2. Tools of economic analysis

Question 1

A model or theory makes

Answer 1

assumptions from which it deduces how people will behave. It is a deliberate simplification of reality

Question 2

Data are

Answer 2

pieces of evidence about economic behavior and can be used to test economic models.

Question 3

A behavioral law is

Answer 3

a sensible theoretical relationship not rejected by evidence over a long period.

Question 4

A time series is

Answer 4

a sequence of measurements of the same variable at different points in time.

Question 5

Cross-section data

Answer 5

record at a point in time the way an economic variable

differs across different individuals or groups of individuals.

Question 6

Panel data

Answer 6

record observations over multiple time periods for the same individuals or groups of individuals.

Question 7

An index number

Answer 7

expresses data relative to a given base value.

Question 8

The consumer price index (CPI)

Answer 8

measures changes in the cost of living by looking at the cost of a standard ‘shopping basket’ of goods.

Question 9

The inflation rate is

Answer 9

the annual rate of change of the consumer price index.

Question 10

Nominal values

Answer 10

are measured in the prices ruling at the time of measurement.

Question 11

Real values

Answer 11

1. adjust nominal values for changes in the price level.
2. are sometimes called relative prices.
3. The CPI and RPI have increased so the real prices has decreased.

Question 12

The purchasing power of money is

Answer 12

an index of the quantity of goods that can be bought for £1.
when the price of goods rises, the purchasing power of money falls £1 buys fewer goods.
NOMINAL variables in CURRENT pounds and REAL variables in CONSTANT pounds.

Question 13

The percentage change is

Answer 13

the absolute change divided by the original number,

then multiplied by 100.

Question 14

The growth rate is

Answer 14

the percentage change per period (usually a year).

Question 15

A scatter diagram

Answer 15

plots pairs of values simultaneously observed for two

different variables.

Question 16

Other things equal is

Answer 16

a device for looking at the relationship between two

variables, but remembering that other variables also matter.

Question 17

Econometrics is

Answer 17

the term used to refer to STATISTICS used to measure relationships in economic data.

Question 18

There is a continuing interplay between (1) in the study of economic relationships. A model is a simplified framework to organize (2).

Answer 18

1. models and data

2. how we think about a problem

Question 19

Data or facts are essential for two reasons: (1) and (2)

Answer 19

1. They suggest relationships which we should aim to explain

2. They allow us to test our hypotheses and to quantify the effects that they imply.

Question 20

Tables present data in a form easily understood.
Time-series data are values of a given variable at (1).
Cross-section data refer to the same point in time but (2).
Panel data are a mix between (3).

Answer 20

1. different points in time
2. to different values of the same variable across different people
3. time-series and cross-section data

Question 21

(1) express data relative to some given base value.

Answer 21

1. Index numbers

Question 22

Many index numbers refer to averages of many variables. The consumer price index summarizes (1). It weights (2) by its importance in the budget of a typical household.

Answer 22

1. changes in the prices of all goods bought by households

2. the price of each good

Question 23

The annual percentage change in (1) is the usual measure of (2), the rate at which prices in general are changing.

Answer 23

1. the retail price index

2. inflation

Question 24

(1) refer to values at the prices ruling when the variable was measured. (2) adjust nominal variables for changes in the general level of prices. They are (3).

Answer 24

1. Nominal or current price variables
2. Real or constant price variables
3. inflation-adjusted measures

Question 25

Scatter diagrams show (1) between (1) plotted in the diagram. By fitting (2) we summarize the average relationship between the two variables. (3) is the use of statistics by economists to measure relationships between many variables simultaneously. In principle this allows us to get round (4), which always applies in two dimensions.

Answer 25

1. the relationship/two variables
2. a line through these points
3. Econometrics
4. the ‘other things equal’ problem

Question 26

(1) are often useful in building a model. They show relationships between two variables (2). If we wish to change one of these other things, we have to (3) we have shown in our diagram.

Answer 26

1. Analytical diagrams
2. holding other things equal
3. shift the line or curve

Question 27

To understand how the economy works we need (1). We need (2): there are too many facts for the facts alone to tell us the correct answer. (3)

Answer 27

1. both theory and facts
2. theory to know what facts to look for
3. Facts without theory are useless, but theory without facts is unsupported assertion.

Question 28

Two pieces of information are needed to draw a straight line in the entire relationship between Q and P

Answer 28

1. The intercept is the height of the line when the variable on the horizontal axis is zero.
2. The slope of the line, measuring its steepness. The slope tells us how much Q (the variable on the vertical axis) changes each time we increase P (the variable on the horizontal axis) by one unit.