.  Essentially the probabilities of any of these replies lie in the range of 0 to 1. The probability of ‘yes’ and ‘no’ depend upon the specific circumstances and are endogenous to the model following the fact that A can perform certain acts and put efforts in order to increase the probability of ‘yes’ and reduce the probability of ‘no’. Putting any effort on the part of ‘A’ is a cost to ‘A’. To simplify the calculation assume this cost to be zero. The probabilities of ‘yes’ and ‘no’ are known to ‘A’ and are ‘p’ and ‘1-p’ respectively.
Now assume that the payoff that A receives from a ‘yes’ is ‘H’ and the payoff from a ‘no’ is ‘-T-N’. The negative payoff from a ‘no’ can be separated into two different components. The payoff from not having B as his/her partner is (-T) and (-N) is negative payoff from a ‘no’ because, say his ego gets hurt.
Indeed we can expect H to be non-negative and T and N to be non-positive. A non-negative H implies that A is happy and gets some positive utility if he gets a ‘yes’ and certainly doesn’t get negative utility. Similarly, a non-positive T and N imply that ‘A’ gets negative utility if ‘no’ and in certain cases where ‘A’ is not at all affected by a ‘no’; T and N both are equal to zero.
‘A’ will then decide to say these magic words to ‘B’ if and only the expected payoff from saying these magic words is greater than or equal to from that of not saying these words. So we compute the expected payoff from saying these magic words
E (say) = pH + (1-p) (-T-N)
On the other hand, the expected payoff from not telling these words to B will be
E (don’t say) = (-T)
The right hand side of the above expression is simple to derive. If ‘A’ is not going to say these words to B; with probability 1 he gets no response and receives a payoff of (-T). Therefore, A will say these magic words to B if and only if
pH + (1-p) (-T-N) ≥ (-T)
or,                          pH –T –N + pT + pN ≥ (-T)
or,                          p (H+T+N) ≥ N
or,                          P ≥ {(N)}/(H+T+N)
Thus A will decide to say these magic words to B if the probability of a ‘yes’ is greater than or equal to the expression in the right hand side above. The equation suggests that value of ‘N’ is crucial.
Some interesting cases:
Case 1. When (-N) = 0;
Did you ever wonder there are guys who will say these words to each and every girl just at every possible opportunity? These are the guys who don’t worry at all about the negative response from the girl. In other words, for them (-N) as well as (-T) both are zero but since H is still positive, for them expected payoff from saying these words is always more than the expected payoff from otherwise.
Notice that even those who get negative payoff from not having the person as partner will say these words to their desired ones as long as a ‘no’ does not add to their negative payoff from not having the person as their partner, in equation form it’s just because the numerator (-N) is zero. So even if probability of a ‘yes’ is slightly positive or even zero that is, p=0; they will take the chance.
Case 2. There are people who can’t digest a ‘no’. For them to say these magic words, ‘p’ has to be very close to 1. In equation terms
                                N = H+T+N
Equivalently H is equal to (-T). Recall T has a negative sign.
Important points
Here we allow ‘p’ to be negative as well which is practically not possible however a negative ‘p’ should imply that A is going to say these magic words to B with certainty.
A.      The ‘p’ can only be negative when H is greater than the sum of T and N. Since the numerator is always negative. This implies that positive payoff from a ‘yes’ is very large and hence A must convey these words to B. This is a result which one would arrive at intuitively.
B.      The second case pertains to the situation when absolute value of T is very large. What does intuition say in this particular case? Of course A should go ahead and tell this to B since the negative payoff from a ‘no’ is very large. The equation tells the same thing, if T is large enough compared to H in absolute sense, a smaller ‘p’ is needed to say these magic words.
In fact the difficulty in saying these magic words arises only when absolute value of N is very large compared to absolute values of H and T. This is also intuitive since those who are too egoistic or give much more value to social sanctions will go ahead only when they are almost sure about a ‘yes’. In this case ‘p’ will be near equal to 1 since we also expect H and T to be correlated. The more pleasure you get from getting the company of person, you also miss him/her badly.
So if you are mulling over whether or not you should tell these magic words to the person you love, calculate the probability with which you should tell her and compare it with the probability that you think he/she is going to give a positive response.
I would like to have your comments on this post.If you find some computational error please let me know. Thanks.

