Login with Facebook
Close

Introduction to Econometric Application

Econometrics is one of the major subjects in the study of economics. It is a subject that deals with the measurement of economic relationships. In other words, econometrics is the link between economics, mathematical economics, and statistics. It aims at offering numerical values to the parameters of economic relationships. Economists use theories to determine the cause and action of specific economic processes. Econometric theories are expressed as mathematical figures, and they appear in the form of combined econometric relations. The use of econometric techniques for the sake of identifying the values and parameters that are crucial coefficients of the mathematical forms.

Economic statistics help inn defining the real nature of the economic phenomenon, whereby it is adapted as econometric methods. The relationship created by the econometric process reveals a random behavior of economic links that may not generally be economics and mathematical formulas. It is important to mention that econometrics is applicable in economics and in other areas of study as well. For instance, econometric methods largely appear in engineering sciences, biological sciences, medical sciences, geosciences, and many other areas where a stochastic relationship is expected in mathematical forms. In other words, econometrics is applied to almost every human existence field as it is used to drive economies to the end. Wherever there is a need to explain a relationship between variables, econometric tools come in as the best tools for finding the right results.

The use of econometric models

As stated above, econometrics studies relationships between variables. When referring to economic processes, there is a need to verify these relationships are part of the real-world process. And that is where economic models come in. An econometric model should always be representative in nature, in that should carry all the salient aspect of the subject, or area being studied. Generally, modeling has many features, and one of them is that is should have a simple model that explains a more complicated phenomenon. A model can be seen as a tangible representation of a real-life situation, which means its objectives must be clearly defined. These objectives may, at times, lead to the oversimplified model, and sometimes it makes unrealistic assumptions. It is all in the nature of models, and the person carrying out a project should be aware of these aspects. The model carries all the variables relevant to the study and which the experimenter thinks are crucial to the study. This is where the main difference between economic models and econometric models appear. It differentiates mathematical models and statistical models. On the one hand, math models are exact in nature, whereas statistical models are also characterized by a stochastic term.

Sometimes understanding an economic model and drawing the difference with econometric modeling can be a bit tricky. However, a few things should make it easy for you to understand these two crucial aspects of modern economies. Nobody said understanding economies has to be easy, yet it is fundamental to humanity’s general well-being. An economic model can be simply termed as a set of assumptions that described an economy’s behavior. For instance, when there is a bubble, an economic model uses different assumptions to explain how it got there and what might happen next. An econometric model is more specific because it contains three major components: a group of equations derived from an economic model, describing the phenomenon – and it features two parts, observed variables, and disturbances; a statement about the errors within studied values of variables and; a specification of the probability distribution of disturbances.

What are the aims of econometrics?

When studying econometric applications, it is important to consider the aims that econometric studies seek to achieve. This will help you describe every application based on its aims. And since econometrics studies relationships, such aims should form a critical aspect of studying the subject. Based on this understanding, there are three major goals econometrics seeks to achieve.

Formulating and specifying econometric models

As discussed above, there is a huge difference between economic modeling and econometric modeling. Econometrics models are described by numbers and figures, which means that they are easily verifiable. Again, economic models are created in an empirical testable from. A single economic model can give rise to several econometric models. This means economic modeling is more general, but when you look at it from an econometric point of view, the models can differ based on different choices of function and specification of the stochastic structure of the components, among other factors. When the experimenter chooses to go with econometric models, they seek to establish a deeper connection between the variables and create specific points of action. This means econometric models touch the most basic areas of human existence. This aim lets the examiner split down economic models until they have reason to take a specified cause.

Estimating and testing models

Again, this aim is linked to the definition of econometrics, where relationships are involved. In this case, the models are estimated based on what has been observed, and the data is tested for suitability. Econometrics is not only about finding data but clearly defining how useful the data is in different setups. Different estimation procedures are applied in understanding the numerical values of the unknown parameters of the theory. There is always a need to select the most suitable and appropriate model to explain events with econometric approaches. The model is chosen based on the differed formulation of statistical models.

