Econometrics

What is Econometrics?

Econometrics refers to the quantitative application of mathematical and statistical models utilizing data for developing theories or hypothesis related to test existing in Economics. It also helps in forecasting future trends with the help of historical data. It is known to subject real-world data for statistical trials. Then, it goes forward with comparing and contrasting the results against the respective theories that are being tested.

Based on whether you might be interested in testing some existing theory or in utilizing the existing data for developing some new hypothesis on the Basis of the given observations, econometrics is subdivided into two main categories –applied and theoretical.

Those who tend to regularly engage themselves in proper practice are referred to as econometricians.

Getting an Insight into Econometrics

Econometrics helps in analyzing data with the help of statistical methods for testing or developing the given economic theory. The given methods are known to rely on specific statistical references for quantifying and analyzing economic theories by making use of advanced tools like statistical inference, frequency distributions, probability, correlation analysis, probability distributions, time series methods, simultaneous equation models, and simple & regression models.

The concept of Econometrics was developed by Lawrence Klein, Simon Kuznets, and Ragnar Frisch. All the three of them went ahead with winning the Nobel Prize in the field of economics in the year 1971. They won the prestigious rank for their valuable contributions. In the modern era, it is being regularly utilized by practitioners as well as academicians like analysts and traders from the Wall Street.

An instance of the application of Econometrics is for studying the overall Income effect with the help of observed data. An Economist might go ahead with hypothesizing that - if the income increases of an individual, then the overall spending is going to increase too. If the given data reveals that the given association exists, a regression analysis concept can be conducted for understanding the strength of the relationship between consumption and income. It also helps in understanding whether or not the given relationship turns out statistically significant.

What is the Methodology of Econometrics?

The initial step in the process of Econometric methodology is obtaining and analyzing the given set of data and defining a particular hypothesis for explaining the overall nature & shape of the given set. For instance, the given set of data can be historical prices for the given stock index, observations that are collected from consumer’s finances, or Inflation & unemployment rates in various countries.

If you might be interested in knowing about the relationship between the annual price change of the unemployment rate and the S&P 500, then you will be required to collect both sets of data. Here, you would want to test the concept that a higher rate of unemployment is going to lead to reduced stock Market prices. Therefore, stock prices in the market serve to be the dependent variable while the unemployment rate serves to be the explanatory or independent variable.