Econometrics And Steps Of Traditional Econometrics
In other words, econometrics is a branch of economics in which the tools of economic theory, mathematics and statistics are used to analyze economic phenomena.
8 steps of Traditional Econometrics:
1.Statement OF Theory: The first step is to give the economic theory of the subject we want to know about. Assuming that we want to know the effect of income on consumer consumption... we can say that income and consumption are positively related.
2.Mathematical Model: In this step , economic theory is expressed as mathematically.
Y=β1+β2X
mathematical model, shows the relationship between two variables. if this consumption function, Y = consumption , X =income, β1=intercept ,β2=slope coefficient or MRS(marginal rate of substitution).
3.Econometric Model: in econometric model, error term is included.
Y=β1+β2X+μ
μ=Disturbance or error term.
(Represents all factors that affect on the model.)
4.Data Collect:
Collect essential and reliable data .This data may be cross sectional data , time series data, pooled data or panel data .
5.Estimation of the Econometric Model: After collecting the data, the parameters have to be estimated. If we are working on a consumption function then we need to estimate the parameter of the consumption function. Generally , regression analysis is used to estimate parameters.
6.Hypothesis Testing: After estimating the parameters, hypothesis testing should be done to see how much the parameter supports the economic theory and how much the estimated parameters are sufficient for the model.
7.Prediction:
Y=β1+β2X+μ
Y=predicted variable
X=predictor
If our considered model does not explain the hypothesis or theory then the predictor X has to predict the dependent variable or the predicted variable Y.
8.Policy implications: The estimated model may be used for policy purposes. The government can manipulate the control variable with the help of monetary and fiscal policy to get predicted variables.
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