Econometrics

Econometrics is defined as the application of mathematical and statistical techniques to

economics in the study of the problems, analysis of data, the development and testing of
economic theories.

It can also be defined as the application of statistical and mathematical methods in the field of
economics to describe numerical estimates of economic variables for example output, capital,
labour, among others.

Note: Econometrics is made up of two Greek words, that is, Econo – economics and metrics –
measurements.

It is also defined as economic measurement or measure of economic relationships.

Econometrics is the integration of math, econ and statistics with the purpose of establishing
numerical values of parameters of economic relationship and verifying economic theories.

Economic statistics involves the process of collecting, presenting, analyzing and interpreting
data.

Mathematical statistics involves specifying mathematics relationships unlike economic theory

which doesn’t specify mathematical relationships.

DATA AND INFORMATION

Data: is a ‘scientific’ term for facts, figures, and measurements. Data on its own has no meaning
but becomes information when interpreted. Here are some examples of data.

 The number of people who pass their driving test each year
 The number of goals scored by each football team
 The profit after tax for the past ten years

Information: Information is "data that have been recorded, classified, organized, related, or
interpreted within a framework so that meaning emerges". Information, like data, can take
various forms. Some examples of the different types of information that can be derived from data
include:

 the number of persons in a group in each weight category (20 - 25 kg, 26 - 30 kg, etc.);
 the total number of households that did not rent a movie during the last month; and
  the number of days during the week where the temperature went above 20°C.

Sources of data

Data can be primary or secondary

 Primary data is data collected directly from the field for the very first time for current
use.
 Secondary data is that collected from already existing sources for current use for
example, from magazines, newspapers among others.

Data can also be classified as:

i) Cross sectional data

This is data collected at a particular point in time.

ii) Time series data

This is collected over a period of time repeated on the same observation.

iii) Pooled data / panel data / longitudinal data

This is a combination of cross-section and time series data.

Goals of econometrics

 To test economic theories

 To verify economic theories
 To describe numerical values of economic relationships
 To forecast necessary events for policy action.

Application of computers in econometrics

There are a variety of software packages that are widely used in the analysis of data for example
SPSS, E-views, Stata, R among others.

The methodology of econometrics

Methodology refers to the steps followed by an econometrician in the study of the problem.
The steps include;

i. Statement of the theory or hypothesis.

Example of Theory;
Keynes: As incomes increase, consumption also increases but not more than income.

Example of hypothesis: Consumption doesn’t increase with increase in income.

ii. Specification of the mathematical model.

The mathematical model gives the exact or deterministic relationship between or
among variables. For example, y= a + bx
iii. Specification of the econometric model.
An econometric model is specified as y = a + bx + u; where u – is the error term.
When specifying a model, some variables are excluded from the model due to
incorrect specification.
iv. Obtain data
Data can be got from primary or secondary sources.
v. Estimation of parameters / coefficients of the model
Once you have obtained data, estimate parameters of the model using methods like (i)
Ordinary least square method (OLS) (ii) Maximum likelihood Estimation (MLE) (iii)
Method of moments.
vi. Hypothesis testing
After estimating the parameters of the model, confirm whether your results are in
accord with economic theory. Hypothesis testing enables us to accept or reject
economic theories.
vii. Forecasting / prediction
Once you have tested your economic theories, then you can use your model to predict
future values of the dependent variable.
viii. Use the model for policy purposes
The model can be used for policy implementation by policy makers.