Lect 2: economic theories, data, and graphs

Normative question

• a question about what policies or institutional arrangements lead to the best outcomes

  • what governments ought (should) to do

  • involves value judgement (what do u think? is it right or wrong?)

  • “should”

Positive question

• a question about the consequences of specific policies or institutional arrangements

  • no value judgements (just facts or predictions / no emotions)

positive

Identify as normative or positive: raising interest rates encourages people to save

normative

Identify as normative or positive: The government should raise the tax on cigarettes to discourage people from smoking

positive

Identify as normative or positive: The majority of the population would prefer a policy that reduced unemployment to one that reduced inflation

normative

Identify as normative or positive: government should not spend taxpayers’ money on supporting commercial banks

Theory

• composed of variables (prices and quantities etc.)

  • endogenous/ dependent variables

  • exogenous/ independent variables

endogenous/ dependent variable

• explained within a theory

exogenous/ independent variable

• determined outside of the theory

• ex: rainfall

rainfall = exogenous, wheat produced = endogenous

Identify the endogenous and exogenous variables of the scenario: The amount of rainfall on the Canadian prairies determines the amount of wheat produced in Canada

increase in the tax on gasoline = exogenous, ppl drive more fuel-efficient vehicles = endogenous

Identify the endogenous and exogenous variables of the scenario: An increase in the tax on gasoline leads people to drive more fuel-efficient vehicles

assumptions

• conditions under which the theory is meant to apply

assume firms maximize profits

• allows us to deduct and predict the behavior of firms

test a theory by confronting its predictions with empirical evidence

how to test a theory?

positive correlation/ relation

• X and Y variables move together

negative correlation/ relation

• X and Y variables move in opposite directions

correlation =/ causality

correlation =/ causality

Motivation ex

• low use of organic and inorganic inputs in Africa

Background ex

• reasons for low input use …

research question ex

• how does information affect farmers’ use of inputs?

theoretical framework

change will be made / theory adopted when the benefits outweigh the costs

baseline survey, soil sampling analysis, follow-up baseline, and endline survey

what are the diff types of data?

Baseline survey

• demographics

• household and dwelling characteristics

• all agricultural inputs and yields

• knowledge about soil and farming practices

• credit

• savings

• assets

• plot maps and details

Soil sampling analysis

• soil pH

• electrical conductivity

• NO3-N

• exchangeable K+ (potassium)

• available P (phosphorus)

• available S (sulfur)

• active C (carbon)

Follow-up Baseline

• yields/harvest

• quantities of maize sold, stored and consumed

• expectations about returns from fertilizers

Endline survey

• demographics

• household and dwelling characteristics

• all agricultural inputs and yields

• knowledge about soil and farming practices

• credit

• savings

• assets

• plot map and details

• same as baseline but again to see if anything changed

variables X and Y are linearly related to each other and their graphs are straight lines

variables X and Y are linearly related to each other and their graphs are straight lines

nominal price of a good

• a goods absolute price

  • the price you observe in a supermarket

real price of a good

• the price relative to an aggregate measure of prices

  • the price adjusted for inflation

an index

• allows you to compare prices over time or space

• take the value of the variable at some point in time (the base) with which values in other periods will be compared

• value of ____ = 100 x ((absolute value in given period of location) / (absolute value in base period or location))

value of index = 100 ((absolute value in given period of location)/(absolute value in base period or location))

what is the equation to find the value of index:

Cross-sectional data

• information collected from multiple subject at a single point or period in time

Time-series data

• a sequence of data points indexed or listed in chronological order, where each observation is tied to a specific timestamp