Model application

Econometric findings are built on figures and crucial data. Hence, the models are used to forecast and policy formulation. These are very crucial aspects of making policy decisions. Policymakers look for real evidence that a certain cause of action will bring out the most desired results. As such, these forecasts assist the policymaker in judging the efficacy of the fitted model. They can then take the necessary measures to re-adjust the relevant aspects of an economy. Policymakers are crucial to the success or failure of the economic process; this is why they have to be certain about every decision they make. They don’t have the luxury of going with the flow but creating a suitable economic growth environment.

Econometrics for statistical process

It is crucial to understand the difference between mathematical statistics and economic statistics. Even though they both deal with figures and probability, certain variables make them applicable subject-wise. Economic statistics begin with collecting empirical data, which is then recorded, tabulated, and used in explaining how they develop time. In simple terms, it presents the description nature of economics. In economic statistics, there is no explanation of the development of various variables. There is also no measurement of the parameters of the relationships under study.

Statistical methods are used the description of the methods of measurement developed from controlled experiments. Therefore, these methods may not be very applicable to the economic phenomenon since they don’t fit in such experiments. Real-life experiments carry variables that usually change continuously, and at the same time, as such, the setup of a controlled experiment may not give the most desired results.

In econometrics, statistical methods are adapted to the issues facing economic life. Examiners of these real-life situations adopt statistical methods termed as econometric methods, and they are adjusted so that they turn into appropriate use for measuring stochastic relationships. The adjustments are crucial because they try to specify efforts to the stochastic element operating in real-world data. Also, the adjustment facilitates turning the information into determining factors for observed data. When this happens, data becomes a random sample, which is a crucial object in statistical tools.

In theoretical econometrics, there is the development of appropriate methods for measuring relations in economics. The relationships are not applicable in controlled experiments because real-life variables are involved, which can change at any time. The development of econometric methods seeks to analyze non-experimental data. When we consider the aspect of applied econometrics, we meet the application of econometric methods to specified branches of econometric theory. It can also be useful in finding a solution to economic problems like demand, supply, production, investment, consumption, and many other aspects of the general economy. This type of econometrics involves the use of tools of an econometric model for economic analysis and forecasting.

Statistical economics is all about data. And there are various types of data used in estimating the model. They include:

- Time series data. This data deals with information on numerical values. For instance, the monthly income data between 2000 and 2015.

- Cross-sectional data. This data provides information about the variable on specific variables, like consumers or suppliers, at a specific point in time. Say, for instance, a researcher is looking for a sample of consumers, they have to take a sample of a family budget with information on their expenditure on different goods.

- Panel data. Data that comes from repeated research on cross-sectional data at different times is known as panel data.

- Dummy data. Sometimes variables can be qualitative in nature, in which case in data is recorded as the indicator function. The value of the variable doesn’t show the extent of the data. These variables appear as the absences or presence of a variable. For instance, we can look at religion, sex, or taste as qualitative aspects. When taking demographic data about sex, there are only two values, male and female, to be used. For taste, you either go with value-like or dislike. These values are presented as dummy variables. A researcher can, for example, use ‘1’ to represent males and ‘0’ to represent females.

Solving the aggregation problem

The aggregate variable can be used as functions, a case that gives rise to aggregation problems. There are various aggregative variables that can be applied in economic analysis. They include the following:

- Aggregation over individuals.

A good case is when the total income comprises the sum of individual income. When looking at the incomes of a household, for example, to determine consumption patterns, in this case, its individual incomes may be considered in combination.

- Over commodities.

Aggregation can also be over commodities, in which case the number of different commodities can be aggregated over aspects like price, or group of goods. A suitable index is needed for this aggregation.

- Overtime period.

Aggregation over time happens when data is available for shorter or longer periods of time that should be used in the form of a function of an economic relationship. In these situations, data aggregation happens over the specified period of time. For instance, the production of many manufacturing goods happens in less than 12 months. If one uses annual data, there will be errors in the production function. They will need to go back and look at the data more specifically or use a formula that takes the error into consideration.

