1 Introduction into Economics and Policy Analysis

Question 1

What is economics?

Answer 1

Is the study of how societies use scare resources to produce valuable commodities and distribute them among different people.

Question 2

Macroeconomics

Answer 2

the big picture which looks at the large scale or general economic factors, national productivity, GDP, inflation etc

The subject is the national level

How all markets in the country interact to generate big phenomena

Government is a major object of analysis e.g studying the role that government plays in contributing to the overall growth in fighting inflation

Question 3

Microeconomics

Answer 3

the small picture which is the part of economics that deals with the effects of single factors and individual decisions

Concerned with how supply and demand interact in individual markets for goods and services

asic assumption: markets are in equilibrium - ie that prices would adjust to equalize supply and demand

Question 4

Econometrics

Answer 4

Econometrics is the branch of economics that uses mathematical methods (esp statistics) to describe economic systems.

Enables sophisticated analysis of micro and macro data

Uses empirical economic models to analyze changes in policy variables

Question 5

Policy

Answer 5

a course or principle of action adopted or proposed by an organization or individual.

Question 6

Policy Science is divided into which two branches?

Answer 6

Policy Study and Policy Analysis

Question 7

Policy Study

Answer 7

understanding and informing the policy making process

By carrying out research into specific policy issues.

It seeks to ensure that decision making is informed by the best available research evidence.

It’s usualy the interest of policy researchers and academics.

Question 8

What’s Policy Analysis?

Answer 8

Policy analysis is the designing of the actual policy to be implemented.

Is more politically motivated

Seek to have direct influence on actual policy outcomes

By designing policies for government agencies

Usually conducted by policy analysts or policy think tanks

Question 9

How can evidence from research assist policy making processes?

Answer 9

It can assist the policy making process by:

1. By identifying new issues for the policy agenda
2. Byinforming decisions about policy content and direction
3. By evaluating the impact of the policy

Question 10

What are the three basic questions that policy analysis seeks to address?

Answer 10

1. Are there fundamental principles that help us understand how the economy works?
2. How well does the economy perform in achieve it its socials objectives?
3. How would changes in laws or political institutions affect the performance of a country?

Question 11

Why do economists build “models”?

Answer 11

Economists build models to essentially become roadmaps of reality. This is to enhance our understanding of the invisible hand.

Question 12

What is the invisible hand?

What or who are economic agents?

Answer 12

The invisible hand is the idea that the economy is self regulating, that economic agents (individuals, firms, governments ) independently seeking their own gain may produce the best result for the society as well.

Economic agents are households/ individuals, firms, governments and central banks. Some economists put the government and central banks together.

As economic agents allocate goods and services amongst themselves they emit measurable signals or data that suggest that there is some order driving the pleasant surprises that invite formal explanations

Learning about this process should help policy makers better understand the inner workings of the economy

Then the knowledge is used to nudge the economy in a more desired direction and toward the desired outcome.

Question 13

Briefly describe an “economic model”?

Explain that in contrast to an “economic theory”

Answer 13

An economic model is a simplified description of reality. It is designed to yield a hypothesis about economic behavior that can be tested.

An economic model is a simplified version of reality that allows us to observe, understand, and make predictions about economic behavior.

An economic theory is a statement of set of related statements about the cause and effect, action and reaction of how a particular economic system behaves.

Question 14

Detail the “Law of Demand”

Detail the “Law of Supply”

Why are both Important?

Answer 14

The Law of Demand tells us that if more people want to buy something, given a limited supply, the price of that thing will be bid higher. Likewise, the higher the price of a good, the lower the quantity that will be purchased by consumers.

The Law of Supply states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa

Together with the Law of Supply, the Law of Demand helps us understand why things are priced at the level that they are, and to identify opportunities to buy what are perceived to be underpriced (or sell overpriced) products, assets, or securities. For instance, a firm may boost production in response to rising prices that have been spurred by a surge in demand.

Question 15

Types of economic models. What are the main characteristics of the two types of economic models?

Answer 15

There are two types of models: the theoretical model and the empirical model.

The theoretical model provide a particular perspective, or lens, through which to examine a topic. Theoretical frameworks are often used to define concepts and explain phenomena eg Laws of Supply and Demand.

• Assume that economic agents maximize specific objective subjects to constraints defined in the model.
• provide qualitative answers to specific questions.

The empirical model is a formal statement of a theory, usually consisting of a mathematical statement of a presumed theoretical relationship between two or more variables. Empirical models aim to verify the qualitative predictions of theoretical models.

Question 16

Explain the basic elements of this empirical model

Output = coefficient x inputs + error

Answer 16

Output = dependent variable (inflation rate etc)
Coefficient = measure of how output changes as input changes
Input = policy variable (eg govt spending) or non policy variable (weather)
Error = the other factors that we cannot measure.

Question 17

What makes a good empirical model?

Answer 17

1. Should yield precise and verifiable implications about the economic phenomenon it is trying to explain
2. Should be able to reproduce the facts
   3 should not produce systemic forecasting errors, (errors should be unpredictable)

Question 18

For economic theory to be a useful tool for public policy making, it must be…?

Answer 18

It must be quantifiable.
- policy makers want to know the difference or association between variables

Economist use econometrics to quantify economic phenomena

Question 19

Why is evidence based policy making important?

Answer 19

1 government resources are limited, policy making will ensure that the right amount of resources though in scarcity go to the right areas.

Evidence analysis is needed to measure the trade offs between one use and another.

Legislative proposals have to be covered by impact assessments, CBA are common attachments to policy making in many countries
Thought there is robust evidence to justify the use of public resources, the demand for evidence to support policy is even stronger