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What Is Applied Econometrics?

Maggie Worth
Maggie Worth

The term econometrics was coined to describe the study of metrics related to the economy or to the theory of economics in general. Theoretical econometrics concerns the concepts, ideals, and patterns surrounding economic measurements. Applied econometrics, on the other hand, concerns using economic metrics and measurements in a functional way. This might include studying economic benchmarks over a period of time to uncover trends or analyzing a set of specific metric points across several markets to determine probable outcomes in a given set of circumstances. Applied econometrics allows governments, financial institutions, and businesses to determine production requirements, project future needs, and align themselves with emerging trends.

While the definition of applied econometrics sounds complex, its basic concept is quite simple. Metrics are anything that can be objectively measured and quantified. In economics, this could include the gross national product of a country, the average per capita income, or the average amount of small business debt.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Applied econometrics analyzes these metric points and figures out what they mean to governments, businesses, and economic systems. They can then make policy or process changes to effect a positive outcome or lessen the impact of a foreseeable negative event or condition. For example, an applied econometrist might compare a country's unemployment rate and its average household income over the course of a five-year period. If he or she discovers, as is probable, that the household income declines as the unemployment rate rises, he or she can advise governmental policy makers to consider jobs-creation acts in order to lower the unemployment rate and raise household income.

The study and execution of applied econometrics at high levels can become quite involved. Multiple factors must constantly be evaluated, and practitioners must take care to consider data completely and objectively. A career in applied econometrics likely requires extensive education and strong competence in subjects such as statistics and probability.

Individuals, however, can benefit from the use of applied econometrics in their personal lives, particularly as they impact budget development. For example, a household might set out to analyze how it spends its income. It might collect credit card statements, utility bills, and other such documents and then classify expenditures by type. This might include living necessities such as the mortgage and utilities, entertainment expenses such as dining out and going to the movies, and medical expenses such as insurance costs and prescription co-pays.

Each of these numbers is a personal economic metric. By comparing these metrics year over year, the heads of households can see where money is being spent. This, in turn, allows them to make informed decisions about where spending cuts could potentially be made.

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