Thinking Like an

Economist
02
Thinking Like an Economist
 CONTENT
1. THE ECONOMIST AS SCIENTIST
2. ECONOMIC MODELS
3. THE ECONOMISTS AS POLICY ADVISER
4. WHY ECONOMISTS DISAGREE
5. SUMMARY
 THE ECONOMIST AS SCIENTIST
● A scientist approaches the study and a biologist approaches
the study of life
● It is same in the Economics
● They use Scientific Method to examine how an economy
works

Devise the Collect Verify/Refute

Analyze
theory data the theory
● But when applying Scientific Method, economists face
an obstacle
✔Scientist can test their theories in their laboratories but
economists are not allowed to manipulate nation’s
policies to generate useful data
✔They have to make do with whatever data the world
happens to give them
● To overcome this, they pay attention to the natural
experiments
 THE ROLE OF ASSUMPTIONS
“Economists make assumptions for the purpose of simplify
the complex world and make it easier to understand”
Eg:- In the international trade, economist might assume that the
world consists of only two countries and that each country
produces only two products
● The art in scientific thinking is deciding which assumptions to
make

● Economists use different assumptions to answer different

questions
 MODEL 1: THE CIRCULAR-FLOW DIAGRAM
Revenue MARKETS FOR Spending
GOODS & SERVICES
Goods & -Firms Sell Goods &
Services -Households Buy Services Bought
Sold
Indicates Flow of
FIRMS HOUSEHOLDS
inputs & Outputs
-Produce and Sell -Buy and Consume
Goods & Services Indicates Flow of Goods & Services
-Hire and Use Factors Dollars -Own and Sell Factors
of Production of Production
Factors of MARKETS FOR Labor, Land
Production FACTORS OF & Capital
PRODUCTION
Wages, Rent & -Households Sell
-Firms Buy Income
profit
MODEL 2: THE PRODUCTION POSSIBILITIES
FRONTIER
A SHIFT IN PRODUCTION POSSIBILITIES
FRONTIER
 MICROECONOMICS & MACROECONOMICS
❖ MICROECONOMICS
It is the Study of how households and firms make decisions and how they
interact in specific markets.
Ex:
1. Rent control on housing in New York city
2. The impact of foreign competition on the US Auto Industry
3. The effects of compulsory school attendance on workers’ earnings
❖ MACROECONOMICS
It is the Study of Economy-wide phenomena including inflation,
unemployment and economic growth.
Ex;
1. The effects of borrowing by the federal government
2. The changes over time in the economy’s rate of unemployment
3. Alternative policies to promote growth in national living
standards
 THE ECONOMIST AS POLICY ADVISER
Why
Economics asked to explain the cause of economic events
Example: Is unemployment higher for teenagers than for older workers?

What ?
Economics are asked to recommend policies to improve the economic outcome
Example:
Should the government do to improve the economic well being of teenagers?

When ?
When economist are trying to explain the world ------They are Scientists
Economics are trying to help improve …....They are Policy Advisers
 POSITIVE VS NORMATIVE ANALYSIS
Policy advisers and scientists have different goals and using language in different way.

Example :
two people are discussing minimum wage laws – two type of statement can hear on this

● Polly: Minimum wage laws cause unemployment

Speaking like a scientists –claim about how the world works

● Norm: The government should raise the minimum wage

Speaking like a policy Adviser – claim about how he would like to change the world

World are two types,

1. Positive Statement : Descriptive – How the world is ? (Polly’s Positive)
2. Normative Statement : Prescriptive – How the world ought to be? (Norm’s Normative)
(enforcement of a rule or method )
 KEY DIFFERENCE BETWEEN POSITIVE &
NORMATIVE STATEMENT
How can we judge their validity ?
How can we judge economist as policy adviser ?
● Positive Statement – by examining evidence can confirm or deny . It can do
analyzing data on changes in minimum wages and unemployment over time
● Normative Statement – involves values and facts
Can not be judge using data alone.
Deciding what is good or bad policy is not a matter of science . It involves views
on ethics/religion / political philosophy too.
Positive and normative statements are fundamentally different but link together in a
person’s set of beliefs

Positive views about how the world works affect. Normative views about what policies are
desirable.
When you hear economists making normative statement, they are speaking as Policy adviser .
 ECONOMIST IN WASHINGTON
Economic Advisers Council
3 member staff of several
dozen economist
Department of Treasury – Department of labor- Analyze
help design tax Policy data on workers – working to
help formulate labor market
policies

Department of justice – Help

• Only dedicated to advice the president to enforce the nations
• Write annual Economics report of the
USA antitrust law
president President –
• (discuss recent development in the Since 1946
economy & present analysis of current Congressional budget office –
policy issues Congress relies on the advice of
this office

Out side administrative Federal reserve –

Branch of government – Set the nation’s monetary policy –
Obtain independent Analyzing economic development
evaluations of policy proposal in USA & Throughout the world
 WHY ECONOMIST ADVICE IS NOT ALWAYS
FOLLOWS
Whenever we discuss economic policy we often focus what is the best
policy for the government to pursue .
How real world figuring out the right policy ?
Economic Advisers - Communication Adviser
What policies best from How best to explain the
their perspective proposed policy to the
public

Legislative Affairs Advisers President Press advisers – how the

How congress will view the
proposal?
What amendment will be
suggested ?
Probability of passing some
versions on president proposal in
to law
news media will report on his
proposal & what opinion will
likely to be expressed
Political Advisers
Which group will support or oppose to
propose policy. How the proposal
affect his standing among different
group in the electorate
 WHY ECONOMISTS DISAGREE
• They may disagree about the validity of
alternative positive theories about how the
world works.

• They may have different values and, therefore,

different normative views about what policy should
try to accomplish.

Copyright © 2004 South-Western/Thomson Learning

 DIFFERENCES IN SCIENTIFIC
JUDGMENTS
• Economics is young science & there is still much to
be learned.

• Sometimes economists have hunches about,

1. Validity of alternative theories
2. Size of important parameters that measure how
economic variables are related
 DIFFERENCES IN VALUES
• Values are the foundation of a person's ability to
judge between right and wrong.

• Values tend to be a personal, individual foundation

that influences a particular person’s behaviour.

• Economists give conflicting advice sometimes

because they have different values.
 PERCEPTION VERSUS
REALITY

Differences in Differences in
Scientific Judgements Values

Disagreement among
Economists are
inevitable
 ENVIRONMENTAL ECONOMISTS

● Use economic arguments to persuade companies to clean up

and to help conserve natural area
● Also known as Green Economists
● Economists are realizing that economics offers frame for
resource allocation where resources are not only labour and
capital but natural resources as well
● Helping to formulate the intellectual framework to protect
endangered species, reducing pollution and preventing
climate change
 SUMMARY
• Economists try to address their subjects with a
scientist’s objectivity.
a. They make appropriate assumptions and build
simplified models in order to understand the world
around them.
b. Two simple economic models are the circular-flow
diagram and the production possibilities frontier.
Summary Continues

● Economics is divided into two subfields:

a. Microeconomists study decision making by

households and firms in the marketplace.

a. Macroeconomists study the forces and trends that

affect the economy as a whole
 Summary Continues

• A positive statement is an assertion about how the world is.

• A normative statement is an assertion about how the
world ought to be.
• When economists make normative statements, they are
acting more as policy advisors than scientists.
 Summary Continues

• Economists who advise policymakers offer conflicting

advice either because of differences in scientific judgments
or because of differences in values.

• At other times, economists are united in the advice they

offer, but policymakers may choose to ignore it.
ANY QUESTIONS?
THANK YOU!