We find that a 10-percent permanent increase in the price of cigarettes reduces current consumption by 4 percent in the short run and by 7.5 percent in the long run.
Gary Becker, Michael Grossman, and Kevin MurphyDefinition of Econometrics
In this chapter we discuss the contents of this book, including the basic ideas we attempt to convey and the tools of analysis used. We begin with our definition of the subject: Econometrics is the application of statistical techniques and analyses to the study of problems and issues in economics.
The term econometrics was coined in 1926 by Ragnar A. K. Frisch, a Norwegian economist who shared the first Nobel Prize in Economics in 1969 with another econometrics pioneer, Jan Tinbergen. Although many economists had used data and made calculations long before 1926, Frisch felt he needed a new word to describe how he interpreted and used data in economics.
Today, econometrics is a broad area of study within economics. The field changes constantly as new tools and techniques are added. Its center, however, contains a stable set of fundamental ideas and principles. This book is about the core of econometrics. We will explain the basic logic and method of econometrics, concentrating on getting the core ideas exactly right.
We divide the study of econometrics in this book into the following two fundamental parts:
Part 1. Description
Part 2. Inference
In each part, regression analysis will be the primary tool. By showing regression again and again in a variety of contexts, we reinforce the idea that it is a powerful, flexible method that defines much of econometrics.