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Economic Model:
- An economic model is a simplified representation of the real world designed to analyze and understand economic phenomena.
- Economic models are theoretical in nature and are typically based on assumptions and simplifications to make complex economic relationships easier to understand.
- Economic models can be used to make predictions, analyze the effects of different policies, and understand the interactions between different economic variables.
Econometric Model:
- An econometric model is a statistical model that uses econometric techniques to estimate and test the relationships between economic variables.
- Econometric models are empirical in nature and are based on data rather than theoretical assumptions.
- Econometric models are used to estimate the parameters of economic relationships based on observed data, test the validity of economic theories, and predict future economic outcomes.
Methodology involved in an econometric model:
1. Formulation of the model: The first step in creating an econometric model is to specify the functional form of the model, including the relationship between the dependent and independent variables.
2. Data collection: Data on the variables of interest are collected from relevant sources such as surveys, official statistics, or research studies.
3. Model estimation: The parameters of the model are estimated using statistical techniques such as regression analysis. This involves fitting the model to the data to find the best-fitting values for the parameters.
4. Model evaluation: The estimated model is then evaluated to assess its accuracy and reliability. This may involve testing the model’s assumptions, checking for multicollinearity, heteroscedasticity, and autocorrelation, among other things.
5. Model interpretation: Once the model has been estimated and evaluated, the results are interpreted to draw conclusions about the relationships between the variables and make predictions about future economic outcomes.
6. Policy analysis: The estimated econometric model can be used to analyze the effects of different policies or interventions on economic variables, allowing policymakers to make informed decisions based on the model’s predictions.
Differentiate between economic model and econometric model.
Describe the methodology involved in an econometric mode
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