ECON1101 Chapter Notes - Chapter 2: Health Care Prices In The United States, Mixed Economy, Gross Domestic Product
Natasha Warrell
Chapter 2 – Observing and Explaining the Economy
• Explaining real-world economic trends
1. Find good data to describe the trend/event
2. Identify what factors may have caused the trend
3. How changes elsewhere in the economy could affect the
explanation
• When applying economic ideas to explain real-world trends and events –
must recognise the limitations of the analysis and think critically about all
possible factors (e.g. if the study takes place over time, must consider
changes in the population)
Economic Variable: Any economic measure that can vary over a range of values
• Two variables are correlated if they tend to move up and down together
✓ Positive correlation if they move in the same direction
✓ Negative correlation if they move in opposite directions
Variables, Correlation and Causation: Correlation Versus Causation:
• Correlation and causation are different – even though two variables may be
strongly correlated, that does not imply causation
1. Correlation: one event usually occurs with another
E.g. high readings on a thermometer are correlated with hot weather
2. Causation: one event brings about another event
E.g. hot weather causes the reading on the thermometer to be high
Variables, Correlation and Causation: The Lack of Controlled Experiments in
Economics
Controlled Experiments: Empirical tests of theories in a controlled setting in which
particular effects can be isolated
• Common in natural sciences → way to establish causation
• Controlled experiments are rare in economics → causation is hard to
determine (no two countries are alike so hard to compare data from different
situations)
Experimental Economics: A branch of economics that uses laboratory experiments to
analyse economic behaviour
• Becoming more common in economics – growing area – to learn how the
economy works
• Difficult to replicate real-world settings so yet to be applied as widely as the
clinical lab experiments in other sciences
Variables, Correlation and Causation: Economic Models
Economic Models: An explanation of how the economy or part of the economy works
• Theory and model used interchangeably – sometimes theory suggest general
explanation and model is more specific (law also sometimes used)
• Always abstractions or simplifications of the real world – take complicated
phenomena (behaviour of people, firms, governments) and simplify them
Microeconomic versus Macroeconomic Models:
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Economic variable: any economic measure that can vary over a range of values: two variables are correlated if they tend to move up and down together. Positive correlation if they move in the same direction. Negative correlation if they move in opposite directions. Variables, correlation and causation: correlation versus causation: correlation and causation are different even though two variables may be strongly correlated, that does not imply causation, correlation: one event usually occurs with another. E. g. high readings on a thermometer are correlated with hot weather: causation: one event brings about another event. E. g. hot weather causes the reading on the thermometer to be high. Variables, correlation and causation: the lack of controlled experiments in. Gross domestic product: a measure of the value of all the goods and services newly produced in an economy during a specified period of time. Includes; newly made goods (cars, shoes, gasoline, airplanes, houses) and services (health care, education and auto repair)
