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Concept
Econometrics
Summary
Econometrics is an application of statistical methods to economic data in order to give empirical content to economic relationships. More precisely, it is "the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference". An introductory economics textbook describes econometrics as allowing economists "to sift through mountains of data to extract simple relationships". Jan Tinbergen is one of the two founding fathers of econometrics. The other, Ragnar Frisch, also coined the term in the sense in which it is used today.
A basic tool for econometrics is the multiple linear regression model. Econometric theory uses statistical theory and mathematical statistics to evaluate and develop econometric methods. Econometricians try to find estimators that have desirable statistical properties including unbiasedness, efficiency, and consistency. Applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing econometric models, analysing economic history, and forecasting.
A basic tool for econometrics is the multiple linear regression model. In modern econometrics, other statistical tools are frequently used, but linear regression is still the most frequently used starting point for an analysis. Estimating a linear regression on two variables can be visualised as fitting a line through data points representing paired values of the independent and dependent variables.
For example, consider Okun's law, which relates GDP growth to the unemployment rate. This relationship is represented in a linear regression where the change in unemployment rate () is a function of an intercept (), a given value of GDP growth multiplied by a slope coefficient and an error term, :
The unknown parameters and can be estimated. Here is estimated to be 0.83 and is estimated to be -1.77. This means that if GDP growth increased by one percentage point, the unemployment rate would be predicted to drop by 1.
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