Econometrics can be defined as a set of quantitative techniques that are useful for making "economic decisions" and these economic decisions are not restricted to those made by economists. It can be any decision that affects the allocation of scarce resources.

Econometrics is the method and application of statistical and mathematical theories to economics involving the purpose of testing hypotheses on a time series. This can also forecast future trends. Econometrics makes use of economic models and tests them through statistical trials and the results are then compared and contrasted against real-life examples.

Econometric analysis proceeds by the statement of theory or hypothesis. Then there will be a specification of the econometric model to test the theory. After that, there will be an estimation of the parameters of the chosen model. Once the estimation is complete there will be verification or statistical inference. Then there is prediction or forecasting. Now the model can be used for control or policy purposes.

Econometrics can be subdivided into two major categories that are theoretical and applied. It uses tools such as frequency distributions and probability distributions. It also makes use of tools like statistical inference and simple as well as multiple regression analysis. It uses models such as simultaneous equations models and time series methods. An illustration of a real-life application of econometrics is to study the hypothesis that as a person's income increases then his/her spending also increases.

Econometrics uses the Linear regression model as the basic tool. In modern econometrics, other statistical tools are also used. Linear regression continues to be the foremost frequently used start line for analysis. A linear regression on two variables can be estimated and it is visualized as fitting a line through data points. This represents the paired values of the independent and dependent variables.

Econometrics may use standard statistical models to study economic questions, but most often they are used with observational study data. It is not used with experiments. In this, the design of observational studies in econometrics is similar to the design of studies in other observational disciplines, such as astronomy and epidemiology. Analysis of data from an observational study is guided by the study protocol, although exploratory data analysis, as well as data analysis, may be useful for generating new hypotheses.

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