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Unformatted text preview: 1 2- 1 HOW ECONOMISTS WORK Slides by Alex Stojanovic with additions by Winston Moore 2- 2 Learning Outcomes • Difference between positive and normative statements • How economists set out their theories • How economic data are handled and graphed • How economic relations are represented in diagrams • How marginal values are measured 2- 3 Economic Advice • Economist give advice on a wide variety of topics. • Advice comes in two broad types: normative and positive. • Normative statements depend on value judgments: they involve issues of personal opinion, which cannot be settled by recourse to facts. • Positive statements do not involve value judgments. They are statements about what is, was, or will be – that is, they are statements that are about matters of fact. 2- 4 Economic Advice (cont’d) • Positive – Higher interest rates cause people to save more. – High income tax rates discourage effort. – Road use charges would increase traffic. • Normative – People should save more – Governments should tax the rich to help the poor – The tax system should be used to reduce traffic. 2- 5 Economic Theorising • Does globalisation help the economies of developing countries? Has the IT revolution of the 1990s increased per capita growth? • Economist usually develop theories/build models to answer these questions. • Theories are constructed to explain and predict things that we see around us. They are built around definitions, assumptions and predictions. 2- 6 Economic Theorising (cont’d) • The basic elements of any theory are its variables. – A variable is a magnitude that can take different values. • Economic models consist of endogenous and exogenous variables. – An endogenous variable is one that is explained within the theory. – An exogenous variable influences endogenous variables, but is determined by factors outside of the model. 2 2- 7 Economic Theorising (cont’d) • A theory’s assumptions concern motives, physical relationships, lines of causation, and the conditions under which the theory is meant to apply. – Motives. It is generally assumed that individuals pursue their own self-interest when making economic decisions. – Physical relationships. If a firm hires more labour or capital it should be able to produce more goods or services. – Conditions of application. A theory might for example assume that there is no government intervention....
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This note was uploaded on 11/12/2011 for the course ECON 2009 taught by Professor Mr.norvill during the Spring '11 term at University of the West Indies at Mona.
- Spring '11