Econometrics

Literally interpreted, econometrics means “economic measurement.” Although measurement is an important part of econometrics, the scope of econometrics is much broader, as can be seen from the following quotations.

Econometrics, the result of a certain outlook on the role of economics, consists of the application of mathematical statistics to economic data to lend empirical support to the models constructed by mathematical economics and to obtain numerical results. (Tintner, 1968, p. 74) Econometrics may be defined as the social science in which the tools of economic theory, mathematics, and statistical inference are applied to the analysis of economic phenomena. (Goldberger, 1964, p. 1) The method of econometric research aims, essentially, at a conjunction of economic theory and actual measurements, using the theory and technique of statistical inference as a bridge pier. (Haavelmo, 1944, p. iii)

As the preceding definitions suggest, econometrics is an amalgam of economic theory, mathematical economics, economic statistics, and mathematical statistics. Instead of being an adjunct to one of these disciplines, econometrics is now taught as a separate subject in most undergraduate and graduate departments of business and economics, for reasons explained below.

Economic theory makes statements or hypotheses that are mostly qualitative in nature. For example, microeconomic theory states that, other things remaining the same (the famous ceteris paribus clause), a reduction in the price of a commodity is expected to increase the quantity demanded of that commodity. Thus, economic theory postulates a negative or inverse relationship between the price and the quantity demanded of a commodity. The theory itself, however, does not provide any numerical measure of the relationship between the two. That is, it does not tell by how much the quantity demanded will go up or down as a result of a certain change in the price of that commodity. It is the job of the econometrician to provide such numerical estimates. Put differently, econometrics gives empirical content to economic theory. Sometimes econometrics can refine an existing theory by explicitly considering variables that were subsumed in the ceteris paribus clause. Qualitative variables such as sex, religion, and ethnicity have been added to labor market studies to explain labor force participation (i.e., the decision to work or not). Traditionally, variables such as hourly earnings and level of education were considered the primary determinants of labor force participation.

The main concern of mathematical economics is to express economic theory in mathematical form (equations) without regard to measurability or empirical verification of the theory. The econometrician uses the mathematical equations provided by the mathematical economist but puts these equations in such a form that they lend themselves to empirical testing. This conversion of mathematical equations into econometric equations (i.e., stochastic equations) requires a great deal of ingenuity and practical skill.

Economic statistics is concerned primarily with collecting, processing, and presenting economic data in the form of charts and tables. These are the jobs of the economic statistician. It is he or she who is primarily responsible for collecting data on such variables as gross domestic product (GDP), employment, unemployment, andprices. The data thus collected constitute the raw data for econometric work. The economic statistician does not go any further, not being concerned with using the collected data to test economic theories. Someone who does that becomes an econometrician.

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