What is Econometrics?

[Splanky]

I’m interested in majoring in Economics in college, and in browsing through course catalogs and such I often see things like “If you’re interested in Game Theory, classes XXX will be helpful. If interested in Econometrics…” I know what Game Theory is, but I’ve yet to find an explanation to any extent of what Econometrics is. The dictionary says it is “the application of statistical methods to the study of economic data and problems”, but I thought that’s what most Economic Analysis is (colleges seem to make a distinction between Analysis and Econometrics classes.)

[js_africanus]

@Splanky

The dictionary says it is “the application of statistical methods to the study of economic data and problems”, but I thought that’s what most Economic Analysis is…

Economics:

Suppose we have an economy with two consumers A and B, each of whom is endowed with a certain amount of good X and Y, denoted as X[sub]A[/sub] and Y[sub]A[/sub], and X[sub]B[/sub] and Y[sub]B[/sub], respectively. Assume further that these consumers are rational and have quasilinear preferences, and can trade costlessly. Neither consumer is capable of production, and the total welfare of the economy is limited to the sum of the initial endowments.

Now translate that into equations, stick it into an Edgeworth Box, and find an equilibrium. Convince yourself that it can be shown that the outcome will be efficient, i.e. it will maximize welfare.

Econometrics:

Apply a hedonic price model of natural amenities and use that to construct a measure of welfare based on stream quality. Search the globe for data on privately and publicly held streams. Test Coase Theorem. Get personally attacked by environmentalists. (Okay, that last one was an editorial.)
Here is a good example. You take a rational person and make predictions about how he will respond to a work envirnment when the independent variable is the probability of getting a gun pulled on you. That’s economics. When you take actual crime data to test the model and estimate the size of the effects, then you’re doing econometrics. That’s what John Lott did in More Guns, Less Crime.

This working paper is an example of econometrics. From the abstract:

This paper measures the extent to which poverty is caused by fluctuations in welfare as well as the long-run level of welfare, using the IFPRI household food security panel which tracked 686 households from rural Pakistan between 1986/76 to 1990/91. The article compares the poverty impact of policies designed to increase mean incomes (‘growth’ policies) and those designed to even out fluctuations of income over time (‘smoothing policies’) after making an explicit adjustment for measurement error. (emphasis mine)

This working paper is an example of economics. From the abstract:

We develop a model where a person chooses from a menu of options and is partially aware of her self-control problems. This menu model replicates earlier results and generates new ones. A person might forego completing an attractive option because she plans to complete a more attractive but never-to-be-completed option. Hence, providing a non-procrastinator additional options can induce procrastination, and a person may procrastinate worse pursuing important goals than unimportant ones. (emphasis mine)