Econometrics is application of mathematical and statistical techniques to analyzing economic data and assessing economic inquiries. It is the use of quantitative measures in economic observation and theory and simply put, is economic measurement. Econometrics applies empirical measures to economies theories in order to test them and apply them to real life economies¹.
Econometrics is the combination of economic theory, mathematical and economic statistics and is therefore a separate area in economics. Some economic theories do not provide numerical measures between two variables and what econometrics does is provide numerical estimates to these theories. It is in many ways the empirical verification of economic theories². Econometrics deals primarily with observational data and opposed to experimental data. This implies that one must understand the nature and behaviour of the data collected, in order to properly assess the data.
Econometricians use mostly the traditional or classical methodology to analyze economic problems. The traditional econometric methodology has the following steps³:
1. Statement of theory or hypothesis
2. Speciﬁcation of the mathematical model of the theory
3. Speciﬁcation of the statistical, or econometric, model
4. Obtaining the data
5. Estimation of the parameters of the econometric model
6. Hypothesis testing
7. Forecasting or prediction
8. Using the model for control or policy purposes.
A basic tool that is often used in econometrics is the linear regression model. The linear regression of two variables represents the independent and dependent variables presented in theories or data retrieved from sampling. Regression analysis is an important method in econometrics because economists are unable to used controlled experiments. Statistical theory is often used in econometric theories in order to establish and verify econometric methods.
Recently, computer science is being implemented in econometrics because computational inconsistencies will highlight problems in econometric theories and decisions. Econometricians regularly use the program STATA to do most of their econometric analysis.
1. Geweke, John; Horowitz, Joel; Pesaran, Hashem (2008)."Econometrics". In Durlauf, Steven N.; Blume, Lawrence E. The New Palgrave Dictionary of Economics (Palgrave Macmillan).doi:10.1057/9780230226203.0425.
2. E. Malinvaud, Statistical Methods of Econometrics, Rand McNally, Chicago, 1966, p. 514.
3. Hendry, Dynamic Econometrics, Oxford University Press, New York, 1995.