Chapter 2: Trade-offs and Trade - Models

Question 1

We test our hypotheses using a model. What is a model? (2)

Answer 1

• simplified representation of a real situation that is used to better understand real life situations
• simple graph and/or economic model that is internally consistent
  in lecture, allows us to focus on 1 variable

Question 2

Why are models used to better understand real-life situations? (2)

Answer 2

• creates a real but simplified economy
  ex. cigarettes in WWII prison camps
• Simulating an economy on a computer
  ex. tax models, money models

Question 3

What is the “other things equal” assumption?

Answer 3

• all other relevant factors remain unchanged
  aka ceteris paribus
  we hold everything constant and change one variable

Question 4

What are theoretical models? (2)

Answer 4

• strip the issue down to the key components (map)
• assumptions

Question 5

What is data?

Answer 5

• econometric techniques used to create control groups

Question 6

What does data do?

Answer 6

describe the world vs explain the world

Question 7

One thing you need to be careful about regarding data is causality versus correlation. Give an example from the lecture. “post-hoc ergo Propter Hoc”

Answer 7

• we think getting a degree causes a higher income because people with degrees earn more
• this is correlation, but it does not imply causation
• there could be different characteristics like being more disciplined, privileged, etc. and not the uni degree

Question 8

Give some examples of natural experiments and actual experiments

Answer 8

Natural - sometimes, we are lucky
- used to be a grade 13 in Ontario, and they checked the diff. between extra year of high school
- helps determine causality

Actual - homelessness
- everyone in Dauphin got $15000 for 6 years
- impacted health, childcare, number of working ppl, etc.

Question 9

What is positive economics?

Answer 9

• branch of economic analysis that describes the way the economy actually works
  note it does not mean good or true

Question 10

What is a positive statement?

Answer 10

something that can be tested

Question 11

What is normative economics?

Answer 11

• makes prescriptions about the way the economy SHOULD work

Question 12

What are characteristics of normative economics? (2)

Answer 12

• normative = ethic
• can inform, but cannot test (opinion)

Question 13

What is a forecast?

Answer 13

• simple prediction of the future

Question 14

Why can economists determine correct answers for positive questions, but not for normative questions?

Answer 14

normative questions involve value judgments

Question 15

What is an exception to how economists can determine correct answers to normative questions?

Answer 15

• when policies designed to achieve a certain prescription can be clearly ranked in terms of efficiency