Answer to Question #173725 in Macroeconomics for innocent kampumba

Question

Question 1

a. Almost all economists believe that economics must ultimately be an empirical discipline, 

that their theories of how the economy works must be related to (and, if possible, tested 

against) real-world events and data. But economists differ enormously on how one does 

this and what implications can be drawn afterward. Kindly distinguish the following four 

(4) different approaches to relating theories to the real world: Common-sense empiricism, 

Statistical analysis, Classical econometric analysis and Bayesian econometric analysis. 

b. Briefly discuss the distinctions among mathematical economics, statistics and 

econometrics.

Answer 1

a)     Almost all economists think that, in the end, economics must be an empirical discipline, in which their theories of how the economy works must be based on real-world events and data. However, economists have a wide range of opinions on how to go about doing this and what conclusions can be drawn as a result. Common-sense empiricism, statistical analysis, classical econometric analysis, and Bayesian econometric analysis are the four approaches to connecting theories to the real world that I will discuss.

           Common-sense empiricism is a method of connecting theory to reality by observing real-world events without the use of statistical aids. Individuals can be taught to be open to a wide range of real-world events, and individuals can objectively determine whether their theories match those events, according to supporters of common-sense empiricism. The method necessitates economists constantly observing economic phenomena with trained eyes, allowing them to see things that others would miss. It does not have a precise line of demarcation to decide whether or not a theory should be accepted in the end, but it does have an imprecise line.

           The statistical analysis approach, like the reality approach, emphasizes aspects of events that can be quantified and thus subject to statistical measurement and analysis. Economic phenomena are frequently statistically classified, measured, and described. The approach makes use of whatever statistical methods and techniques are available in order to extract as much information as possible from a data set. It doesn't try to connect the data to a theory; instead, it makes the data speak for itself.

           The classical econometric approach is an empirical analysis technique that connects theory and data directly. In empirical analysis, the researcher's common-sense sensibility, or understanding of the phenomena, plays little role; the classical econometrician is merely a technician who allows the data to test the theory.

           The Bayesian approach connects theory and data directly, but it assumes that any statistical test isn't conclusive when interpreting it. It is based on the Bayesian approach to statistics, which seeks probability laws as subjective degrees of belief rather than objective laws. Statistical analysis cannot be used to ascertain objective truth in Bayesian analysis; it can only be used to aid in the development of a subjective judgment. As a result, researchers must merely alter their subjective views using statistical tests. The technological extension of common-sense empiricism is Bayesian econometrics.

b)     Mathematical economics is the application of mathematical techniques to the formulation of hypotheses. It's a type of formal, abstract analysis that's used to come up with theories and their consequences. However, the statistics refers to a set of numerical data, and statistical analysis refers to the application of statistical tests derived from probability theory to obtain insight into those data. On the other hand, Econometrics is a branch of economics that blends mathematical economics with statistical analysis to formally test hypotheses.