Importance of econometrics
Regression analysis is the study of the interdependence of a variable with one or more variables. The goal is to find the mean value of the first few. Econometric models are nothing more than statistical models. They are a set of hypotheses that allow statistical inference from a specific data that is being reviewed.
Consumption function, cost function, demand function, production function, etc. are some of the examples of relationships. Economic theory is primarily a study of such relationships between economic variables. Econometric models are a set of equations that explain the relationships between economic variables. They are subject to errors.
The national income model, for example, consists of the following set of mathematical equations: Y=C+I; C= a+bY+u. Where Y represents national income, C consumption, I investment, u is a disturbance term and a, b are the parameters.
Mathematics and statistics are the basic tools of econometrics. Econometrics transforms economic theory into mathematical terms and uses statistical methods to derive economic relationships with some assumptions.
The following steps are involved in econometric modeling in the same order. Economic theory, mathematical model of theory, econometric model of theory, data, econometric model estimation, hypothesis testing or statistical inference, forecasting or prediction, use of model for control or policy purposes.
There are two main branches of econometrics. The development of suitable methods for the measurement of economic relations according to econometric models is known as theoretical econometrics. The use of theoretical economics tools to study some functions such as demand, supply, production, etc. It is called applied econometrics.
Econometrics is about how theory and data from economics, business, and other social sciences can be used with the help of statistical tools to answer “how much” questions. For example, in the analysis of the impact of tax rates, interest rates, the cash reserve ratio, etc. on demand in an economy, econometric tools are widely applied.
When studying the relationships between the cost of tuition and enrollment, advertising and sales, investment and demand, etc., econometric tools play a dominant role. The impact of spending on the agricultural, industrial, social, etc. it can also be studied with the help of econometric tools.
The key elasticities and multipliers are called parameters. Economic parameter values should be assessed using economic data samples when making economic policies.