Microeconometrics in Business Management

1A single-equation econometric model

1.1 The essence of an econometric model

An econometric model, in the form of a single stochastic equation, is a primary tool in econometrics. The subject of its description consists of a dependent variable Y with y_t observations, where t is the statistical observation’s number (t = 1, …, n) and n is the sample size. The dependent variable is economic in character and represents a specific economic category [1].¹

Explanatory variables marked as X₁, …, X_j, …, X_k, essentially, represent the factors causing variations of the dependent variable Y. Also, some statistical observations are assigned to each dependent variables: x_t1, representing the variable X₁, …, x_tj, representing the variable X_j, … as well as x_tk for the variable X_k.

The most general form of a model with a single stochastic equation can be written as follows:

(1.1)

with one more variable η_t, the random component. This random component gives the model its stochastic character and results from the following:

• The random nature of economic phenomena and processes.
• A conscious and purposeful resignation from complying with less important and statistically insignificant factors.
• Inaccuracies during observation and measurement of economic phenomena and processes.
• A lack of full precision in determining the equation’s analytical form.
• Round-ups in the course of numerical calculations ...