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1.3 Data: Sources and Types 53

theory this experiment would estimate the effect on test scores of reducing class
size, holding all else constant.

The concept of an ideal randomized controlled experiment is useful because
it gives a definition of a causal effect. In practice, however, it is not possible to
perform ideal experiments. In fact, experiments are relatively rare in economet-
rics because often they are unethical, impossible to execute satisfactorily, or pro-
hibitively expensive. The concept of the ideal randomized controlled experiment
does, however, provide a theoretical benchmark for an econometric analysis of
causal effects using actual data.

Forecasting and Causality

Although the first three questions in Section 1.1 concern causal effects, the
fourth—forecasting the growth rate of GDP—does not. You do not need to know
a causal relationship to make a good forecast. A good way to “forecast” whether
it is raining is to observe whether pedestrians are using umbrellas, but the act of
using an umbrella does not cause it to rain.

Even though forecasting need not involve causal relationships, economic
theory suggests patterns and relationships that might be useful for forecasting. As
we see in Chapter 14, multiple regression analysis allows us to quantify historical
relationships suggested by economic theory, to check whether those relationships
have been stable over time, to make quantitative forecasts about the future, and
to assess the accuracy of those forecasts.

1.3 Data: Sources and Types

In econometrics, data come from one of two sources: experiments or nonexperi-
mental observations of the world. This book examines both experimental and
nonexperimental data sets.

Experimental Versus Observational Data

Experimental data come from experiments designed to evaluate a treatment or
policy or to investigate a causal effect. For example, the state of Tennessee
financed a large randomized controlled experiment examining class size in the
1980s. In that experiment, which we examine in Chapter 13, thousands of students
were randomly assigned to classes of different sizes for several years and were
given standardized tests annually.