Econometrics

Econometrics is the application of statistical methods to economic data and is described as the branch of economics that aims to give empirical content to economic relations. More precisely, it is "the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference." An introductory economics textbook describes econometrics as allowing economists "to sift through mountains of data to extract simple relationships." The first known use of the term "econometrics" (in cognate form) was by Polish economist Paweł Ciompa in 1910.Ragnar Frisch is credited with coining the term in the sense in which it is used today.

The basic tool for econometrics is the linear regression model. In modern econometrics, other statistical tools are frequently used, but linear regression is still the most frequently used starting point for an analysis. Estimating a linear regression on two variables can be visualized as fitting a line through data points representing paired values of the independent and dependent variables.

For example, consider Okun's law, which relates GDP growth to the unemployment rate. This relationship is represented in a linear regression where the change in unemployment rate (${\displaystyle \Delta \ {\text{Unemployment}}}$) is a function of an intercept (${\displaystyle \beta _{0}}$), a given value of GDP growth multiplied by a slope coefficient ${\displaystyle \beta _{1}}$ and an error term, ${\displaystyle \varepsilon }$:

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