Observing & Explaining the economy

1. Observing & Explaining the economy AP Macro for chapter 2 in Taylor

2. Key points (p. 29 in text) • Economists try to explain facts & observations about the economy • Tables & graphs help organize the info • GDP is a measure of all the goods and services produced in a country during a period of time • Correlation does not imply causation • Establishing causation is more difficult in econ because controlled experiments are rare. • Recent advances improve this situation • Economic observations not always accurate; e.g. quality of service difficult to measure

3. The circular flow • The circular flow diagram is useful for showing how huseholds & firms interact in markets & how funds flow through the economy

4. Economic models (p.35) • Economists use ec. Models to explain ec. Observations. Models are simplifications of reality & have variables & constants. Types of representation: verbal, with numerical tables, with graphs, with algebra. • New models are developed b/c existing models cannot explain facts or observations.

5. Theory’s impact on public policy • Can be used to make better economic decisions; improving public policy has long been a purpose of economics. • Most basic economic policy questions concern the general role of governmnet in a market economy.

6. Positive vs. normative economics • When economists are trying to explain the world, they are scientists. The descriptive statements they make are positive statements. They describe how the world is, and they are based upon evidence. • When economists are trying to improve the world, they are policy advisers. The prescriptive statements they make are.normative statements. They describe how the world ought to be, and do not rely on data alone but also on values. (ethics, religion, or political philosophy.