Chapter 2 Flashcards
What is a normative statement?
Normative statements depend on value judgements and cannot be evaluated solely by a recourse to facts. (i.e., what ought to be)
e. g., Your professor should improve his jokes.
* Not testable
What is a positive statement?
Positive statements do not involve value judgements. They are statements about matters of fact. (i.e., what actually is, was, or will be)
e. g., My professor makes students laugh.
* Testable by appeal to facts.
What must a responsible economist clearly state?
Which part of proffered advice is normative and what part is positive.
What are theories?
A theory is an abstraction from reality that consists of variables, assumptions, and predictions.
What is the central approach to the study of economics?
The scientific approach.
A theory is tested by confronting its predictions with empirical evidence. If a theory is in conflict with facts, it will usually be amended to make it consistent with those facts, or it will be discarded to be replaced by a superior theory.
What is positive/negative correlation?
Positive correlation means that X and Y move together, in the same direction.
Negative correlation means that X and Y move in opposite directions.
Correlation does not mean causation.
What is an index number?
An index number is a measure of some variable, conventionally expressed relative to a base period, which is assigned the value 100.
Give an example of a single economic variable.
Unemployment
National income
Average house price
What kind of economic data is there? [2]
- Cross-sectional data
- Time-series data
Why do economists often disagree? [4]
- different definitions
- different assumptions
- different values (i.e., different normative/subjective views)
- short run vs. long run perspective (i.e., the savings paradox)
What is the Law of Large Numbers?
Random movements of individuals offset one another.
Group behaviour is easier to predict than individual behaviour.
e.g., the warmer the weather, the more go to the beach OR the higher your income, the more you will spend
What is the ‘as if’ test?
Individual acts as if s/he maximizes happiness.
Theory = model =
- explains why a relationship exists
- is testable, by comparing predictions to evidence
- can only be disproven, not proven
What are the components of a theory? [3]
-
Variables = item that can take on different values
- Endogenous, IN (induced, dependent)
- Exogenous (given), OUT (autonomous, independent)
-
Assumptions: definition/behaviour/conditions
- Motives = psychological reason for action (rational person maximizes self-interest)
- Causation = one independent variable causes the dependent function (sunspots do not ‘cause’ drought)
-
Predictions = hypotheses
- Hypothesis = propositions that can be logically inferred from assumptions
- cause and effect
- IF - THEN statement
- Function - for every x, one and only one value of y.
What is the fundamental test?
A prediction - a theory is discarded when it fails to predict better than an alternative theory.
What is a refutation test?
Proper way to test a theory is to determine if it can be refuted by evidence.
What are the two rules of thumb for finding an index number?
