Economics Terms A-Z
Pioneered by Ragnar Frisch, Lawrence Klein and Simon Kuznets, econometrics is the application of statistical models to economic data to develop both new theories and test existing hypotheses - a division which demarcates its two main branches: theoretical and applied. Its aim is the quantitative analysis of economic phenomena; giving empirical content to economic relationships. Or in other words, analysing economic history and making forecasts.
Relatively self-explanatory, theoretical econometrics prepares and tests the methods that are later applied to real-life data - it’s intensely maths-heavy. Key to this process is the search for ‘estimators’ - desirably unbiased, efficient and consistent - whose suitability are rigorously tested under certain mathematical conditions.
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The applied branch of econometrics typically focuses on consumer behavior and predictive models that attempt to anticipate how - to put it incredibly simply - something will be affected by changes in something else. This may include the study of: the relationship between income levels and consumption; and advertising expenditure vis-à-vis product sales. To establish the strength of association, if, of course, there is one, econometricians employ trusty tools like the multiple linear regression model.