ECONOMIC AND DEVELOPMENT STUDY
AND ITS NATURE
ECONOMIC AND DEVELOPMENT STUDIES:
ECONOMICS – is a social science. It is concerned
with human beings and the social systems by
which they organize their activities to satisfy basic
material needs (ex. Food, shelter, clothing) and
non-materials (ex. Education, knowledge, spiritual
fulfillment).
INSTITUTION – the context is largely missing from
most neo-classical models of market exchange and
human interaction.
DEVELOPMENT - may mean different things to
different people, it is important at the outset that we
have same working definition or core perspective
on its meaning.
GLOBAL PERSPECTIVE – is a comprehensive
lens through which you see the world around you.
Globalization – gives us a context that links into
our day-to-day experiences of the world.
WHY IS A GLOBAL MINDSET IMPORTANT?
We live in a globalized world. If you want to be
successful, it’s vital to see and understand how the
world works and how we are all interconnected
through media, the internet, travel, and policies.
What Is Development Economics?
Development economics is a branch of economics
that focuses on improving fiscal, economic, and
social conditions in developing countries.
Understanding Development Economics
Development economics studies the transformation
of emerging nations into more prosperous nations.
Types of Development Economics
Mercantilism - is thought to be one of the earliest
forms of development economics that created
practices to promote the success of a nation.
Economic Nationalism -reflects policies that focus
on domestic control of capital formation, the
economy, and labor, using tariffs or other barriers.
ECONOMICS
WHAT IS ECONOMICS?
The word 'economics' comes from two Greek
words, 'eco' meaning home and 'nomos' meaning
accounts. The subject has developed from being
about how to keep the family accounts into the
wide-ranging subject of today.
Economics - a social science directed at the
satisfaction of needs and wants through the
allocation of scarce resources which have
alternative uses.
 economics is about the study of scarcity and
choice
 economics finds ways of reconciling unlimited
wants with limited resources
 economics explains the problems of living in
communities in terms of the underlying
resource costs and consumer benefits
 economics is about the co-ordination of
activities which result from specialization
THE ROLE OF ECONOMICS
 Economics has quite an extensive role to play
in a multitude of contexts, particularly in solving
agricultural and environmental problems.
 'The widespread concern over the current state
of the environment and the limited success of
existing policy have generated renewed
interest in the effectiveness of alternative
approaches to environmental protection.
 Fixers make a living solving problems -
problems faced by government, business,
charities,
all sorts of organizations.
 Bean-counters make a living doing just that,
calculating costs, comparing them with prices
and the values offered to buyers.
PHILOSOPHERS
 like to play with ideas, and only occasionally
enter the fray with a suggested answer to a
problem.
The main objective of studying Economics is to
have an overall account of production,
distribution as well as consumption of goods
and services.
Nature of Economics
Economic Development-First Quiz
The nature and scope of Economics is prevalent as
an art and science. Untitled Question*

Economics as an Art
Economics 
Economics as an art is the implementation of
theories, concepts, and findings to achieve goals.
Thus, the practical application of the scientific What were the central topic of political
economic findings comes under Economics as an concern?*
Art. It includes graphs, figures, tables as well as
equations.
All of the Above
Economics as a Science
Capitalist and Communist System
Science is based on the systematic study of
knowledge or facts.
Economic and Political Organization
For example: To conduct microeconomics and
macroeconomics research, we collect data
systematically and classify it and analyze it. What is largely missing from the most neo-
Science deals with the relationship between cause classical models of market exchange and
and effect.
human interaction?*
SCOPE OF ECONOMICS
Institution
 Scope can be understood as ‘the extent of the
area that something deals with’.
Classical Model
 Major things come under the preview of
Economics are considered as its nature and
May refer to different things to different
scope.
people?*
 When it comes to the scope of Economics

 Microeconomics deals with the Economic

applications of Economics on an
individual level, be it consumer-oriented or Development
household related.

 Macroeconomics expands the scope of This refers to the comprehensive lens through
economics to the extent of a whole which you see the world around?*
economy as well as international
economies.
Global Perspective
DIFFERENT VIEWPOINTS ON ECONOMICS

 Classical Viewpoints  Global

The classical Economists focused on the concept
of wealth. Adam Smith- founder of economics
Is the trend towards increasing international
himself said that the study of nature and the
causes of generating the wealth of nature. inter-connectedness among people and the
entire entities worldwide?*
 Neo-Classical Economics
Among all neoclassical idea propagators, Alfred
Marshall falls on the top list. It is believed that he Globalization
has given a reputed place to Economics within the
domain of Social Science.
 
