Econometrics

Economists like to make theories. They theorize about why inflation happens, for
example, or what causes unemployment. But theories are not useful if you cannot test them. This
is true for all sciences, and the same for economics.
To test a theory, you first need to gather what scientists call empirical evidence. That’s
evidence that can be measured, like money spent or babies born. When you have collected the
evidence, you’re ready to do the maths and statistics to test your theory. Economists call their
maths econometrics.
Let’s take an example. Imagine that you want to find out why some people save more
money than others. You may think that this depends on two things: how much money they earn
(their income) and how happy they generally are about saving money. We can express your
theory as an econometric formula: amount someone saves equal their income multiplies their
happiness to save.
Of course, we can’t measure happiness to save exactly, but with econometric
mathematics we can give it a value. Then we can see how that value differs between groups of
people or cultures. Econometrics is about finding relationships between variables - in other
words relationships between values that change. Economists try to find out if variable A changes
every time value В changes. They want to find out if variable A is dependent on variable B. This
is called analysis, and there are two main kinds of econometric analysis: time-series analysis and
cross-sectional analysis.
Time-series analysis shows how variables change over a period of time. How salaries
increased over the last century, for example. Cross-sectional analysis compares variables at one
point in time. The salaries of men compared to women right now, for example. Of course,
economists like
to make things more complicated than that. Sometimes they combine cross-sectional with time-
series analysis, and this is called panel data analysis.
As we said earlier, econometrics is good for testing economic theories. However, there is
also a practical side to econometrics. The same maths and statistics are used by governments and
business managers, as well as academics. Econometrics can help governments and companies
find out how well they are doing. With the data from all this mathematics, they can make better
decisions and plan better for the future.