# How is econometrics used in accounting?

## Econometrics

The **Econometrics** forms a branch of economics that deals with the review and analysis of economic theories with the help of mathematical-statistical procedures. In this sense, it serves as an auxiliary science to test the informative value of economic models and to make economic predictions.

### Measure and test economic theories

Econometrics was founded as an independent branch of science by a group of well-known economists in the 1930s. With the establishment of the Econometric Society and the establishment of the magazine Econometrica in 1933, the term also found official recognition and use. The term "econometrics" is an artificial word. It is made up of "Ökonomie" for economics and "Metrie" from the Greek metron = measure, measurement. Econometric studies and methods are mainly used in the field of economics, but there are also some applications in business administration areas. The econometric analysis always needs a theoretical reference basis, and the availability of suitable data is an essential prerequisite for the use of methods for testing and checking.

### Goals of Econometrics

On this basis, econometrics pursues **different objectives**:

- Econometrics aims to quantitatively determine abstract theoretical parameters in economic models on the basis of empirical data. In a macroeconomic investment function that describes the relationship between investment activity and the interest rate, econometrics tries, for example, to measure the dependence of the propensity to invest on the interest rate. While the theoretical model only describes a general relationship for this, econometrics provides a concrete number for a specific economy.
- Econometrics is also used to test economic hypotheses. A hypothesis is not yet a theory, but an assumption about a logical connection for which there is still no evidence. Econometrics provides such evidence by means of mathematical-statistical test procedures with which the quality of a hypothesis can be checked. Often there are several competing hypotheses to explain a situation. With the help of econometrics it can be determined which hypothesis provides the best explanation.
- A third area of activity in econometrics is simulation and prognosis. With the help of models derived from earlier data estimates, predictions can be made about future developments or statements can be made about what will happen if individual parameters change. Such statements are valuable, for example, in order to be able to assess the impact of economic policy measures.

### Regression and Correlation - the methodology

The classic instrument of econometrics is regression analysis. It is still of central importance for determining, describing or testing connections. The regression analysis, which is linear in its simplest form, has been significantly refined and differentiated over the last few decades. In addition, the correlation analysis (see also Correlation) is of particular importance in econometrics. It checks the strength of connections.

Modern computer technology has significantly expanded the possibilities and complexity of the econometric methodology. For example, it has also made the use of non-linear models or neural networks possible. Econometric analyzes can, however, only ever show a mathematical-statistical relationship; this is not necessarily proof of a factual logical relationship. This is where the limits of econometrics lie.

### Summary econometrics

- emerged in the 1930s as an economic auxiliary science
- Analysis to estimate, test and review
- Connection of economic theory and empirical verification
- Mathematical-statistical procedures as a basis
- Regression analysis and correlation analysis

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