It is impossible within the confines of a single chapter to deal with all the issues involved in the testing of economic theory. What we hope to do, as in previous chapters, is to convey a feel for the nature of the problems and how research workers have attempted to deal with them. Our attention will be on those problems which particularly arise in the framing of models for testing an economic theory. It is apparent that moving from theory to measurement will involve the consideration of three subject areas: (1) economic theory, (2) mathematics, and (3) statistical estimation. The precise way these interlink is the province of econometrics. It is not our intention to teach econometrics but rather to impart the flavour of the econometric approach to problem-solving and to highlight several important methodological issues. Finally, a word of warning. Econometrics, as its name implies, is grounded in economics. It is important to keep this fact in mind because there is a danger that econometrics may degenerate into statistical-estimation procedures at the expense of economics. At the end of the day, econometrics is a means of establishing the validity of economic hypotheses and theories.
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