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## Significance of Econometrics

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. Econometric models are not just statistical models. They are a set of hypotheses that allow statistical inference from a particular data that is under review.

Some examples of relationships are consumption function, cost function, demand function, production function, etc. Economic theory is primarily the study of relationships between economic variables. Econometric models are sets of equations that explain the relationship between economic variables. They are subject to errors.

For example the national income model consists of the following mathematical equations: Y=C+I; C= a+bY+u. Where, Y is national income, C is consumption, I is investment, u is an intercept term and a, b are parameters.

Mathematics and statistics are the basic tools of econometrics. Econometrics converts economic theory into mathematical terms and uses statistical methods to derive economic relationships with certain assumptions.

The following steps are involved in econometric modeling in the same order. Using economic theory, mathematical model of theory, econometric model of theory, data, estimation of econometric model, hypothesis testing or statistical inference, forecasting or prediction, control or policy purposes.

There are two major branches of econometrics. The development of appropriate methods for the measurement of economic relations according to the econometric model is called theoretical econometrics. Applying the tools of theoretical economics to study some function like demand, supply, production etc. is called applied econometrics.

Econometrics is the study of how theory and data from economics, business, and other social sciences can be used with statistical tools to answer “how much” questions. For example, in analyzing the effect of tax rate, interest rate, cash reserve ratio, etc. on demand in the economy, econometric tools are widely applied.

Econometric tools play a major role in studying the relationship between tuition fees and enrollment, advertising and sales, investment and demand, etc. The impact of expenditure on agriculture, industrial, social sector etc. can also be studied with the help of econometric tools.

The principal elasticities and coefficients are called parameters. The values of economic parameters should be evaluated using samples of economic data while formulating economic policies.

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