Introduction to Basic Econometrics

Introduction to Basic Econometrics. What is Econometrics? 1.1 Definition Econometrics is a mixture of economics, mathematics and statistics as illustrated in Figure 1.1.1. Figure 1.1.1 Economics, or economic theory, makes statements or hypotheses that are mostly qualitative in nature. Only econometrics gives empirical or numerical content to most economic theory. The main concern of mathematical economics is to express economic theory in mathematical form (equations) without regard to measurability or empirical verification of the theory. Econometrics, as noted previously, is mainly interested in the empirical verification of economic theory. Economic statistics is mainly concerned with collecting, processing, and presenting economic data in the form of charts and tables. The data thus collected constitute the raw data for econometric work. But the economic statistician does not go any further, not being concerned with using the collected data to test economic theories. Although mathematical statistics provides many tools to analyze the data, the econometrician often needs special methods in view of the unique nature of most economic data, namely, that the data are not generated as the result of a controlled experiment. The econometrician generally depends on data that cannot be controlled directly. In econometrics the modeler is often faced with observational as opposed to experimental data.