INTRODUCTION TO ECONOMETRICS

Econometrics is ‘the application of statistical and mathematical methods to the analysis of economic data, with a purpose of giving empirical content to economic theories and verifying or refuting them’.

The Aims of Econometrics:
1. The formulation of economic models in an empirically testable way.
2. Estimation and testing of these models with observed data.
3. Use of these models for prediction and policy purposes.

In many instance there are competing theories and model specifications, which presents the problem of model selection. Theories and models are generally judged on the basis of their predictions.

Economic and Econometric Models:
A model is a simplified representation of a real world process.

• An economic model is a set of assumptions that approximately describes economic behaviour.
• An econometric model consists of a set of equations derived from the economic model.

For example the economic model of demand suggests that whe...