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What is Econometrics?

Econometrics is part of economics as a science. It deals with the statistical (empirical) modelling of economic theories (hypotheses) in order to explain, confirm or disprove economic theory empirically. In economic theory, causalities between two (or more) relevant measures are assumed, e.g. the relationship between income (Y) and consumption (C) of a household. Two causalities can be suspected: (1) The consumption of a household depends on its income: C(Y) or (2) the income of a household depends on its consumption: Y(C). Both statements (theory/hypotheses) are not opposed to each other (no contradiction), but are inversely related to each other (inverse causality). Using a sample or total population of households a statistical unit of interest and econometric methods it is possible to test both hypotheses for their internal validity and external validity.

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Scope of Econometrics

Econometrics quantifies the theoretical hypotheses (economic theory) by testing corresponding empirical statements (empirical model). If we hypothesize that the consumption of individual households has a positive relationship with household income, the resulting empirical model should confirm or disprove the positive relationship between consumption and household income in the sample and in the household population.

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