1. Econometrics
Econometrics means ‘economic measurement’.
Quantitative analysis of actual economic phenomena based on the concurrent
development of theory and observation.
is a set of quantitative techniques that are useful for making "economic decisions".
Why Econometrics as a separate subject?
Economic theory makes statements or hypotheses that are mostly in qualitative in nature.
For example, microeconomic theory states that, other things remaining same, a reduction in
the price of a commodity is expected to increase the quantity demanded of that commodity.
But econometrics will try to provide numerical.
Mathematical economics is to express economic theory in mathematical form (equations)
without regard to measurability or empirical verification of the theory. But econometrics
interested in the empirical verification of economic theory.
Statistical economics is mainly concerned with collecting, processing, and presenting
economic data in the form of charts and tables. But these data becomes a raw material for
econometrician, he will be using these data for testing the economic theories.
ENDOGENOUS VARIABLE
In a statisticalmodel, a parameter or variable is said to be endogenous when there is a
correlation between the parameter or variable and the error term. Endogeneity can arise as
a result of measurement error, autoregression with autocorrelated errors, simultaneity and
omitted variables. Broadly, a loop of causality between the independent and dependent
variables of a model leads to endogeneity.
For example, in a simple supply and demand model, when predicting the quantity
demanded in equilibrium, the price is endogenous because producers change their price in
response to demand and consumers change their demand in response to price. In this case,
the price variable is said to have total endogeneity once the demand and supply curves are
known.
METHODOLOGY OF ECONOMETRICS
Traditional econometrics methodology proceeds along the following lines;
1. Statement of theory or hypothesis
2. Specifications of the mathematical model of the theory
3. Specifications of the statistical, or econometric model
4. Obtaining the data
5. Estimation of the parameters of the econometric model
6. Hypothesis testing

2. 7. Forecasting or prediction
8. Using the model for control or policy purposes.