GSF 1025 Lecture : Chapter 2 – Economics methods and economics questions
Chapter 2 – Economics methods and economics questions
Key ideas
1. A model is a simplified descriptions of reality
2. Economists use data to evaluate the accuracy of models and understand how the world works
3. Correlation does not imply causality
4. Experiments help economists to measure cause and effect
5. Economic research focuses on questions that are important to society and can be answered with models
and data
Empiricism
The scientific method (also referred to as empiricism) is composed of 2 steps ;
1. Developing models that explain some part of the world
2. Testing those models using data to see how closely the model matches what we actually observe
Evidenced-based example ;
Returns to education ;
Assumption – one more year of education results in a 10% increase in future earnings.
If you would earn $15 per hour with 12 years of education, with one more year of education (your first year of
college) you would earn : $15 x 1.10 = $16.50
Second year of college : $16.50 x 1.10 = $18.15
Third year of college : $18.15 x 1.10 = $19.97
Fourth year of college : $19.97 x 1.10 = $21.97
Hypothesis :
Getting a college degree increases wages from $15 to $21.97, or 46.5%
Two important features of models :
1. They are not exact. Not everyone will see his or her wages increase by 10% with every additional year of
education.
2. They generate predictions that can be tested with data.
Causation
When one thing directly affects another. Example : Pulling an all-nighter will make you tired.
Document Summary
Assumption one more year of education results in a 10% increase in future earnings. If you would earn per hour with 12 years of education, with one more year of education (your first year of college) you would earn : x 1. 10 = . 50. Second year of college : . 50 x 1. 10 = . 15. Third year of college : . 15 x 1. 10 = . 97. Fourth year of college : . 97 x 1. 10 = . 97. Getting a college degree increases wages from to . 97, or 46. 5% Two important features of models : they are not exact. Not everyone will see his or her wages increase by 10% with every additional year of education: they generate predictions that can be tested with data. Example : pulling an all-nighter will make you tired. Chapter 2 economics methods and economics questions. Positive correlation : they both change in the same direction. Negative correlation : they change in opposite directions.