 Global What country is the prime example of
economic nationalism?*
 We live in a  ________ world?*
US
Technology

 USSR
Globalization

How does the performance of the economic

The form of developmental economics that
system in the country be measured?
created practices to promote the success of a
nation?*
Inflation Rate

Mercantilism GDP

Socialism
What plays the important roles in determining
the performance of a system?*
The kind of theory that promote augmenting
state power by lowering exposure to rival
All of the Above
nation power?*
Ethics
Mercantilism
Policies
 Nationalism
Culture
Monopolized market with staple ports and
banned some golds and silver exports?* What are the two countries were at the brink of
complete success before world war II?*
Socialism
Germany and Japan
Mercantilization
Japan and China
It refers to the policies that focus on domestic
control of capital formation?* After the fall of _______, attention shifted to
problems of transition economies?*
Economic Nationalism
Socialism
Economic Socialism
Communism
 The kind of nationalists who do not generally
agree with the benefits of globalization and what is commonly known as the force market
unlimited free trade?*
economy of free enterprise economy?*

Development
Capitalism

Economic
 
 Communism What resources that was allocated to have an
alternative in use?*
 A kind of political system on public
membership of the means of production?* Scarce

Resource Costs
Socialism

It is all about the study of scarcity and choices?

Capitalism
*

 A kind of economy which has the market Economics

system of resource allocation with government
interaction?* Microeconomics

Feudalism The problems faced by government of all sorts

of organization?*
Mixed Economy

First Quiz Bean-counters

Fixers
Where does the word Economics came from?
* It is the comparison of the prices and the
values offered to buyers?*
Greek
Bean-counters
Latin
Fixers
What does "ECO" stands for?*
Known to be the prevalent as an art and
Accounts science?*

Home Nature of Economics

What is the Greek word NOMOS means?* Science and Nature

Accounts The implementation of theories and findings to

achieve goals?*
Savings
Economic as a Science
It refers to the directed at the satisfaction of
needs and wants?* Economic as an Art

Scarcity It is based on the systematic study of

knowledge or facts?*
Economics
Economic as a Science
 
 
 Economic as an Art  Who falls on the top list among all the
neoclassical ideas?*
This is for the extent of the area that something
deals with?* Adam Smith

Scope Alfred Mashall

Overview What domain does Alfred Marshall that given a

reputed place to economics?*
What is considered as its nature and scope?*
Classical Economics
Preview of Economics
Neo-classical Economics
Overview of Economics
MICROECONOMICS AND MACROECONOMICS
The application of economics on an individual
level?* What is 'Microeconomics?

Microeconomic Microeconomics is the study of individuals,

households and firms' behavior in decision making
and allocation of resources. It generally applies to
Macroeconomic  markets of goods and services and deals with
individual and economic issues.
This is to the extent of a whole and the
international economies?* IMPORTANCE OF MICROECONOMICS

Microeconomics has both theoretical and practical

Macroeconomics
importance. It helps in formulating economic
policies which enhance productive efficiency and
 Microeconomics  results in greater social welfare. Microeconomics
explains the working of a capitalist economy where
individual units are free to take their own decision.
It focused on the concept of wealth?*
WHAT DOES MICROECONOMICS STUDY
Neo-classical Economics
Microeconomics studies how prices are determined
Classical Economics in the marketplace. Manufacturers and customers
initiate forces that we term them as supply and
The founder of Economics?* demand accordingly and it is their interaction within
the marketplace that devises the price mechanism.

Adam Smith LIMITATIONS OF MICROECONOMICS

Alfred Mashall The major limitation of microeconomics is it fails to

explain the functioning of an economy. It cannot
What are the study of Adam Smith?* explain unemployment, poverty, illiteracy, and other
problems prevailing in the country.

