1.1             What is Econometrics?

The term econometrics is derived from two words of Greek origin, oikovouia (economy) and ueipov (measure). In Literal words, it simply refers to as measurement of economy or economic relationships.  It may be defined as the integration of economic theory, mathematics and statistics for the purpose of providing numerical values for the parameters of economic relationship and verifying economic theories.  More importantly, econometrics is different from other branches of economics and related sciences for is concerned with stochastic, implying non-exact economic relationships measurement.



To this end, econometrics is a development of statistics and mathematical economics not only to measure but make an inference to real world problems. For instance, you are consulted by the Lagos State government to evaluate the effectiveness of Bus Rapid Transit (BRT) on traffic congestion in Lagos state. To what extent does the knowledge of econometrics will help you in the evaluation task because already the Lagos Metropolitan Area Transport Authority (LAMATA) has the statistics or records of BRT and even traffic congestion's since inception in March 2008? Truly, they have the statistics or data but statistics only cannot measure the term effectiveness? Therefore, the knowledge of econometrics will help you to measure the relationship between BRT and traffic congestion's and if possible the effects of BRT on traffic congestion's? And even consider the measure of other possible factors not included in this evaluation that can also affects traffic congestion in Lagos State and thus, make a better decision about traffic congestion's by the Lagos government at present and in the future, all through the knowledge of econometrics.



1.2             Process of Testing a Theory

Foremost, a theory is a Model. It is an abstraction from the world. Hence, econometrics presupposes the existence of a body of economic theory. Economic theory should come first, because it sets the hypotheses about economic behavior which should be tested with the application of econometric techniques.

In testing a theory, we should consider the following steps;

STEP 1: Define the problems and state the assumptions and hypothesis about the economic behaviour as theory.

STEP 2: Express the theory in its mathematical form which constitutes the model. This is done by expressing the equation in two components of systematic and random components.

STEP 3: Confrontation of model with data. That is, process of gathering the data to investigate the economic relationship.



                                __ Example of a data showing an economic relationship__


STEP 4: Empirical investigation or evaluate with data   through the aids of economic criteria or statistical criteria or econometric criteria.

STEP 5: Conclusion on whether the theory agrees with the data or disagree with the data. Accept the theory if it agrees with the data from the economic criteria or statistical criteria or econometric criteria and reject the theory if it disagrees with data from each criteria. Then, revise or amend theory in line with our new empirical observations.

Thus, the procedure to be followed when testing a theory may be schematically, a summary of methodology of econometric research.

 Feel free to drop your comment if you need any other explanation on econometrics or you have your own definition of econometrics. And don't forget to like and also share.