Friday, 12 January 2018

Tell me, what is econometrics?

This is the first question I asked the very day this website came on live…so, I ask again: what is econometrics? It simply refers to measuring economic phenomena. The word “econo” refers to the economic events while the “metrics” is the measurement. So, econometrics is the process of measuring economic scenarios. It therefore means that measurement is the defining distinction between econometrics and other related disciplines like statistics, mathematics and mathematical economics.

I have come across other supportive definitions of econometrics as the discipline that is more concerned with quantitative analysis. A discipline that is wrapped around empirical testing to either validate or refute economic theory. That means, an econometrician must be quite proficient with the use of data and must fashion out ways of making the data to communicate. Communication is germane in the sense that a large pool of data (either quantitative or qualitative) will not make much sense to policy makers if they (data) do not say anything or point out any prevailing scenarios or assist in planning and forecasting. So, am I implying that data, talks??? Oh yes, they do….all the time if an econometrician have a prevailing theory and if s/he knows the appropriate model to deploy.

Next, I will briefly explain the pillars that hold econometrics, so that starters will know what basic skills to acquire.

Econometrics is a combination of economic theory, mathematical economics, economic statistics and mathematical statistics. Each of these are the benchmarks that an econometrician must be familiar with.

So, what is an economic theory? These are simply hypotheses, conjectures, assumptions, ideas that mostly describe how economies operate. Since, theories are often qualitative in nature, it is the econometrician that validates economic theory through empirical testing. For instance, an economic theory says that the higher the price, the lower the quantitative demanded of commodities. This is an economic theory stating that price and quantity demanded exhibit a negative relationship. The econometrician then takes it from there by analysing both data on price and demand quantities to observe what the outcome will be….sort of verifying/validating or disproving what the economic theory says.

A mathematical economist, on the other hand, expresses economic theories in mathematical forms. That is, using equations. Given the economic model stated above, the mathematical economist will express it as: Q = a -bP  or P = a -bQ. The first equation is known as demand function while the second is the inverse demand function. The -b sign indicates the negative slope of the demand function which emanates from economic theory. Since the mathematical economist is not involved in measuring the impact of price increase on quantity demanded or in the empirical investigation of economic theory, again, this is where the econometrician comes in using these mathematical equations to either validate or disprove theory via empirical testing.

What of an economic statistician? Such person is only concerned with the collection and descriptive presentation of data. The main tools used are charts, tables and graphs. Again, from the price and quantity example, an economic statistician goes to the field, collects data on prices and quantities and puts them out using pie charts, bar charts, histograms, line graphs showing the pictorial illustrations between these two variables. These primary level of data communication is very relevant to policy makers as it shows the relationships between the two variables. However, since the economic statistician is not involved in empirical testing, it is left for the econometrician to take the data collected and subject it to tests using several econometric tools and models at his/her disposal.

Lastly, the mathematical statistician provides the tools used by the econometrician. They construct the programmes and methods used in econometric analysis.

I conclude that a starting econometrician must have some basic knowledge about each of the sub-fields explained above. Econometrics is not difficult but interesting. Begin, by knowing the fundamentals from the tools used, to modelling, analysing, hypothesis testing, interpretation, forecasting. Stay with me on this platform as I patiently teach you this subject and it will not take too long for you to gravitate into the intermediate and complex stuff.

So, let us keep it simple and take it one step at a time 😊

Again, I ask you: what is econometrics? Let me know what other definitions you can come up with.

Post your comments and questions…

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