Generating the wealth of Nation

Supply and demand models reduce the world to
simple decisions of buying and selling. By cutting
All of the Above out every other part of life and just looking at a
single market transaction, supply and demand
The study of nature and cause
analysis makes it easier to see relationships that
would otherwise be hidden.
What is 'Macroeconomics'?
MACROECONOMICS
Macroeconomics is the branch of economics that
studies the behavior and performance of an
economy. It focuses on the aggregate changes in
the economy such as unemployment, growth rate,
gross domestic product, and inflation.
What is macroeconomics?
Macroeconomics is concerned with understanding
economy-wide events such as the total amount of
goods and services produced, the level of
unemployment, and the general behavior of prices.
Macro economists employ aggregate measures
such as gross domestic product (GDP),
unemployment rates, and the consumer price index
(CPI) to analyze large-scale consequences of
individual decisions. The two main areas of
macroeconomic research are long-term economic
growth and shorter-term business cycles.
Macroeconomics refers to the study of the overall
performance of the economy. While
microeconomics studies how individual people
make decisions, macroeconomics deals with the
overall aggregate effect of microeconomics.
Macroeconomics is crucial for the government to
understand and predict the long-term
consequences of their decisions.
GOALS OF MACROECONOMICS
The overarching goals of macroeconomics are to
maximize the standard of living and achieve stable
economic growth.
ECONOMIC INDICATORS
1. Gross Domestic Product (GDP)
Often used as the primary indicator of
macroeconomics, absolute GDP represents the
economy’s size at a point in time.
Economic growth can be calculated by comparing
GDP over time, such as year-over-year increases.
2. Inflation
Inflation is the increase of overall price levels and
consequently the decrease in purchasing power. It
occurs primarily due to increased demand for
products and services, which, in turn, raises prices.
3. Unemployment
Unemployment accounts for individuals who are
jobless and are actively seeking one. Individuals
who are retired or disabled are not included as
unemployed.
THREE CATEGORIES OF UNEMPLOYMENT
 Frictional unemployment occurs when
individuals spend time searching for a job.
 Structural unemployment occurs when jobs are
eliminated due to economic structural changes.
 Cyclical unemployment occurs due to
fluctuations in the business cycle.
4. Interest Rates
Interest rates are the return the borrower pays from
lending. They are set by the central bank – the
Federal Reserve in the U.S. and the Bank of
Canada in Canada.
MONETARY POLICY
Implemented by central banks, monetary policy is
an action that influences money supply and interest
rates.
Two Types of Monetary Policy
1. Expansionary Monetary Policy
In times of economic slump, the government can
encourage economic growth by implementing an
expansionary monetary policy.
2. Contractionary Monetary Policy Macroeconomics

In economic booms, high inflation rates in the long Microeconomics

term can spell trouble by reducing purchasing
power.
The explanation of working a capitalist
FISCAL POLICY economy that individual units are free to take?*

The government implements fiscal policy through Macroeconomics

spending and taxes to guide the macroeconomy.
Microeconomics
TWO TYPES OF FISCAL POLICY

The determination of prices in the

1. Expansionary Fiscal Policy
marketplace?*
To increase inflation, governments increase
spending to increase money in circulation or cut Microeconomics
taxes, so consumers have more money to spend.
Macroeconomics
2. Contractionary Fiscal Policy

To ease inflation, governments decrease spending Aside from customers, who initiates the
to reduce money in circulation or increase taxes. interaction of supply and demand in the
marketplace?*
WHAT IS KEYNESIAN THEORY?
Manufacturers
Keynes's theory or the Keynesian theory argues
that state intervention is necessary to moderate the
booms and busts in economic activity, otherwise Consumers
known as the business cycle.

Second Quiz The major limitations of microeconomic is to

fail to explain the function of economy?*

The study of individuals of the behavior in the

False
decision making and allocation of research?*
True
Microeconomics 
The models that reduce the world to simple
Macroeconomics  decisions of buying and selling?

