Econometrics

Econometrics is the area of statistics specialized to deal with economic models. We can identify distinctions between both economics and econometrics and between statistics and econometrics.

Economics (as typified by the Classic Economic Models featured on this web site) is generally presented in terms of smooth curves and precise equations. Reality is a cloud of data points that may only suggest the existence of some underlying smooth curve. The reconciliation of these two views takes the form of a model

y = a + b x + e,

where x and y are observable data, a and b are parameters, and e is an error term. The relation

y = a + b x

would be a smooth line. The error term e accounts for why the observed data points do not lie on that straight line. The goal of econometrics is to make inferences about a and b given the observed cloud of data points (x,y).

The major distinction between econometrics and statistics is that economic models almost universally involve multiple equations. As a consequence, the typical economic model involves several equations such as

y1 = a + b y2 + c x + e,

where both y1 and y2 are endogenous (or determined by the model at hand. The range of statistical models, on the hand, includes many models where right-hand side endogeneity is not an issue. Econometrics also involves equations such as

y1 = a + b y2* + c x + e,

where y2* is the expectation of y2 rather than its observed value. This kind of modeling elements takes econometrics into areas not at all common in statistical models of, for example, a science experiment where the explanatory variables are neither endogenous or determined by the expectations of the subject of the experiment.

●
Classic Economic Models

Interactive presentations of the most important models

in microeconomics and macroeconomics go beyond

anything appearing in a printed-on-paper textbook.

Learn to think like an economist.

Arbitrage Pricing

Arbitrage Profit

Average Cost

Balance of Payments

Budget Constraint

Call Option

Concave Function

Consumer Surplus

Consumption Function

Convex Function

Deadweight Loss

Demand Curve

Econometrics

Economic Agent

Economic Model

Economics

Economics Textbook

Elasticity

Endogenous

Endogenous Technical Change

Equilibrium

Exchange Rate

Exogenous

Expectations Hypothesis

Federal Funds (Fed Funds) Rate

Fixed Exchange Rate

Floating Exchange Rate

Frictional Unemployment

Gross Domestic Product (GDP)

Income Effect

Income Elasticity

Indifference Curve

Interest Rate

Intertemporal Substitution

Jensen's Inequality

Macroeconomics

Marginal Cost

Marginal Product

Marginal Utility

Microeconomics

Monopoly

Optimizing Behavior

Perfect Competition

Phillips Curve

Price Elasticity

Producer Surplus

Production Function

Production Possibility Frontier

Put Option

Recession

Reservation Wage Rate

Risk Aversion

Structural Unemployment

Substitution Effect

Supply Curve

Taylor Rule

Technological Growth

Term Structure

Theory of the Consumer

Theory of the Firm

Unemployment Rate

Utility Function

Velocity of Money

Widget

Yield Curve