# ECON 208 Chapter Notes - Chapter 2: Time Series, Panel Data, Scatter Plot

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12 Dec 2012

School

Department

Course

Professor

Chapter 2 – Economic Theory, Data, and Graphs

Sept.13.12

Positive and normative advice:

- Normative statements

- depend on value judgments and opinions

- use of facts

- subjective

- i.e. unemployment is a more important social problem than inflation

- Positive statements

- do not involve value judgments

- about what is, was, or will be

- objective

- can be tested

- i.e. the majority of the population would prefer a policy that reduced

unemployment to one that reduced inflation

- Disagreement among economists:

- failure to define their terms/points of reference clearly

- stems from economists’ failure to acknowledge the full state of their own

ignorance

- public disagreement based on the positive/normative distinction

- economists must differentiate normative advice from positive facts

- laws requiring equal pay for work of equal value will make women better off

- “better off” wages? Unemployment? Equality?

Theories:

- Constructed to explain things

- i.e. what determines quantity/price of eggs bought and sold this month

use theory of demand and supply

- theory consists of definitions about variables (endogenous, exogenous),

assumptions (motives, causation, applicability), and a set of

predictions/hypotheses

market goods

consumers producers

market factors

Models:

- Used as a synonym for a theory

- Applied to a specific quantitative formulation of a theory

- As an illustrative abstraction which helps to organize our thoughts about a

particular issue, not designed to generate testable hypotheses

Testing theories:

- Tested by confronting its predictions with evidence

- Scientific approach:

- empirical observation leads to construction of theories

- theories generate specific predictions

- the predictions are tested by more detailed empirical observation

- Rejection vs. confirmation

- prediction

- need confirming evidence

- an alternative is to see if the hypothesis can be rejected by data

Statistical analysis:

- Used to test a hypothesis (i.e. if x increases then y will also increase)

- Economists are compelled to use millions of “uncontrolled” experiments

going on every day

- Activities can be observed and recorded continuously, producing a mass of

data

- Analysis of this data requires the use of appropriate/complex statistical

techniques

Correlation vs. causation:

- Positive correlation means x and y move together

- Negative correlation means x and y move apart

- X and Y may not be causally related or they may be related in the opposite

way to what is expected (reverse causality)

- i.e. correlation: more ice cream trucks when the temperature is higher

causation: ice cream trucks don’t cause the temperature to be higher

- Need econometrics to prove causality

Economic data:

- Economists use data collected, i.e. governmental statistics

- Data can be displayed in tables and graphs

- When interested in relative movements we use index numbers

- Index numbers:

- used to compare changes in some variable relative to some base period

- important when the variables are measured in different units

- value of index in given period =

(absolute value in given period)/(absolute value in base period) x 100

- Economic variables come in two forms of data: cross-sectional and time-

series, the combination of the two is panel data

- A scatter diagram is a common way of looking at the relationship between

two variables

- Graphing economic theories:

- verbal statement

- numerical schedule (table)

- mathematical equation

- a graph

- Non-linear functions:

- recognize if the slope is positive or negative

- recognize if the absolute value of the slope is increasing or decreasing

- what happens to Y when X changes marginally

- what is the response of Y to marginal changes in X

- use absolute value and slope to answer these questions