It applies to markets of goods and services Supply and Demand

dealing with individual and economic issues?*
Microeconomics
Macroeconomics
 
Microeconomics

The analysis that makes it easier to see the

It deals with the choices of people?* relationship that is hidden?*
 Data Analysis  Who plays a crucial role for the government to
understand and predict the long-term
Supply and Demand decisions?*

Who support the method of making a broad Microeconomics

assumptions on human behavior?*
Macroeconomics

Economists
What is achieved upon maximizing the
Psychologists standard of living?*

The study of behavior and performance of an Economic Growth

economy?*
Unemployment

Microeconomics
The calculation by comparing the GDP over
Macroeconomics time like year-over-year increases?*

It also fused on the aggregate changes in the 3/3

economy?*
Economic Growth
Macroeconomics
 
Microeconomics 
Inflation Rate
Deals on how an economy functions on a large
scale?*  

Macroeconomics Refers to the increase of the overall price

levels and the decrease in purchasing power?*
Microeconomics

Tariff
Who employs aggregate measures of the
GDP?* Inflation

Micro Economists  An account for individuals who are jobless and
looking for vacancy?*
Macro Economists
Unemployment
 A study of the overall performance of the
economy?*  

Microeconomics Inflation

Macroeconomics CIRCULAR FLOW DIAGRAM


 The circular-flow diagram represents the flows
of goods and services between households
and firms.
 Circular-flow diagram represents
corresponding flow of dollars. The households
spend money to buy goods and services from
the firms.
 The firms use some of the revenue from these
sales to pay for the factors of production, such
as the wages of their workers.
REALISTIC CIRCULAR FLOW DIAGRAM
 It shows the linkages among the economic
actors—households, firms, and the
government. And how dollars flow among them
through the various markets in the economy.
 Both households and firms borrow in financial
markets to buy investment goods, such as
houses and factories.
THE CIRCULAR FLOW MODEL AND THE
ECONOMY
the
The circular flow model is a method for
understanding how money travels throughout an
economy and a society. Once money is introduced
into the economy, it circulates in several different
ways allowing individuals, firms, organizations, and
the government to obtain goods and services that
they need in order to function properly.
The circular flow model shows how money helps to
transform the factors of
production into goods and services that are then
traded to consumers in exchange for even more
money. This money allows firms to continue to
produce these goods and services and to also
increase its output and ability to make a profit. In
addition to consumers and firms, the money is also
circulated through the government in the form of
taxes, subsidies, etc. This model is ordinarily
represented by a visual depiction known
as a circular flow chart, shown in Figure 1, that
shows all of these diverse interconnected
relationships.

CIRCULAR FLOW DIAGRAM
Circular flow diagram is a visual model of the
economy that shows how dollars flows through
markets among households and firms.
Breaking down Circular Flow Diagram
The economy consists of millions of people
engaged in many activities—buying, selling,
working, hiring, manufacturing, and so on.
To understand how the economy works, we must
find some way to simplify our thinking about all
these activities.
In other words,
We need a model that explains, in general terms,
how the economy is organized and how
participants in the economy interact with one
another.
Above Diagram presents a visual model of the
economy, called a circular flow diagram.
In this model, the economy has two types of
decisionmakers—households and firms.
Firms produce goods and services using inputs,
such as labor, land, and capital (buildings and
machines). These inputs are called the factors of
production.
Households own the factors of production and
consume all the goods and services that the firms
produce.
HOUSEHOLDS AND FIRMS INTERACT IN TWO
TYPES OF MARKETS.
In the markets for goods and services, households
are buyers and firms are sellers. Households buy
the output of goods and services that firms
produce.
In the markets for the factors of production,
households are sellers and firms are buyers. In
these markets, households provide firms the inputs
that the firms use to
produce goods and services.
The circular flow diagram offers a simple way of
organizing all the economic transactions that occur
between households and firms in the economy.
THE INNER LOOP:
Of the circular-flow diagram represents the flows of
goods and services between households and firms.
The households sell the use of their labor, land,
and capital to the firms in the markets for the
factors of production.
The firms then use these factors to produce goods
and services, which in turn are sold to households
in the markets for goods and services.
Hence, the factors of production flow from
households to firms, and goods and services
flow from firms to households.
THE OUTER LOOP:
Of the circular-flow diagram represents the
corresponding flow of dollars. The households
spend money to buy goods and services from the
firms.
The firms use some of the revenue from these
sales to pay for the factors of production, such as
the wages of their workers.
What’s left is the profit of the firm owners, who
themselves are members of households.

