Econometrics: why a separate Subject? even they have many other theories.

As we know that Econometrics is a combination of Economic Theory, Mathematical Economics, Economic Statistics, and Mathematical Statistics then why we study Econometrics as a separate subject?

The reasons are as follows.

Table of Contents

## Economic Theory

Economic theory makes statement or hypothesis that are mostly qualitative in nature but does not provide any numerical measure of the relationship given in the statement, e.g. economic theory postulates a negative or inverse relationship between quantity demanded and price of a commodity relationship, but does not provide any numerical measure of this relationship.

But it is an Econometrician who provides numerical measurement.

## Mathematical Economics

mathematical economics expresses economic theory in form of equations and identities without regard to empirical verification of the theory. Mathematical Economics also establishes the exact relationship among variables, e.g. consumption function.

C= β_{1} +β_{2} Yd Mathematical Relationship

C= β_{1}+β_{2} Yd +µi Econometric

β_{2} = MPC

(b) Mathematical Economics does not provide any numerical value for the coefficient of a relationship like β_{1} & β_{2}.

While econometric establishes the inexact relationship among variables and also provides a numerical measurement of the coefficient.

## Economic Statistics

Economic statistics are mainly concerned with collecting processing and presenting economic data in the form of charts and tables. The economic statistician does not go any further to test economic theories. And one who does this becomes an Econometrician.

## Mathematical Statistics

Mathematical statistics provides many of the tools used in the trade but econometrician often needs special methods in view of the unique nature of economic data.

In mathematical statistics, the data can be produced and controlled to verify statistical theories.

While in econometrics data is collected by public & private agencies which are noncontrolled and non-produced, like data on savings, investment, prices, income, consumption, etc., and for such data, econometrician faces special problems.

Moreover, such data are likely to contain an error of measurement, and econometrician has to develop special methods of analysis to deal with such errors of measurement.

For all the above reasons, Econometrics become a separate subject to be studied.

## Methodology of Econometrics

The econometrician goes on these lines and it is called methodology of econometrics.

1- Statement of the theory

2- Specification of a mathematical model

3- Specification of an econometric model

4- Obtaining the data

5- Estimation

6- Verification of the mathematical model

7- Hypothesis estimation

8- Prediction or forecasting

9- Use of the model for control and policy purpose