The application of mathematical and statistical techniques to economic problems. Econometric studies proceed by formulating a mathematical model. Then, using the best data available, statistical methods are used to obtain estimates of the parameters in the model. Methods of statistical inference are then used to decide whether the hypotheses underlying the model can be rejected or not. Econometrics is thus concerned with testing the validity of economic theories, and providing the means of making quantitative predictions. In addition, side by side with the empirical application of econometric methods, a body of statistical and mathematical theory has been developed which is essentially concerned with the particular difficulties encountered in applying statistical methods to economic theory and data. Thus it becomes possible to speak of ‘econometric theory’ and ‘applied econometrics’, of which the latter may still appear rather abstract to the layman.
Reference: The Penguin Dictionary of Economics, 3rd edt.