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The term econometrics can
be defined as the
application of economic theory, mathematics and statistical techniques for
the aim of testing hypothesis, estimating and forecasting economic phenomena.
In other words, "econometrics is to put flesh and blood on theoretical
structures" (Johnston, 1984), while it achieves to integrate
mathematical economics, economic statistics and statistical inference.
Concerning the mathematical economics, is the mathematical theories and ideas
in a mathematical form, which are qualitative rather than quantitative (ie.
it does not involve numbers). The economic statistics, is the collection and
processing of economic data as well as their expression in an understandable
form. Econometrics takes the equations of mathematical economics and by
confronting them with economic data seeks for techniques of statistical
inference in order to give these equations quantitative form.
The fact that the mathematical theories are
qualitative rather than quantitative, is more understandable by taking as an
example the monetary theory, which suggests that the aggregate demand for
money in an economy may depend on a "scale" variable such as
national income (or national wealth) and an interest rate variable that
represents the opportunity cost of holding money. Thus, we have the equation
M = f(Y,r), where M stands for the demand for money, Y is the scale variable
and r is the interest rate variable. The point is that theory leaves us with
many unanswered questions like the fact that we do not know how to define our
variables. Besides, theory in whole refers to the long run, which means that
it tells us about equilibrium positions. A money market seldom appears to be
in equilibrium, so the theory does not apply in most cases. Meanwhile, the economic
theory has little to say about how an economy or market moves from one
equilibrium to another as well.
Scope and usefulness
To a greater or a lesser extent econometrics seeks
to provide the
answers to the questions that the economic theory leaves unanswered.
Hence, we observe that econometrics provides the empirical testing of
economic
theory.
In a more explanatory way the stages that
econometrics follows are:
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Econometrics become identified with regression analysis, according to which a
dependent variable is related to one or more independent (ie. explanatory)
variables. But since the relationships amongst the economic variables are
inexact, a disturbance or error term must be included. Thus, econometrics can
deduct or predict a wide variety of relationships among variables in models
like a production function or a consumption function model etc.
Copyright © 2002
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Evgenia Vogiatzi
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