Econometrics Study pack - 1 Nature and scope of Econometrics 1.1 Meaning of Econometrics Literally interpreted econometrics means \u201ceconomics

Econometrics Study pack - 1 Nature and scope of...

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1.Nature and scope of Econometrics1.1.Meaning of EconometricsLiterally interpreted econometrics means “economics measurements”.Econometrics may be defined as the social science in which the tools ofeconomic theory, mathematics, and statistical inference are applied to theanalysis of economic variable. Econometrics can also be defined as“statistical observation of theoretically formed concepts or alternatively asmathematical economics working with measured data” We know very well that economic theory attempts to defined the relationshipamong different economic variables.Why a separate disciplineEconomic theory makes statements or hypotheses that are mostly qualitativein nature. For example, microeconomic theory states that, other thingsremaining the same, a reduction in the price of a commodity is expected toincrease the quantity demanded of that commodity. It is the job of the econometrician to provide such numerical estimates.The main concern of mathematical economics is to express economic theoryin mathematical form (equations) without regard to measurability or empiricalverification of the theory.Economic statistics is mainly concerned with collecting, processing, and presenting economic data in the form of charts and tables. It does not go any further. The one who does that is the econometrician. Without evidence, economic theories are abstract and might have no bearing on reality (even if they are completely rigorous). Econometrics is a set of toolswe can use to confront theory with real-world data.Why study econometrics?1
E.g, economic theory postulates an inverse relationship between the price and quantity demanded of a commodity. Theory does not provide any numerical measure of the strength 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 the commodity. It is the econometrician’s job to provide such numerical estimates.In the work environment, an economics and business graduate may be called upon to forecast sales, interest rates and money supply or to estimate demand and supply functions or price elasticities for products. When setting monetary policy, for example, central bankers need to know thelikely impact of changes in official interest rates on inflation and the growth rate of the economy. It is in cases like this that economists turn to econometrics.

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