The methodology of econometrics is the study of the range of differing approaches to undertaking econometric analysis.[1]
The econometric approaches can be broadly classified into nonstructural and structural. The nonstructural models are based primarily on statistics (although not necessarily on formal statistical models), their reliance on economics is limited (usually the economic models are used only to distinguish the inputs (observable "explanatory" or "exogenous" variables, sometimes designated as x) and outputs (observable "endogenous" variables, y). Nonstructural methods have a long history (cf. Ernst Engel, 1857[2]).[3] Structural models use mathematical equations derived from economic models and thus the statistical analysis can estimate also unobservable variables, like elasticity of demand.[3] Structural models allow to perform calculations for the situations that are not covered in the data being analyzed, so called counterfactual analysis (for example, the analysis of a monopolistic market to accommodate a hypothetical case of the second entrant).[4]