The world of economics is sometimes complex, and at times downright confusing, especially for those who have challenges in processing and interpreting data. Statistics is an integral part of economics since some of the statistical methods and ideas are applied in solving economics problems. Statistics involve the collection, analysis, interpretation, and presentation of data. The branch of economics which deals with the application of statistical methods to economic data to give empirical content to economics problems is referred to as Econometrics. It is a quantitative analysis of economic data relating to a development theory and observation and connected by relevant model or method of reference.
History of Econometrics
The use of both mathematical theory and statistical estimates in economic analysis first occurred in the work of Henry Moore, who was a professor at Columbia University in the 20th Century. His econometric work was based on a business cycle, determination of wage rates, and demands of certain commodities. Econometrics acquired its identity as a distinct study of economics in the 1920s with several people gaining interest in this disciple. An international society called Econometric Society was founded on December 30, 1930, through the persistence of Ragnar Frisch and the support of Irvin Fisher, a Yale University professor. Through persistence and methodological controversies the influence of econometrics on the wider profession of economics was steadily expanded. Today, all departments of Economics in most universities around the world offer work on econometrics.
Relevance of Econometrics
The application of econometrics to the varied fields of economics has increased significantly in recent decades. Almost all fields of applied economics include elements of mathematical and statistical theory. Econometrics contains statistical methodologies which test assertion in economic theory. It is used to provide certain parameter estimates which are assumed to be empirically relevant. Economists can only claim scientific validity and distinguish facts from reality by applying the principles of econometrics. Without econometrics economists will not be able to generate, apply, and interpret statistical data thereby eliminating the aspect of science in economics.
Practical Application of Econometrics
Econometrics are important tools in economic decision making, especially in the distribution processes such as the distribution of a family's income or the distribution of an investment firm's assets. Econometricians can apply the concept of economics to determine to determine whether there is equilibrium distribution of the units and what the distributions are. Econometric is also important in identifying the factors which determine the entry and exit of a firm into or out of the market by determining the firm concentration and market power. Econometrics determines the most important factors among the many factors responsible for the entry and exit of the firm including government regulations, profit levels, and cost of production. By use of time series model, econometricians can forecast microeconomic indicators such as the effect of monetary and fiscal policy on the performance of the economy.
Drawbacks of Econometrics
Econometric models, just like other economic models, inherently have their own major limitations and drawbacks. The econometric model may show two correlated variables which are casually unrelated, having a spurious relationship. Some economic variables cannot be manipulated or randomly assigned to objects. In such instances, economists rely on observational study resulting in models with similar explanatory sense but different regression estimates. Thus, in some instance econometrics is considered insensitive to the choice of assumption