Wednesday, February 9, 2011

BTR 2 - Macroeconomics by Dornbusch, Fischer and Startz

The second book in the series is, 

Macroeconomics by Rudiger Dornbusch, Stanley Fischer and Richard Startz

This is a very well written and nice book on introductory microeconomics. There are though some books which are easier to read compared to this one, most famous among them are probably
Principles of Macroeconomics by N. Gregory Mankiw; and
Macroeconomic Analysis by Edward Shapiro

However, I found Macroeconomics by Dornbusch, Fischer and Startz the best introductory book which is easy to read as well as covers almost all the materials required for undergraduates and provides good foundation for graduate courses.

The book contains national income accounting, introduction to growth, aggregate demand and supply models and IS-LM models, introduction to business cycles and much more. The problems at the end of the chapter should be attempted and solved in order to have good understanding. Again the diagrams play very important role in understanding the topics presented in the topic. The knowledge of algebraic illustrations would be very helpful to solving the problems. Mathematics required to read the book is very elementary.

This book can be accompanied with 

Schaum’s Outlines of Macroeconomics; which has lots of solved and unsolved problems. This outline contains a brief and very lucid introduction about each topic and then proceeds with solved problems. The problems are solved using both diagrammatic and mathematical techniques. 

Those who didn’t have economics at undergraduate level should read both of them together. This will enable them comprehend the topics presented in the book themselves with little help required from outside.
Once you have read these two books completely and you are able to solve the problems at the end of the chapter; you are ready for graduate level courses in Macroeconomics.

Tuesday, February 8, 2011

BTR 1 - Intermediate Microeconomics by Hal R. Varian

This is the time when everyone has already submitted the application or is almost done. Some of the applicants are waiting for the results from now only but since universities gets hundreds of applications every year, applicants would have to wait another a month to know their admission status. In the meantime probably the best use of time (assuming one is not busy in other things) will be to refresh your economics and mathematics. Those who have their undergraduate or graduate degree in economics already they must have read the books those are prerequisites to economics graduate courses. However some of the applicants will be coming to economics from other backgrounds and they might not be aware which books to read. This series Books to Read (BTR) will introduce some wonderful economics and related textbooks which make you ready for the graduate courses.

The first book that I am going to discuss is
Intermediate Microeconomics by Hal R. Varian

This textbook is probably the most widely used textbook for microeconomics today. This is a nicely written book which is very comprehensive and lucid to read. As name suggests it’s an intermediate level book and you don’t need any background in economics to read this. However you must be familiar with some high school mathematical techniques in order to better understand the book and be ready for graduate school. The diagrams are the assets of the books. In fact, for an economics student understanding the context in diagrammatical representation can be very helpful and intuitive.

One is supposed to read the entire book before the graduate courses begin. The book contains consumer theory, production theory, and behavior of firms, markets (perfect competition, monopoly, monopolistic competition, oligopoly, monopsony and so on) and welfare, externalities etc. In short it has everything that you need in order to prepare yourself for graduate school.

The exercises at the end of each chapter must be solved. A student wishing for an advanced degree in economics must not refrain from the appendices and make sure that he completely understands the mathematical derivations too. There is a work out book by Varian based on this textbook. Solving the workbook will make sure that you have understood the topic completely and you know how to use the applications in solving the problems. You also do lot of practice which is helpful.

Therefore it it’s a one book in microeconomics that I would recommend somebody to read at undergraduate level it will be Intermediate Microeconomics by Hal R. Varian.