2. Tools of economic analysis Flashcards
A model or theory makes
assumptions from which it deduces how people will behave. It is a deliberate simplification of reality
Data are
pieces of evidence about economic behavior and can be used to test economic models.
A behavioral law is
a sensible theoretical relationship not rejected by evidence over a long period.
A time series is
a sequence of measurements of the same variable at different points in time.
Cross-section data
record at a point in time the way an economic variable
differs across different individuals or groups of individuals.
Panel data
record observations over multiple time periods for the same individuals or groups of individuals.
An index number
expresses data relative to a given base value.
The consumer price index (CPI)
measures changes in the cost of living by looking at the cost of a standard ‘shopping basket’ of goods.
The inflation rate is
the annual rate of change of the consumer price index.
Nominal values
are measured in the prices ruling at the time of measurement.
Real values
- adjust nominal values for changes in the price level.
- are sometimes called relative prices.
- The CPI and RPI have increased so the real prices has decreased.
The purchasing power of money is
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.
The percentage change is
the absolute change divided by the original number,
then multiplied by 100.
The growth rate is
the percentage change per period (usually a year).
A scatter diagram
plots pairs of values simultaneously observed for two
different variables.
Other things equal is
a device for looking at the relationship between two
variables, but remembering that other variables also matter.
Econometrics is
the term used to refer to STATISTICS used to measure relationships in economic data.
There is a continuing interplay between (1) in the study of economic relationships. A model is a simplified framework to organize (2).
- models and data
2. how we think about a problem
Data or facts are essential for two reasons: (1) and (2)
- 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.
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).
- different points in time
- to different values of the same variable across different people
- time-series and cross-section data
(1) express data relative to some given base value.
- Index numbers
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.
- changes in the prices of all goods bought by households
2. the price of each good
The annual percentage change in (1) is the usual measure of (2), the rate at which prices in general are changing.
- the retail price index
2. inflation
(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).
- Nominal or current price variables
- Real or constant price variables
- inflation-adjusted measures
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.
- the relationship/two variables
- a line through these points
- Econometrics
- the ‘other things equal’ problem
(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.
- Analytical diagrams
- holding other things equal
- shift the line or curve
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)
- both theory and facts
- theory to know what facts to look for
- Facts without theory are useless, but theory without facts is unsupported assertion.
Two pieces of information are needed to draw a straight line in the entire relationship between Q and P
- The intercept is the height of the line when the variable on the horizontal axis is zero.
- 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.
