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THE DEVELOPMENT OF ECONOMETRICS AND EMPIRICAL METHODS IN ECONOMICS Debate about empirical methods in economics has had both

h a microeconomic and a macroeconomic front. The microeconomic front has, for the most part, been concerned with empirically estimating productions and supply-and-demand curves. The macroeconomic front has generally been concerned with the empirical estimation of macroeconomic relationship and their connections to individual behavior.

EMPIRICAL ECONOMICS Common-sense empiricism, approach that relates theory to reality through direct observation of real world events with a minimum of statistical aids. Its sometimes disparagingly called armchair empiricism.

Can involve careful observation, extensive field work, case studied, and direct contact with the economic events and institutions being studied.
Argue that individual can be trained to be open to a wide range of real-world events.

The statistical analysis approach also requires one to look at reality but emphasizes aspects of events. Its can be quantified and thereby be subject to statistical measure and analysis. Focus to statistically classifying,measuring and describing economic phenomena.

Many theories and permits the researcher to choose the most relevant theory.
Statistical analysis approach is very similar to common-sense empiricism.

The classical econometric approach is a method of empirical analysis that directly relates theory and data.
Classical econometrician is simply a technician who allow the data to do the testing of the theory. Bayesian approach to statistics that seeks probability laws not as objective laws but as subjective degrees of belief. Statistical analysis cannot be used to determine objective truth. Bayesian econometrics is a technical extension of common-sense empirical.

Bayesian analysis requires that researchers arrive at their own prior belief by some alternative method. Bayesian and the classical interpretations of statistics are mutually exclusive. Ultimately each research must choose one or the other. Recursive system with much more complicated dynamics are finding a wider audience. Another group of economists is using a VAR (Vector Auto Regression) approach, find patterns in data independent of any theory.

Mathematical Economics, Statistics and Econometrics Mathematical economics refer only to the application of mathematical techniques to the formulation of hypotheses. Statistics refer to a collection of numerical observations. Statistical analysis refer to the use of statistical tests derived from probability theory to gain insight into those numerical observations. Econometrics economics,which is used to formulate hypotheses and statistical analysis.

Marshall and Edgeworth believing that the ceteris paribus assumptions used to analytically derive the curve made difficult to quantity. Testing of general hypotheses was done in relation to current circumstances or in relation to historical events. Advances in computer technology made it possible to conduct extremely complicated empirical work.

Early attempt to add empirical foundation to a demand relationship is the work of Gregory King (1648-1714).

NEOCLASSICAL ECONOMICS AND EMPIRICAL ANALYSIS Neoclassical economists followed many different approaches to statistical analysis. Stanley Jevons saw statistics as a method of making economics into an exact. Leon Walras continued to develop his theory independents of any chance of empirically testing it. Alfred Marshall believed in empirical work but did not conduct formal statistical analysis.

MACROECONOMICS AND EMPIRICAL ANALYSIS Jevonss Sunspot Theory

One of the early attempts at formal macroeconomic empirical work.


He was interested in discovering the cause of trade or business cycle that led to fluctuation in prices. To test his theory, Jevons looked at agricultural data, about fluctuations in the harvest, that were available from the thirteen and fourteenth centuries. Jevons is recognized as one of the spiritual forefather of econometrics.

THE RISE OF ECONOMETRICS Mitchells methodology and toward econometrics: (i) The future development of statistical and econometric methods. (ii) The strong desire on the part of the profession and the society for precision in implementing and testing theories. (iii) The development of mathematical economics. (iv) The hope that econometrics would turn economics into an exact science. (v) Brilliant and strong-willed advocates of the econometric method.

BAYESIAN ECONOMETRICS Bayesian propose dropping the classical interpretation and dropping traditional classical econometrics. In the classical statistics, one arrives at a point estimate of the parameter that satisfies certain characteristics, such as BLUE criteria (best, linear, unbiased,estimator). Bayesian analysis produces a density function for data, which is called a posterior density function.

EXPERIMENTAL ECONOMISTS AND SIMULATION Experimental economists claim to have proved various economic proposition through their experiments. Vernon Smith, conducted a laboratory experiment in 1956 to test whether equilibrium would be achieved in a double oral auction market. In a recent experiment, researchers tested a posted-price market and compared it to a doubleoral auction market.

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