Chapter 2 September 7: Thinking like an Economist
Intro: What is different about economics as a “science”? What is the “economic
methodology?”
Three common themes in the economic methodology
1. The scientific method: most research questions are carried through 3 stages
a. Three stages of research in economics:
1) Devise a theory/hypothesis: Usually based on a observation
As money supply rises, so should prices!
As economies grow poorer, population rises!
ii. Collect Data
NOTE: unlike the natural sciences, economists mostly
cannot generate data through experiments
They have to use historical data: TWO TYPES:
a. Cross-sectional data: across subjects but at a
given point in time
i. Collect data on money supply and prices
for 200 countries in 2008
b. Time-series data: across time but for a given
subject
i. Collect quarterly data on US money
supply and prices for the last 50 years
ii. Test the theory using the data collected
1. Usually statisics techniques
2. Roles of assumptions:
a. Assumptions are extensively used in econoics “ the science of
assumptions”
i. Study of international trade
1. 150 countries in the world
2. thousands of goods
3. what resources?
a. Labor
b. Capital
c. Skilled resources
d. Land
e. Etc….
4. Other variables:
a. government taxes
b. currency
c. exchange
d. transportation costs
5. regulations: World Trade Organization (WTO)
b. Start with assumptions
i. Examples:
