Econometrics is a science that is dedicated to explaining and predicting economic phenomena, through the use of models reflected in mathematical form and the use of statistical procedures of estimation and contrast. Econometrics emerged in the 20th century as a necessity given the great advances that statistics was acquiring, in addition to the fact that economic theory increasingly provided new theories which had to be contrasted with reality.
That is why the economist Ragnar Frisch in 1920 began the study of econometrics.
This branch of economics makes use of mathematical and statistical models to examine, interpret and make predictions on economic procedures, predicting variables such as exchange rates, interest rates, prices of goods and services, production costs, reactions of the market and the effects of economic policies.
In the development of econometrics, mathematics, statistics and economic theory are combined, however experience has shown that each of these elements are necessary, but that it does not present a sufficient condition to really understand the quantitative relationships of the context modern economical. It is the mixture of these three elements that makes up a powerful analysis tool.
There are different types of econometrics:
Theoretical econometrics: is used in methodological developments in order to measure the affinities of economic origin that are established in econometric models. In order to do so, it is necessary to have the collaboration of other sciences such as mathematics and statistics. One of the most typical examples is that of least squares.
Applied econometrics: in this case, mechanisms of theoretical econometrics are applied for the specific analysis of certain economic and investment areas, such as supply and demand, investments, production, etc.
Due to the complexity of its study, different approaches are presented to undertake the methodological process, however, the traditional methodology prevails for both economic research and in the other associated areas. This methodology, in turn, is guided by a set of guidelines such as: hypothesis statements, explanation of the mathematical model, explanation of the econometric model, accumulation of data, valuation of parameters of the econometric model, elaboration and testing of hypotheses, prediction and application of the model.
