Econometrics: What is the Gauss Markov Theorem?

According to the Gauss Markov Theorem, if the first six classical assumptions are met within your model, then the estimates produced by Ordinary Least Squares will be BLUE. This means that Ordinary Least Squares will produce the Best Linear Unbiased Estimates available. Hence, BLUE.

Check out our blogs on the classical assumptions here.

So what exactly does this mean?

BEST means that your estimates will have the minimum amount of variance. The spread of the estimates will be the least dispersed they can be within the Ordinary Least Squares (OLS) method of calculation. This method strives to present these estimates as tightly around the true population mean as possible.

Any relationship in Econometrics between two variables that is considered LINEAR indicates that this relationship can be explained by a straight line. In a previous blog on linearity, we explain that a regression equation need only be linear in the parameters and not necessarily the variables to present as a straight line.

UNBIASED simply means correct on average.  An unbiased distribution centres around the true population average whereas a biased distribution will centre to either the left or right of the true beta.

ESTIMATOR simply means that it is used as a means of Estimation.


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