JAGANNATH BAROOAH COLLEGE

IMPORTANCE OF ECONOMETRICS

SUBMITTED BY: SUBMITTED TO:

SHARMISTHA NATH SANTANA DUTTA
ROLL NO:2021379 DEPARTMENT OF ECONOMICS
B.A. 4th SEMESTER
 ACKNOWLEDGEME
It gives me immense pleasure that we got the opportunity to take part in this
assignment and so we are thankful to MRS. SANTANA DUTTA that we could
successfully complete the task given to us by you. We are grateful enough to you
that we got to learn new things from the task allotted to us and this could only
happen because of the things you made us do. We are thankful to you again for
granting us the opportunity. This is a gratitude to you from us for giving things in
time and not less than the work to be done.
I also wish to express my gratitude to my fellow classmates for their kind and
valuable advices without which my work would not have been completed.

SHARMISTHA NATH
 BIBLIOGRAPHY

1.My Respected Teachers.

2.Refreshers.
3.Friends and classmate.
4.Internet.
  WHAT IS ECONOMATRICS?

Econometrics is the quantitative application of statistical and mathematical models using

data to develop theories or test existing hypotheses in economics and to forecast future
trends from historical data. It subjects real-world data to statistical trials and then
compares and contrasts the results against the theory or theories being tested.

Depending on whether you are interested in testing an existing theory or in using existing
data to develop a new hypothesis based on those observations, econometrics can be
subdivided into two major categories: theoretical and applied. Those who routinely engage
in this practice are commonly known as econometricians.
Origin of Econometrics:

Since 1960 economics have been influential in the formation of public policy in the
development world and it has achieved impressive results. Economic theories of fiscal and
Monetary policies have helped the government greatly reduce the effect of business cycle
on the economy. The world never faced any recession comparable to the great depression
after the second world war. Economic analysis has supported the government in reviving
the charging GDP and employment, promoting competition and trade, rationalised the
government spending on welfare programs, make the efficient tax regime. This is a
management that are supported with forecasting the demand for their product and
services, improving efficiency of their operations. Estimating the effects of various levels of
advertising on sales and profits, relating to the price of stock to the overall economy.
Economics is also concern with relationship between G.D.P and employment at the micro
level, it is concerned with production and employment in automobile industries, volume of
the peanut and price etc. All these requires the use of economic theory to be apply in real
world problem and application which can be analyse with the help of economic data.
Without measurement or forecasting of G.D.P central bank wouldn't know when to
stimulate the economy and when to pull it off. Without measurement of production and
cost function, economist couldn't identify industries with competitive conditions likely to
benefit from the regulation. All these are the examples where economists need
mathematical model and statistical data. So that they can prepare policy to improve the
economic condition. Ragnar Frisch has found the word “Econometrics" in the first edition of
the journal 'Econometric' in 1933. It means measurement of economics or economic
measurement.
Aims of econometrics: The three main aims econometrics are as follows:
1. Formulation and specification of econometric models: The economic models are
formulated in an empirically testable form. Several econometric models can be derived
from an economic model. Such models differ due to different choice of functional form,
specification of the stochastic structure of the variables etc.
2. Estimation and testing of models: The models are estimated on the basis of the
observed set of data and are tested for their suitability. This is the part of the statistical
inference of the modelling. Various estimation procedures are used to know the numerical
values of the unknown parameters of the model. Based on various formulations of
statistical models, a suitable and appropriate model is selected.
3. Use of models: The obtained models are used for forecasting and policy formulation,
which is an essential part in any policy decision. Such forecasts help the policymakers to
judge the goodness of the fitted model and take necessary measures in order to re-adjust
the relevant economic variables.
Econometrics and statistics: Econometrics differ both from mathematical statistics and
economic statistics. In economic statistics, the empirical data is collected recorded,
tabulated and used in describing the pattern in their development over time. The economic
statistics is a descriptive aspect of economics. It does not provide either the explanations of
the development of various variables or measurement of the parameters of the
relationships.
Statistical methods describe the methods of measurement which are developed on the
basis of controlled experiments. Such methods may not be suitable for the economic
phenomenon as they don’t fit in the framework of controlled experiments. For example, in
real-world experiments, the variables usually change continuously and simultaneously, and
so the set-up of controlled experiments are not suitable.
Econometrics uses statistical methods after adapting them to the problems of economic
life. These adopted statistical methods are usually termed as econometric methods. Such
methods are adjusted so that they become appropriate for the measurement of stochastic
relationships. These adjustments basically attempt to specify attempts to the stochastic
element which operate in real-world data and enters into the determination of observed
data. This enables the data to be called a random sample which is needed for the
application of statistical tools.
The theoretical econometrics includes the development of appropriate methods for the
measurement of economic relationships which are not meant for controlled experiments
conducted inside the laboratories. The econometric methods are generally developed for
the analysis of non-experimental data.
The applied econometrics includes the application of econometric methods to specific
branches of econometric theory and problems like demand, supply, production,
investment, consumption etc. The applied econometrics involves the application of the
tools of econometric theory for the analysis of the economic phenomenon and forecasting
economic behaviour.

3. NATURE OF ECONOMETRICS

Economic theory is mainly concerned with quantitative relationships among economic

Variables. Such quantitative statements are usually expressed in the form of equations
with specified numerical coefficients According to Prof. Carl F. Christ, these equations
must have some desirable characteristics.

1.Relevance:

Since our study is based on equations, an economic equation should be relevant to the
phenomenon being studied, the model should be relevant to objective and area of study.
For eg if we want estimate production function for manufacturing sector, Cobb-Douglas
production function is to be considered

2.Simplicity: The economic model should be simple and easy to estimate. The simple linear model
satisfies these criteria

3. Theoretical acceptability: Constructing economic theory Specifies the econometric model. For
example, Harrod-Domar Growth model is suitable for developing countries and it should be considered
to get growth rate of national income.

4.Explanatory ability: The estimated econometric model should have greater explanatory power.
Using the Coefficient of determination (2) the explanatory power of the model can be derived. For
example, if consumption expenditure has a multiple relation with income, wealth, family size and age of
the head, then a multiple linear consumption function is to be estimated instead of a simple linear
consumption function.

5.Accuracy: The model should give accurate value for economic parameters. For example price elasticity of
demand can be estimated more accurately with the use of Engler’s demand function than Marshall's demand
function
6.Forecasting power: The estimated model should have forecasting ability. The Econometric study is not
concerned with present only but it is also to forecast future. Example if we know the population in 2016 with
accurate coefficient. the probable population in 2020 can be forecast.

Importance of Econometrics

1. To examine the statistical and economic hypothesis.

2. To provide a statistical method to analyse the economic data rather than the traditional descriptive
method.
3. It help in drawing and implementing the economic policies.
4. Econometrics helps in using the scientific research in forecasting.
5. It place a service rule to economic analysis by establishing new relationship in different theories.
6. It is widely use in policy making for nation by government, businessman and economic thinker.
Limitation of econometrics
1. The method is only to quantity phenomena.
2. Th assumptions which are not truly applicable to the universe which is homogenous and has
content behaviour.
3. We don’t Except rational and consistent behaviour human being. Thus, errors bound to inherit I
our observation.
4. The mathematical model doesn’t help in moral judgement.
5. Econometrics methods are time consuming and tidies and complex.