Economics is a data-rich social science. Economists, business analysts and statisticians use a variety of mathematical and statistical tools to analyze economic data that they collect or that they gather from various sources. These methods provide quantitative ways to explain economic theories, allocate resources to achieve favorable outcomes, and predict the future direction of the economy. Economic data analysis techniques require a solid grasp of statistics, matrix algebra, and other mathematics.
Defined as economic measurement, econometrics involves the quantitative measurement and analysis of economic phenomena. Economists use econometric techniques to describe economic phenomena, test theories and predict future economic activity. The primary technique used in econometrics is regression analysis. This complex statistical technique seeks to explain changes in an outcome, or dependent variable, as a function of changes in a set of predictors, or independent variables. For example, economists may use regression techniques to estimate the effects of multiple independent variables such as education, ethnicity, gender and work experience on average incomes of workers in a particular economic sector. It is important to remember that regression analysis cannot prove causal relationships; it can test only whether a significant relationship exists.
Time-Series Analysis is a specialized form of econometrics that uses regression techniques to analyze economic data collected over a period of time. Time-series regression uses past and present values of a dependent variable, such as unemployment rate or the price of a commodity, to try to predict future values, based on changes in independent variables.
Input-Output is a form of economic data analysis that illustrates the linkages among various industries. The Input-Output method uses matrix algebra techniques to analyzes those linkages, The rows and columns of a matrix in this form of analysis represent sales and purchases by various economic sectors. The matrix then illustrates the flow of goods among various industrial sectors, such as the flow of oil to the steel industry for production and the flow of steel for oil exploration equipment to the oil industry. Input-Output analysis helps economists determine the level of inputs needed for a given level of output.
Economics, by definition, studies how people, households, firms and whole societies allocate limited resources to satisfy needs and wants. Linear programming is a valuable tool in allocating resources to achieve optimal benefit. This technique allows economists to analyze ways for achieving an outcome, such as the highest level of profit for a firm, subject to a set of given constraints. During World War II, linear programming was used to study how the military could produce effective weaponry while reducing costs. The technique spread to industry after the war.