Managerial Economics and Econometric Models

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MANAGERIAL ECONOMICS AND ECONOMETRIC MODELS Econometrics is the integration of economics, mathematics, statistics for the purpose of providing numerical values for the parameters of economic relationships and verifying economic theories. It is a special type of economic analysis and research in which the general economic theory in mathematical terms is combined with measurement of economic phenomenon. Economic theory should come first because it sets the hypotheses about economic behavior which should be tested with the application of econometric techniques.

Methodology of Econometrics :

Methodology of Econometrics Statement of theory or hypothesis. Specification of the econometrics model to test the theory. Estimation of the parameters of the chosen model. Verification of statistical interference. Forecasting or Prediction. Use of the mode for control or policy purpose.

Goals/Objectives/ Purpose of Econometrics:

Goals/Objectives/ Purpose of Econometrics Analysis – i.e. testing of economic theory. Obtaining empirical evidence to test the explanatory power of economic theories to decide how well they explain the observed behavior of the economic units. Policy Making : i.e. supplying numerical estimates of the individual coefficients of economic relationships which may be then used for decision making. Helps to compare the effects of alternate policy decisions. Forecasting : Using the numerical estimates of the coefficients in order to forecast the future values of the economic magnitudes. It will help policy maker to judge whether it is necessary to take any measures in order to influence the relevant economic variables. Forecasting is increasingly important both for the regulation of developed economies as well as for the planning of the economic development of underdeveloped countries.

Econometric Models:

Econometric Models A mathematical description of some economic entity, varying in size all the way from rather small to vast. A objective is to predict the future behavior of the economic variables encompassed in the model. GNP = G t + I t +C t C t = α + β GNP t α + β = constants


Advantages To derive a predicted set of eco-variables numbers from the econometric model - Specify explicitly the full set of variables to be included in the full set of equations constituting the model. Then estimate the parameters for those equations. Recognize which variables are autonomous. Formulate some basis the estimating those autonomous variables Through the verification process recognize approximately how strong/ weak our criteria for acceptance are. Thus, the process of model formulation virtually forces both a better understanding of complex problems and a rational critique. Sometimes the econometrician will have either greater/low confidence in the predicted set of numbers. When low, he can pinpoint the reasons in the areas in his models. Then can substitute alternative assumptions about assumed values for autonomous variables and determine how much difference it is making in the predicted model ( set of numbers).

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