Econometrics is the science that is based on the use of mathematical and statistical tools to estimate economic relations . 

Therefore, this scientific discipline can, from certain data, test hypotheses and finally predict the behavior of both economic variables and individuals.

For example, econometrics helps answer questions such as: What is the elasticity – price of cigarettes? What is the effect of reducing class size on student grades? o What is the effect of a Christmas advertising campaign?

Among the main objectives of econometrics are:

  • Estimate causal relationships: Econometrics allows a qualitative and quantitative analysis of some factors that affect a variable that is associated with an economic phenomenon. For example, the effect that education would have on wages, so it could be estimated whether having a university degree influences the increase in the income of a worker.
  • Project:Forecast macroeconomic variables such as inflation rates, GDP or interest rates.

Types of Econometrics

This science can be classified into two categories:

  1. Theoretical Econometrics: It is characterized by relying mainly on statistics and mathematical methods, that is, not on economic theory.
  2. Applied Econometrics: Use the tools of theoretical econometrics to conduct a study of economic and business areas, such as production, investment , demand , supply , etc.

Econometrics Methodology

The econometrics methodology is carried out following the following guidelines:

  • Approach of the economic hypothesis to study.
  • Specification of the mathematical model that is formed by equations. Their variables can be dependent, those that are trying to explain from others, or independent, which are the explanatory variables.
  • Specification of the econometric model. Thus, in the case of a mathematical model, the relationships that exist between the variables are exact. However, the relationships between economic variables are inaccurate, so it is necessary to introduce a margin of error.
  • Data collection
  • Estimation of parameters of the econometric model.
  • Formulation and test of the hypothesis.
  • Model application.

Finally, it should be noted that econometrics is important in most branches of the applied economy: labor, health, industrial, macroeconomics, development,  marketing , finance, etc.

by Abdullah Sam
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