Name: Asif Mahamud
Class: MBA Semester 2
Paper: GE 207-II Econometrics
Roll No: 95/MBA/210003
Business Management Department, University of Calcutta
1. Distinguish between an economic model and econometric model using a
suitable example
Ans:
Economic Model
Economic models are qualitative but by nature,
they are based on mathematical models as they
ignore residual variables.
It shows the relationship between dependent and
independent variables without any presence of
error terms.
Economic models attempt to exhibit the logical
relationship between different variables considered
in the model.
The economic model is directly linked with the
mathematical model as in mathematical economics
all the economic models are applied to express
them into quantitative form.
The outcome of the economic model is almost
certain and exact. It means all the economic
models are developed with a set of fixed
assumptions/conditions so the outcome is also
almost fixed.
Economic models are deterministic models.
Deterministic models do not include the error
term.
Economic models are less powerful to predict the
future.
Economic models do not have anything to do with
the significance testing of the variables and
parameters.
Economic models allow for random elements
which might affect the exact relationship and
tender it in stochastic character.
Y=B1+B2X, Keynesian consumption function is an
example of an economic model. This relation is
deterministic.
2. What are the assumptions of the error term?
Ans: Assumptions of Error Term:
i.  Zero  mean  of  error  :   E(ε) = 0
ii.  The  errors  have  constant  variance. 
Econometric Model
Econometric models are extensively statistical
or future forecast oriented and thus based on
statistical models.
It shows a functional relationship among the
variables in presence of error terms.
Econometric models focus on calculating the
numerical values and direction of variables
considered in the model.
Econometric models are also directly linked
with the mathematical model but it is used for
further empirical forecasting and extension of
an economic model or mathematical model.
The econometric model includes the residual
variables/uncertainty so their outcome is not
fixed and unknown, unlike the economic model.
So the outcome of econometric models may be
certain but not exact.
All the econometric models are stochastic and
econometrics assumes all the economic models
as stochastic by including the error terms.
Econometric models are more powerful to
predict the future.
Econometric models require significant testing
of their parameters.
Econometric models take randomness as an
essential element of the model. So all the
economic models in econometric models as
probabilistic models.
Y=B1+B2X+U, this stochastic relation is an
example of the econometric model.
iii. The  errors  are  not  related with each other. 
iv.   The  independent variables  are  not  correlated  with  error term.
v.  The independent variables  are  not related with each other.