Regression analysis is the study of the interdependence of one variable with one or more variables. The objective is to find the mean value of the first ones. 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, estimation of econometric model, 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 the tools of theoretical economics 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” type queries. For example, in analyzing the impact of tax rates, interest rates, the cash reserve ratio, etc. on demand in an economy, econometric tools are widely applied.
In studying the relationships between the cost of tuition and registration, 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. The values of economic parameters should be evaluated using samples of economic data when making economic policies.
