Econometric Predictors and the Economy

Econometrics unites economic theory with economic statistics and mathematics. The end goal is to analyze and test economic relationships, using different scenarios and theoretical situations to predict what might logically happen. Students who do well in this discipline are generally bright in financial economics, economic research and statistics. What started in the thirties following the Great Depression is now being offered by leading economists at universities around the world.

It’s a common misconception that economic statistics and econometrics are exactly the same thing. The difference is that statistics are performed in controlled experiments with known data sets, whereas econometrics deals with data as is or data that is subjected to hypothetical possibilities too. Regression analysis is often used in this technique, which determines the mean of random variables is predicted based on the mean of previously measured variables. Other tools used include time-series analysis (measuring variables over a period of time) and cross-sectional analysis (studying the correlation between two variables at a certain point in time).

Like other economics statistics, econometrics is often slammed by critics who feel the results can be inaccurate. After all, predictions of the future must be made based on current data only, without withstanding the test of time. Also, if economists accidentally measured a relationship linearly, when it should be curved, they may produce incorrect findings. Relying too heavily on statistics, without considering what forces shaped those statistics, could be a serious flaw in the study. Even so, people’s insatiable demand to see what lies ahead has created an opening for intelligent individuals to fuse math and economic theory together to create assumptions based on logic and probability.

An economic recession is ugly. Consumers lose their jobs, lose their homes, file for bankruptcy and tighten spending. Businesses shed jobs, cut wages, lay-off employees and collapse. Lending institutions have trouble collecting from debtors and this dries up their liquid assets. Investors see drops in profits and nervously pull their money out. As a result, our Gross Domestic Product declines and our nation as a whole becomes poorer. Is there no end in sight for our current despair? Global economics experts have a thing or two to say about the current crisis.

According to “macro economics” professors Antonio Fatas and Ilian Mihov at the INSEAD International Business School, there were some “classic macroeconomic imbalances that predicted the crisis.” They argue the best way to avoid an economic recession is to have a stable pattern of consumption that matches national GDP, as we see in countries like Germany and France. In the US, the GDP went up 1% in the first quarter of 2008, which is extremely low, and then retracted 0.5% in the third quarter, which is the worst decline since 2001. When advanced economies build insurmountable deficits and their Gross Domestic Products decline, you can be rest assured a recession is on its way.

According to “macro economics” professors Antonio Fatas and Ilian Mihov at the INSEAD International Business School, there were some “classic macroeconomic imbalances that predicted the crisis.” They argue the best way to avoid an economic recession is to have a stable pattern of consumption that matches national GDP, as we see in countries like Germany and France. In the US, the GDP went up 1% in the first quarter of 2008, which is extremely low, and then retracted 0.5% in the third quarter, which is the worst decline since 2001. When advanced economies build insurmountable deficits and their Gross Domestic Products decline, you can be rest assured a recession is on its way.

“Economists are frequently interested in relationships between different quantities, for example between individual wages and the level of schooling. The most important job of econometrics is to quantify these relationships on the basis of available data and using statistical techniques, and to interpret, use or exploit the resulting outcomes appropriately” (A Guide To Modern Econometrics, Marno Veerbeek, 2008). In essence, this technique combines basic economics, observed data and statistical methods. The textbook goes on to say, “It is the interaction of these three that makes econometrics interesting, challenging and, perhaps, difficult.”

There are different economics books and schools of thought regarding how to dig out of an economic recession. Mainstream followers of basic economics say we must simply create more consumer demand and stimulate spending again, which has been the policy carried by the Bush and Obama administrations so far. Monetary experts favor decreasing interest rates, discounting federal bonds and opening up loan access to more people and small businesses. Keynesian economists, on the other hand, prefer to raise interest rates, tighten overall government spending but increase investments in infrastructure, while also encouraging businesses to decrease wages (faster than the prices are falling). One could argue that the current stimulus packages have also made use of these theories. Supply-side economists may advocate tax cuts to promote business investments, while laissez-faire minded economists say the situation will work itself out naturally, without government interference.

BOLA TANGKAS