Econometric Theory/Introduction

The word econometrics means "economic measurement". The purpose of econometrics is to quantify and verify predictions from economic theory. It is a mixture of economic theory, mathematical economics, and statistics.

Apart from econometrics, there are two subjects closely related to econometrics. Firstly, mathematical economics is concerned with expressing economic theory in equations. It is algebra of the kind where variables can be subtracted, added, multiplied and divided in an equation. But it is not concerned with measurability or empirical verification. Secondly, we have economic statistics whose concern is to collect, process and present economic data. Many developed countries have government agencies whose job it is to collect and distribute economic data, such as the U.S. Bureau of Labor Statistics, which publishes data on unemployment, inflation, productivity, etc. The Bureau releases this information to the public and it is often used by other levels of government, social scientists, and interested laymen.

Lastly, it is important for econometricians to distinguish between observational data and experimental data. The use of observational data has three implications: firstly, the econometrician often uses data without knowledge of how the data were sampled; secondly, since the econometrician has no knowledge of how the data were generated, i.e. how people and companies behaved, there is uncertainty as to which economic or statistical model best represents these data; and thirdly, in order to obtain a suitable model that can be used for inference, econometrics is concerned with avoiding misspecification, or else the results of the model may be wrongly interpreted.[1]



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  1. This is the somewhat the view expressed by Judge et al. (1988, p. 5-6) and Gujarati (2003, p.5)


  • Judge; et al. (1988). Introduction to the Theory and Practice of Econometrics - 2nd ed. John Wiley & Sons. ISBN 0-471-62414-4. {{cite book}}: Explicit use of et al. in: |last= (help)
  • Gujarati, D.N. (2003). Basic Econometrics, International Edition - 4th ed. McGraw-Hill Higher Education. ISBN 0-07-112342-3.