Chapter 2 (macro)
Chapter 2: Observing and Explaining the Economy
Key Role of Economists
Economists aim to explain observations and facts about the economy.
Understanding economic events is crucial for making informed policy recommendations.
Incorrect explanations may lead to harmful policy responses during economic crises.
Fundamental Questions in Economics
Economists investigate various important questions, including:
What drives community college enrollment during recessions?
What causes Super Bowl ticket prices to change?
Why is healthcare spending increasing faster than the overall economy?
What factors contributed to China's dramatic economic growth over the last 30 years?
What triggered the 2008 U.S. recession?
Correlation and Causation
Key Definitions
Economic Variables:
Any economic measure that can vary over a range of values
Example: vehicle miles traveled per person, price of gasoline
Two variables are correlated if they move up down together
Correlation:
Occurs when two variables move in the same direction (when one moves up, so does the other)
Distinguishing Correlation from Causation
Correlation does not imply causation; careful analysis is necessary to determine which factor causes the other.
Controlled Experiments and Experimental Economics
Definition
Controlled experiments: empirical tests of theories in a controlled setting in which particular effects can be isolated
Experimental economics: a branch of economics that uses laboratory experiments to analyze economic behavior
Economic Models
Definitions:
An economic model explains how economies function, often through simplifications.
Differentiates between microeconomics (individual firms and households) and macroeconomics (overall economy).
Model Presentation Types
Multiple Descriptions
Economic models can be represented verbally through numerical data, graphs, or algebraic expressions.
Example of a Two-Variable Model
Model Representation:
Verbal - More doctors lead to more physical examinations, with diminishing returns.
Numerical - A table showing the relationships.
Graph - Visual representation of the relationship.
Algebra - Formula elucidating the relationship between variables.
Micro/Macro Economics
Microeconomics: looks at individual decision-making at firms and households and the way they interact in specific industries
Macroeconomics: looks at problems of the economy as a whole; focuses on variables, such as the GDP growth and unemployment
Gross Domestic Product (GDP):
the most comprehensive measure of the size of an economy
total value of all goods and services made in the country during a specific period of time
includes all newly made goods like cars, shoes, gas, airplanes, and houses as well as services such as healthcare, education, and financial services
Positively Related: an increase in one variable is associated with an increase in another variable (also called directly related)
Features: upward sloping
Negatively Related: an increase in one variable is associated with a decrease in another variable, also called inversely related
Features: downward sloping
Ceteris Paribus Assumption
This assumption facilitates predictions by holding other conditions constant while altering one variable.
Positive vs. Normative Economics
Definitions
Positive Economics:
Describes and analyzes what happens in economics without policy recommendations.
Example: Discussing the decline in driving during the recession.
Normative Economics:
Offers recommendations on what policies should be implemented.
Example: Proposing actions to prevent future increases in driving for environmental protection.