Hence, spending on goods and services flows from
households to firms, and income in the form of
wages, rent, and profit flows from firms to
households.
EXAMPLE OF CIRCULAR FLOW DIAGRAM
Let’s take a tour of the circular flow by following a
dollar bill as it makes its way from person to person
through the economy.
Imagine that the dollar begins at a household,
sitting in, say, your wallet.
If you want to buy a cup of coffee, you take the
dollar to one of the economy’s markets for goods
and services, such as your local Starbucks coffee
shop.
There you spend it on your favorite drink. When the
dollar moves into the Starbucks cash register, it
becomes revenue for the firm.
The dollar doesn’t stay at Starbucks for long,
however, because the firm uses it to buy inputs in
the markets for the factors of production.
For instance, Starbucks might use the dollar to pay
rent to its landlord for the space it occupies or to
pay the wages of its workers. In either case, the
dollar enters the income of some household and,
once again, is back in someone’s wallet.
At that point, the story of the economy’s
circular flow starts once again.
Realistic Circular flow diagram
The image below more accurately reflects how real
economies function.
It shows the linkages among the economic actors
—households, firms, and the government. And how
dollars flow among them through the various
markets in the economy.
Let’s look at the flow of dollars from the viewpoints
of these economic actors.
Households receive income and use it to pay taxes
to the government to consume goods and services,
and to save through the financial markets.
Firms receive revenue from the sale of goods and
services and use it to pay for the factors of
production.
Both households and firms borrow in financial
markets to buy investment goods, such as houses
and factories.
The government receives revenue from taxes and
uses it to pay for government purchases. Any
excess of tax revenue over government spending
is called public saving, which can be either positive
(a budget surplus) or negative (a budget deficit).
Above all:
The above circular flow diagram in Figure is one
simple model of the economy. It dispenses with
details that, for some purposes, are significant.
A more complex and realistic circular-flow model
would include, for instance, the roles of
government and international trade.
Yet these details are not crucial for a basic
understanding of how the economy is organized.
Because of its simplicity, this circular flow diagram
is useful to keep in mind when thinking about how
the pieces of the economy fit together.
Third Quiz on Circular
Flow
A model for understanding how money travels?
*
Supply and Demand
Circular Flow Model
Aside from economy, who else can benefit the
circular flow of money?*
 Society No

 Firms  The method for understanding how money

travels in the economy and society?*
What is introduced into the economy that can
Circular Flow Model
circulates in different ways?*

Firms
Firms

 It shows how money helps to transform?*

Money

Factors of the Firms

The transformation of the factors showing the
movement of the money?* Factors of Production

Factors of Production
Goods and services are traded in exchange for
more money?*
Economic Factor

Producers
Who are to be traded on goods and services?*
Consumers
Consumers

The model that is ordinarily represented by a

Retailers
visual depiction?*

In what way does money circulate in

Goods and Services
government form?*
Circular Flow Chart
Taxes
 
Subsidies

All of the above A visual model of the economy showing the

flow of money in the market?*
What is known as the model of ordinary
represented by a visual depiction?* Circular Flow Diagram

Supply and Demand  Circular Flow Model

Circular Flow Chart  It consists of millions of people engaged in

many activities?*
does circular flow diagram is a visual model of
Firms
the economy?*

Economy
Yes

It produce goods and services using inputs?*

 Firms reference theoretical or systematic aspects of a
method (or several methods).
Forms
The story begins with John Stuart Mill's
seminal essay from 1836 on the definition and
It owns the factors of production and consume method of political economy, which is then followed
by an examination of how the actual practices of
all goods and services?* economists changed over time to such an extent
that they not only altered their methods of enquiry,
Firms but also their self-perception as economists.
Beginning as intellectuals and journalists operating
to a large extent in the public sphere, they then
Households  transformed into experts who developed their tools
of research increasingly behind the scenes. No
longer did they try to influence policy agendas
 It is used from the sales to pay for the factors through public discourse; rather they targeted
of production?* policymakers directly and with instruments that
showed them as independent and objective policy
advisors, the tools of the trade changing all the
Revenue
while.

