What is 'Mathematical Economics'

Mathematical economics is a model of economics that utilizes math principles and methods to create economic theories and to investigate economic quandaries. Mathematics permits economists to conduct quantifiable tests and create models to predict future economic activity.

Advancements in computing power, big data techniques and other advanced mathematics applications have played a large part in making quantitative methods a standard element of economics. These elements are all backed by scientific methods advancing the study of economics.

The marriage of statistical methods, mathematics and economic principles has created an entirely new branch of economics called econometrics.

BREAKING DOWN 'Mathematical Economics'

Mathematical economics relies on statistical observations to prove, disprove and predict economic behavior. Although the discipline is heavily influenced by the bias of the researcher, mathematics allows economists to explain observable phenomenon and provides the backbone for theoretical interpretation.

Economists often wrestle with competing models capable of explaining the same recurring relationship called an empirical regularity, but few models provide definitive clues to the size of the association between central economic variables. From Main Street to Wall Street to Washington, this is what matters most to policymakers. When setting monetary policy, for example, central bankers want to know the likely impact of changes in official interest rates on inflation and the growth rate of the economy. It is in cases like this that economists turn to econometrics.

Using Econometrics

By turning to econometrics, the mixture of economic theory, mathematics and statistical inference can quantify valuable economic phenomena. In other words, it turns theoretical economic models into useful tools for everyday economic policymaking. The objective of econometrics is to convert qualitative statements (such as “the relationship between two or more variables is positive”) into quantitative statements (such as “consumption expenditure increases by 95 cents for every one dollar increase in disposable income”).

As we're flooded with ever more information, it's something of an understatement to say the blending of qualitative and quantitative methods are a substantial improvement on traditional economic techniques. As Stock and Watson (2007) put it, “econometric methods are used in many branches of economics, including finance, labor economics, macroeconomics, microeconomics and economic policy.” Economic policy decisions are rarely made without econometric analysis to assess their impact.

  1. Econometrics

    The application of statistical and mathematical theories to economics ...
  2. Lawrence Klein

    An American economist and winner of the 1980 Nobel Memorial Prize ...
  3. Econometrician

    A person who uses statistics and mathematics to study, model ...
  4. Quantitative Analysis

    A business or financial analysis technique that seeks to understand ...
  5. Development Economics

    Development economics is a branch of economic study that focuses ...
  6. Happiness Economics

    The formal academic study of the relationship between individual ...
Related Articles
  1. Investing

    The Basics Of Business Forecasting

    Discover the methods behind financial forecasts and the risks inherent when we seek to predict the future.
  2. Trading

    4 Ways To Forecast Currency Changes

    Whether you are a business or a trader, forecasting currency exchanges helps guide your decisions to minimize risks and maximize returns.
  3. Investing

    Nobel Winners Are Economic Prizes

    Before you try to profit from their theories, you should learn about the creators themselves.
  4. Investing

    The Difference Between Finance And Economics

    Finance and economics are often taught as separate subjects, but they are interrelated disciplines that influence one another in many ways.
  5. Trading

    Best Undergraduate Degrees for Day Traders

    Here's a look at some popular undergrad majors for those wanting to begin a career in the exciting, fast-paced world of day trading.
  6. Insights

    Pay Attention to These Economic Indicators

    Vanguard's Chief Economist on the three economic forces you should watch for.
  7. Insights

    Economic Indicators for Germany

    Here is a list of the top macro-economic indicator data sources for Germany.
  8. Personal Finance

    Quantitative Analyst: Job Description & Average Salary

    Learn the different job duties of a quantitative analyst and how much money an analyst makes; understand the skills needed to be successful at this career.
  9. Trading

    Economic Factors That Affect The Forex Market

    Knowing the factors and indicators to watch will help you keep pace in the competitive and fast-moving world of forex.
  1. Is economics a science?

    Learn how economics fits into the category of social sciences, and discover the arguments critics make against this classification. Read Answer >>
  2. What math skills do I need to study microeconomics?

    Find out how and why mathematics are used in microeconomics, what its limitations are and the kinds of math skills that economics ... Read Answer >>
  3. What are some of the limitations and drawbacks of economics as a field?

    Find out why the field of economics is full of controversy. Policy decisions, political campaigns and personal finances are ... Read Answer >>
  4. What is the difference between accounting and economics?

    Discover the difference between accounting and economics by comparing and contrasting the financial discipline of accounting ... Read Answer >>
  5. What skills do I need to become a Portfolio Analyst?

    Learn what a portfolio analyst does and some examples of skills and knowledge one must possess to become a successful portfolio ... Read Answer >>
Hot Definitions
  1. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  2. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  3. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  5. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  6. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
Trading Center