The regression analysis is the study of the interdependence of a variable with one or more other variables. The objective is to find the average value of the former. The econometric models are nothing but the statistical models. They are a set of hypothesis which permits statistical inference from a specific data which is under review.
Consumption function, cost function, demand function, production function, etc are some of the examples of the relations. Economic theory is primarily a study about such relationships among the economic variables. The econometric models are a set of equations which explains the relationships among the economic variables. They are subjected to errors.
The national income model for instance consists of the following set of mathematical equations: Y=C+I; C= a+bY+u. Where, Y stands for national income, C for consumption, I for investment, u is a disturbance term and a, b, are the parameters.
Mathematics and statistics are the basic tools of econometrics. Econometrics does transform economic theory into mathematical terms and does utilise the statistical methods to derive economic relationships with some assumptions.
The following steps are involved in econometric modelling 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, using the model for control or policy purposes.
There are two major branches of econometrics. The development of suitable methods for the measurement of the economic relationships as per econometric models is known as theoritical econometrics. The usage of the tools of theoritical economics to study some functions such as demand, supply, production,etc is termed as applied econometrics.
Econometrics is all about how the theory, and data from economics, business, and other social sciences can be used with the aid of statistical tools to answer “how much” type queries. For instance, in the analysis of the impact of tax rates, interest rates, cash reserve ratio, etc on demand in an economy, the econometric tools are widely applied.
In studying the relationships among tuition fee and enrollment, advertising and sales, investment and demand, etc econometric tools play a dominant role. The impact of spending on agricultural, industrial, social sector, etc too can be studied with the aid of econometric tools.
The key elasticities and the multipliers are termed as the parameters. The values of economic parameters must be evaluated by using samples of economic data while making the economic policies.