Profit To shed light on this evolution of economic

methodology, this book takes carefully selected
snapshots from the discipline’s history. It tracks the
 who receives income and use to pay taxes to process of development through the nineteenth
the government? * and twentieth centuries, analysing the growth of
empirical and mathematical modelling. It also looks
Households at the emergence of the experiment in economics,
in addition to the similarities and differences
between modelling and experimentation.
Firms
Economic methodology, broadly conceived, is the
study of how economics functions, how it could
Who barrows in the financial markets to buy function, and how it should function and of the
investment goods?* various presuppositions and conditions of all these.
It examines various meta theoretical key concepts
such as theory and model, assumption and
All of the above idealization, causation and explanation, testing and
progress, rhetoric and truth, social construction and
 Households pluralism;
as well as various goals, styles and constraints of
research, such as mathematical modelling and
Firms experimentation, grounded theory and case study,
causal and functional explanation, forecasting and
 It refers to the excess of tax revenue over policy, ontological and institutional (academic and
otherwise) constraints on economic inquiry. It also
government spending?*
sets out to examine fundamental substantial
concepts such as rationality, choice, routine, trust,
Profit institution, evolution, coordination, equilibrium, path
dependence.
Public Savigs THREE DIMENSIONS SEEM PARTICULARLY
RELEVANT TO THESE INQUIRIES WITHIN
ECONOMIC METHODOLOGY
EAEPE.
is the study of methods, especially the scientific
method, in relation to economics, including The first is often put in terms of orthodoxy and
principles underlying economic reasoning.  In heterodoxy.
contemporary English, methodology may The second is in terms of realism and non-
realism.
Neither of these dimensions and the respective
distinctions is unproblematic, and hence should be
part of the domain of methodological inquiry itself.
The distinctions also do not coincide as there are
realist versions of "orthodoxy" and non-
realist versions of "heterodoxy", which
helps to underline the fact that none of the four
categories on the two dimensions is uniform. There
is a methodological and conceptual jungle there,
and it is our task to develop maps that help us
orient ourselves to do better economics without
misrepresenting current practice.
A third-dimension deals with what is and what
is not economics.
Are there, or should there be, any disciplinary
boundaries? If so, where are they located? On
what conditions, and how, are they to be crossed?
Economics participates in interdisciplinary
encounters in a variety of ways and directions,
influencing other disciplines and being
influenced by them. For example, while political
science, sociology, and science studies
have been partly reshaped by an increasing use of
economic concepts and methods,
economics itself is being transformed due to its
encounters with cognitive and life
sciences. Institutional and evolutionary economics
lie at the crossroads of these trends.
Since none of this is simple, uniform, and
straightforward, careful analyses are needed
to track the detailed structure of these processes.
What drives and shapes them? Which
parts of economics participate in these encounters
and how? How are we to evaluate
the outcomes? How does all this relate with the first
two dimensions?
Economic theory and empirical work: What is
it?
What is economic theory and what can it do?
Unlike “theory” in some other social science
disciplines, economic theory is mostly based on
mathematical modelling and rigorous proof that
certain conclusions or results can be derived from
certain assumptions. But theory alone can say little
about the real world.
In Economics: Models = Theory = Mathematics…
for the most part.
What is empirical work and what can it do?
In contrast, empirical work gathers evidence from
the real world, usually organized
into systematic data sets.
 Empirical papers use evidence from the real world,
 It tries to bring evidence to refute or
substantiate economics theory,
 It tries to estimate parameters such as price
elasticity or the government spending
multiplier in specific context
 It rigorously presents broad “stylized facts”,
providing a clear picture of a market, industry,
or situation
Much empirical work itself relies on assumptions,
either assumptions from
economic theory, or assumptions about the data
itself, or both. But empirical work
does not “prove” anything. Instead, it presents
evidence in favor of or against certain
hypotheses, estimates parameters, and can, using
the classical statistical framework,
reject (or fail to reject) certain null hypotheses.
What “rejecting” means is “if the
assumptions underlying my estimation technique
are correct, then it is highly unlikely
that the null hypothesis holds.”
Normative vs. Positive
The word ‘Normative’, also called ‘prescriptive’,
often refers to what ought to be, what an ideal
policy would be, or how to think about judging
whether this is a justifiable welfare function.
“Positive” work claims to be value-neutral and to
address what is or what must be going on in the
real world. Most modern economists would
probably claim their work is “positive”, and in this
sense, “prescriptive” is often used as a pejorative,
In my experience. However, prescriptive papers
can be very valuable if done well.
Note: There is also another context in which you
will hear the expression ‘normative analysis.’ This
