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Economics (479)
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Gustavo Indart

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Chapter 2Thinking Like an EconomistThe Economist as Scientisty Economists devise theories collect data and then analyze these data in an attempt to verify or refute their theories y Scientific methodthe dispassionate development and testing of theories about how the world works y The whole of science is nothing more than a refinement of everyday thinkingThe Scientific Method Observation Theory and More Observationy An economist might develop a theory about inflation The theory might assert that high inflation arises when the government prints too much money To test this theory the economist could collect and analyze data on prices and money from different countries If growth in the quantity of money were not at all related to the rate at which prices are rising the economist would start to doubt the validity of his theory of inflation If money growth and inflation were strongly correlated in international data as in fat they are the economist would become more confident in his theory y Experiments are often difficult in economics y Economists studying inflation for example are not allowed to manipulate a nations monetary policy simple to generate useful data Economists usually have to make do with whatever data the world happens to give them y Economists pay close attention to the natural experiments offered by history y Historical episodes are valuable to study because they give us insight into the economy of the past and because they allow us to illustrate and evaluate economic theories of the presentThe Role of Assumptions y Assumptions can simplify the complex world and make it easier to understand y To study the effects of international trade for example we may assume that the world consists of only two countries and that each country produces only two goods By assuming two countries and two goods we can focus our thinking Once we understand international trade in an imaginary world with two countries and two goods we are in a better position to understand international trade in the more complex world in which we live in y Economists use different assumptions to answer different questions y Economists use different assumptions when studying the shortrun and longrun effects of a change in the quantity of money
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