- Spatial.

Aggregation can also be linked to spatial problems. Variables like the population of towns, countries, or production of a city/region are classified as spatial.

With these aggregation sources, it becomes hard to avoid the issue of “aggregate bias” when estimating the coefficients. For this reason, the researcher must consider the possibility of such errors whenever they embark on estimating the model.

Regression analysis

Econometrics is also defined by its critical role in providing tools for modeling on the ground of present data. It is the regression theory that helps us in undertaking this task. Regression models are defined as either linear or non-linear if they have linear or non-linear regression study. Linear models are the most commonly used, whereby the theory and fundamentals of the linear model create the background for constructing the tools for regression analysis.

Regression analysis follows a basic framework that includes the following steps:

- The statement of the issue being examined

- Choosing appropriate variables

- Collecting data on the variable

- Model specification

- Choosing the right method for fitting the data

- Fitting the model.

- Validation and criticism

- Applying the chosen model

Conclusion

There is no denying the econometrics is an important aspect of modern economics. As seen aboveEconometric Application, it can be applied in a wide range of fields that require data authentication and determining relationships. Studying econometrics should get your ready for the normal economic phenomenon.

Author: James Hamilton


Need a custom
essay?

We will write it for you.
Order now

Free Essay Examples

Free essays:

All you need to know about Neuroendocrinology
All you need to know about Big data management
All you need to know about digital special effects
All you need to know Technical Writing?
Basics the Game Theory in Cryptoeconomics
Business innovation ideas for making money
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Cognitive Computing- How does Cognitive Computing work?
Consciousness: characteristics and peculiarities
Conservation Economics
Cybersecurity in business: challenges, risks, and practices
Demographic trends and how they affect Economic Growth
Dance as an art form and entertainment
Discrimination Economics
Determinants of Wages
Everything you need to know about short-term memory
Economic and Policy Impacts of Demographics
Ethics: an essay on the understanding of evil
Emotions: what are they? Theories explained
Factors of Demographic Data Collection
Factors Affecting Purchasing Behavior
Financial Statement Analysis
Factors Influencing Interest and Exchange Rates
Government's Intervention in The Labor Market
Guide on the Pathways of the nervous system
Game theory in microeconomics
Globalization: definition, causes, social impact and risks
How Relativism Promotes Pluralism and Tolerance
How to use the audience’s feedback to write a news report
History of silent cinema
How news report can be strengthened through multimedia
Introduction to Population Problems
Imperfect Information and Asymmetric Information
Imperfect Information in Insurance
Introduction to Labor Markets
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Magnetoencephalography (MEG)
Microeconomic Analysis to the Demand for Labor
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Objections to utilitarianism
Organizational motivation and its effects
Overcoming Hiring Challenges for Nonprofit Organization
Population Demographics
Recurrent neural networks (RNN) for speech detection
Russian School of Mathematics
Research and Development
Risk Sharing in Insurance and Asset Markets
Stochastic optimization methods in deep learning?
Structure of the nervous system
Structure of a Corporation
Schizoaffective disorder: how to live better with it
The climate change denial
The techniques of basic cinematography
The Endosymbiotic Theory
The Role of Internal Audit in Corporate Risk Management
Unions
Unemployment
Utilitarianism Vs. Kantianism
Understanding Auctions and Auction Theory: Part 2
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What are the linear models in machine learning?
What is Convolutional Neural Network
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 emerging technologies according to World Economic Forum
10 strategies to maximize corporate profits
3d Model Of Building
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
A Look into Regression Analysis
Analysis of Household's Consumption and Savings Behavior
All you need to know about Capital Budgeting
All you need to know about risk management
Art looted in wartime.
Appropriate use of Data in Economics
All you need to know about reaction kinetics?
A historical overview of Financial Crises
All you need to know about management discipline?
