economics terms


Econometrics is the area of statistics specialized to deal with economic models.  We can identify distinctions between both economics and econometrics and between statistics and econometrics.

Economics (as typified by the Classic Economic Models featured on this web site) is generally presented in terms of smooth curves and precise equations.  Reality is a cloud of data points that may only suggest the existence of some underlying smooth curve.  The reconciliation of these two views takes the form of a model

        y = a + b x + e,

where x and y are observable data, a and b are parameters, and e is an error term.  The relation

        y = a + b x

would be a smooth line.  The error term e accounts for why the observed data points do not lie on that straight line.  The goal of econometrics is to make inferences about a and b given the observed cloud of data points (x,y).

The major distinction between econometrics and statistics is that economic models almost universally involve multiple equations.  As a consequence, the typical economic model involves several equations such as

        y1 = a + b y2 + c x + e,

where both y1 and y2 are endogenous (or determined by the model at hand.  The range of statistical models, on the hand, includes many models where right-hand side endogeneity is not an issue.  Econometrics also involves equations such as

        y1 = a + b y2* + c x + e,

where y2* is the expectation of y2 rather than its observed value.  This kind of modeling elements takes econometrics into areas not at all common in statistical models of, for example, a science experiment where the explanatory variables are neither endogenous or determined by the expectations of the subject of the experiment.

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Classic Economic Models

Economics Terms

Arbitrage Pricing
Arbitrage Profit
Average Cost
Balance of Payments
Budget Constraint
Call Option
Concave Function
Consumer Surplus
Consumption Function
Convex Function
Deadweight Loss
Demand Curve
Economic Agent
Economic Model
Economics Textbook
Endogenous Technical Change
Exchange Rate
Expectations Hypothesis
Federal Funds (Fed Funds) Rate
Fixed Exchange Rate
Floating Exchange Rate
Frictional Unemployment
Gross Domestic Product (GDP)
Income Effect
Income Elasticity
Indifference Curve
Interest Rate
Intertemporal Substitution
Jensen's Inequality
Marginal Cost
Marginal Product
Marginal Utility
Optimizing Behavior
Perfect Competition
Phillips Curve
Price Elasticity
Producer Surplus
Production Function
Production Possibility Frontier
Put Option
Reservation Wage Rate
Risk Aversion
Structural Unemployment
Substitution Effect
Supply Curve
Taylor Rule
Technological Growth
Term Structure
Theory of the Consumer
Theory of the Firm
Unemployment Rate
Utility Function
Velocity of Money
Yield Curve