As the classificatory scheme in Figure I.5 suggests, econometrics may be divided into two broad categories: theoretical econometrics and applied econometrics. In each category, one can approach the subject in the classical or Bayesian tradition. In this book the emphasis is on the classical approach. For the Bayesian approach, the reader may consult the references given at the end of the chapter.
Theoretical econometrics is concerned with the development of appropriate methods for measuring economic relationships specified by econometric models. In this aspect, econometrics leans heavily on mathematical statistics. For example, one of the methods used extensively in this book is least squares. Theoretical econometrics must spell out the assumptions of this method, its properties, and what happens to these properties when one or more of the assumptions of the method are not fulfilled.
In applied econometrics we use the tools of theoretical econometrics to study some special field(s) of economics and business, such as the production function, investment function, demand and supply functions, portfolio theory, etc.
This book is concerned largely with the development of econometric methods, their assumptions, their uses, their limitations. These methods are illustrated with examples from various areas of economics and business. But this is not a book of applied econometrics in the sense that it delves deeply into any particular field of economic application. That job is best left to books written specifically for this purpose. References to some of these books are provided at the end of this book.
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