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What Are the Different Types of Econometrics Theory?

Osmand Vitez
Osmand Vitez

Econometrics theory uses a mix of mathematics, statistics, and economics to create usable models for business studies. Economists and other educated individuals can engage in these activities as upper degrees are often necessary to learn and understand these models. Different types of econometrics theory include introductory, spatial, and nonparametric estimation. The different theories rely on the gathered data to ascertain information used to make decisions. In short, econometrics is meant to provide the best data available for making decisions that have the least risk and greatest economic rewards.

Introductory econometrics tend to be a much more basic set of models. The two most basic assumptions here include an inverse relationship between the price of an item and the quantity demanded — investment expenditures increase as interest rates decrease, and there is a positive relation between income and consumption expenditure. These factors are commonly parts of each introductory theory and are based in econometric studies. Early studies in econometrics often focus on these attributes because companies most often want to discover these relationships before moving on to more complex studies. Though the study of econometrics here and later may seem extremely academic, it does provide useful data for private businesses and governments.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Spatial econometrics uses information gathered from different data sets to create models for use in business. The data either results in dependent data pieces or correlated data taken from a larger population of information. A few attributes of this econometrics theory include decay of sample data with distance, observation similar to neighboring observations, hierarchy, and a systematic change in parameters. These attributes may not present themselves in each and every study that surrounds spatial econometrics theory. Some of the attributes should be included, however, as that will define the study.

Nonparametric studies are a very common inclusion within econometric theory. In short, it is a general method used by reviewers to discover a functional form that fits any observed data. As the main thrust of econometrics is to gather large data sets to make statistical or mathematical assumptions, the use of nonparametric estimates is extremely common. When enough econometrics studies continue to gather and report similar data using nonparametric methods, a theory will develop based on the hypotheses stated. Hence, econometrics theory develops from the numerous studies on business activities that exist around a certain data set.

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