hardiwinoto.com-The aim of economics is to understand how the economy works. We described three mayor economic issues: the effects of oil price increases, the distribution of income, and the role of government. Economists analyze these issues for two reasons. The first reason is to understand why particular economic relationships exist. For instance, we want to understand how oil price increases affect the economy, what determines the distribution of income, and what roles government plays in economic life.
The second reason for analyzing the issues is that society may want to do something about them. Perhaps we want to motorists to use less gasoline or want the middle class to get a larger share of income. Perhaps we want to reduce the size of government. The first step here, too, is to understand how these economic variables the amount of gasoline used, the distribution of income, and the size of government are demanded. Then we will be better able to predict the effects of actions such as reducing income taxes or taxing gasoline.
To analyze economic issues we use both models and data. A model is a simplified description of reality.
Model which we discuss in more detail later in this chapter, are frameworks for organizing thinking about a problem. They simplify by leaving out some details of the real world in order to concentrate on the essentials. From this simplified picture of reality we develop our analysis of how the real world works.
The data, or facts, interact with models in two ways. First, the data themselves sometimes suggest relationship among variables. For instance, in this chapter we will see the people with more education on average have higher incomes. A model is needed to provide a framework in which to think systematically about that relationship. Second, once of economist has built a model, the data are useful for measuring the different relationship suggested by the model. Many interpretations are possible, and data are needed to sort out the significant relationships from the less important ones.
In this chapter we introduce the tools economist use. The emphasis is not on learning economics but on gaining mastery of some of the tools of the trade. We start with economic data and the way they are shown in tables, chart, and diagrams. Then we show how data and models are used in practice. We do this by describing the approach an economist takes to a specific problem. We show how to build a simple model, how to gather data and evidence, and how to test a theory.
By the end of this chapter you should be familiar with and able to use figures and diagrams as a matter of routine. Indeed, after reading chapter 1, you have already started using these tools. Because total familiarity comes only with practice, you may find it useful to come back to this chapter as you study later material, to refresh your understanding of the basic tools as you begin to apply them.
Fischer, Stanley and Dornbusch, Rudiger. 1983. The Macro Economics. McGraw-Hill, Inc. USA
