WHAT IS ECONOMETRICS?

Is concerned with the testing the theoretical propositions embodied in relations and with estimating the parameters involved. Econometrics is the science that combines economic theory with economic statistics and tries by mathematical and statistical methods to investigate the empirical support of the general law established by economic theory.

It is a composition of economics, mathematics and statistics. Where economics is for developing a hypothesis, mathematics is for model building in a mathematical form and statistics deals with using statistical techniques to analyse the economic model, to estimate the unknown parameters of the model and using the estimates for statistical inference.

Econometrics may be defined as the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference.

 

1.1 OBJECTIVES/ GOALS OF ECONOMETRICS

a)     To judge the validity of economic theory.

b)    To supply the numerical estimates of the coefficients of the economic relationships that may be used for sound economic policies.

c)     To forecast the future values of the economic magnitude with a certain degree of probability.

 

 

1.4 CATEGORIES OF ECONOMETRICS

It is distinguished into two categories;

       i.            Theoretical econometrics: deals with the development of the appropriate methods for measuring economic relationships described by econometric models. These methods may be classified into two groups;

Ø Single equation techniques (simple regression analysis) which are applied to one relation at a time.

Ø Simultaneous equation techniques (multiple regression) which are applied to all relationships of the model simultaneously.

 

Theoretical econometrics is concerned with spelling out the assumptions of the above methods, their properties and what happens when one or more of the assumptions of the methods are not fulfilled.

     ii.            Applied econometrics: describes the practical value of econometric research. It deals with the application of econometric techniques developed in theoretical econometrics to different fields of economic theory for its verification and forecasting. Applied econometrics makes it possible to obtain numerical results from studies that are of great importance to planners.

 

 

I.3 METHODOLOGY OF ECONOMETRICS

The traditional or classical methodology, which still dominates empirical research in economics and other social and behavioral sciences involves the  following steps:

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.