An insight into the error-correction models
All you need to know about Data visualization
All you need to know about Work-family balance
All you need to know Technical Writing?
All you need to know about digital special effects
All you need to know about Big data management
All you need to know about Neuroendocrinology
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
Hate speech on social media.
How to Build an Economic Model
How to start a healthcare startup?
How can financial illiteracy harm you?
How cancer is developed - Cancer biology
How to define the Enterprise Value
How to conduct economic research?
How women can manage sexual harassment
How to use quotes in your news reports?
How news report can be strengthened through multimedia
History of silent cinema
How to use the audience’s feedback to write a news report
How Relativism Promotes Pluralism and Tolerance
Introduction to Urban Studies
Importance of dance in education
InMoov: how to build an open source humanoid robot
Importance of KYC verification to making the Blockchain secure
Importance of Rhythm
Importance of dance student evaluation
I/O control methods -types and explanations
Identity theft: what to do?
Introduction to Utilitarianism
Importance of 3d Modelling in Architecture
Importance of online journalism
Image processing in medical diagnosis
Introduction to USA Politics
Introduction to Comparative Politics
International Relations as a Major in Political Science
Importance of modern trade policy
Introduction to Journalism
Introduction to Writing a TV Script
Introduction of Microfabrication techniques
Introduction to Microeconomics
Interaction of Consumer and Firm Choices in Markets
Importance of corporate sustainability
Issues in International Monetary Macroeconomics
Introduction to Statistics and Data for Economics
Introduction to Data and Probability for Economics
Introduction to the Game Theory
Introduction to Econometrics
Introduction to Economic Information
Introduction to Market Equilibrium
Introduction to Economic Models and Application
Introduction to Empirical Research
Introduction to Econometric Data
Importance of Critical Thinking, Principles, and Goals
Introduction to Identification and Causal inferences
Introduction to Econometric Application
Intermediaries and Government in Financial Crisis
Importance and seven principles of quality management
Illiteracy in the USA
Introduction to Economics of Law
Introduction to Coase Theorem
Introduction to Social Choice and Incarceration
Intellectual Property and Product Liability
Investment in Human Capital
Introduction to Labor Markets
Imperfect Information in Insurance
Imperfect Information and Asymmetric Information
Introduction to Population Problems
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
The Role of IMF in International Monetary Macroeconomics
Tools for investment decision making
The concept of Organizational Culture and its applications
The Conduct of Monetary and Fiscal Policy
The Basics of Financial Accelerator Models
Tips for labeling medical devices- Medical Entrepreneurship
The different medical imaging techniques
The Economics of Uncertainty – Introduction
Theories of Public Policy
The Game Theory in Social Media
The political theory of Thomas Hobbes
The Use of Law on Economics and Vice Versa
The Role of Internal Audit in Corporate Risk Management
The Endosymbiotic Theory
The techniques of basic cinematography
The climate change denial
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations
What is regenerative medicine?
What is Population ecology?
What is Microfinance: evolution, and practices?
What is biotechnology and its applications?
What are Workplace diversity and its benefits?
What is the difference between a leader and a manager?
What Is Branding and best branding Business strategies?
Why are microelectronics important?
What are biologic drugs.
What is the Foreign Exchange market?
What is the role of scientific research in times of crisis?
What are the risks of international trade?
What is financial management?
What is gene therapy?
What is education economics?
What is regression analysis, and why should you use it?
What Is Technology Marketing And How Should It Work?
What is Management Accounting
What are the methods of valuation of companies?
What is Immune System and Immunotherapy?
What is big data analytics?
What is the 7 layers of OSI model?
What is Neuroplasticity?
What are Sculpture art and its types?
What are the different genres of films?
What is Transcranial magnetic stimulation (TMS)?
What is TES-Transcranial electrical stimulation?
What is Relativism?
What is Vaccine skepticism, and what to do about it?
What happens in the brain when learning?
What is the deep neural network?
What is Convolutional Neural Network
What are the linear models in machine learning?