may also be used to describe microeconomic
analysis derived from the axioms of rational
optimizing behavior; this describes much of what
you have
covered in your textbook. This dual meaning of the
word ‘normative’ is admittedly
confusing!
Theoretical vs. Empirical (techniques)
Papers that use theory (modeling) as a technique
typically start from a series of assumptions and try
to derive results simply from these assumptions.
They may motivate their focus or assumptions
using previous empirical work and anecdotes, but
these papers do not use themselves data nor do
they do what we call “econometrics”. Remember
that in Economics “theory papers” are usually
highly mathematical and formal.
usually to test hypotheses, but also to generate
description and help formulate ideas and
hypotheses.
THEORETICAL VS. APPLIED (FOCUS)
“Theoretical” can also be used to describe a
paper’s focus; a theoretical paper
in this sense will address fundamentals of
economic modeling. In theory, these may
be widely applied across a range of fields, but they
do not typically address any
single issue of policy or focus on a specific
industry. These papers are often very
difficult to read and there is argument about
whether many such papers will ultimately
“trickle-down” to having practical use. These
papers typically used theory and
modeling techniques rather than empirics. However
some empirical papers may be
aimed at addressing fundamental theoretical issues
and parameters.
Papers with an “applied” focus will directly target a
policy issue or a puzzle or
question about the functioning of certain market or
nonmarket interactions. Nearly all
of the papers you will read and work on as an
undergraduate are “applied” in this
sense.
CATEGORIES OF EMPIRICAL APPROACHES
“Causal” vs. “Descriptive”
“Causal” papers try to get at whether one factor or
event “A” can be seen to directly “cause” an
outcome “B”. For example, “does an individual
getting more years of schooling lead him or her to
have higher income, on average?” A good way to
think about this conception of causality is to
consider the counterfactual: if a typical person
who received a university degree had been
randomly selected to not get this
education, would her income have been lower than
it now is? Similarly (but not
identically) if the typical person without his
education had been randomly input into a
university program, would her income now be
greater?
Since the real world does not usually present such
clean experiments, “causal”
empirical researchers rely on various techniques
which usually themselves depend
on" identification assumptions." See, for
example, control strategies, difference in
difference, and instrumental variables techniques.
“Descriptive” papers essentially aim to present a
picture of “what the data looks like” in an
informative way. Causal relationships may
be suggested but the authors are not making a
strong claim that they can identify these. They may
present a data- driven portrait of an industry, of
wealth and inequality in a country or globally over
time, of particular patterns and trends in
consumption, of a panel of governments’ monetary
and fiscal policy, etc. They may focus on the
‘functional form’ of relationships in the data and the
‘residual’ or ‘error structure. They may hint at
causal relationships or propose a governing model.
They may identify a ’puzzle’ in the data
(e.g., the ‘equity premium puzzle’) and propose
potential explanations. They may use
the data to ‘provide support’ for these explanations.
5  They may devote much of the
paper to providing a theoretical explanation
(remember, in Economics these are
usually mathematical models) for the pattern. They
may also run statistical tests and
report confidence intervals; one can establish a
‘statistically significant’ relationship
between two variables even if the relationship is
not (necessarily) causal. This is
important when one sees the data as subject to
measurement error and/or as
a sample from a larger population. E.g., just
because age and wealth (or height and
head-size, or political affiliation and food-
preference) are strongly related to one
another in a random representative sample of 10
people does not mean they are
strongly related to one another in the
entire population. 6
STRUCTURAL VS. REDUCED FORM
This is a rather complicated issue, and there are
long debates over the merits of each approach. In
brief, structural empirical papers might be said to
use theory to derive
necessary relationships between variables and
appropriate functional forms, often as
part of a system of questions describing a broad
model. They then “take this model to
the data” and estimate certain parameters; these
estimates rely on the key structural
assumptions and the chosen functional form (which
is often selected for convenience) holding in the
real world. They may also try to check how “robust”
the estimates are to alternate assumptions and
forms. Structural estimates can then be used to
make precise predictions and welfare calculations.
Reduced form work may begin with some
theoretical modeling but it will not usually try to
estimate the model directly. Reduced form work
often involves estimating single equations which
may be “partial equilibrium”, and they may often
use linear regression and interpret it as a “best
linear approximation” to the true unknown
functional form. Reduced form researchers often
claim that results are “more robust” than structural
work, while proponents of structural work may
claim that reduced form econometrics is not
theoretically grounded and thus meaningless. Most
of you are likely to focus on reduced form empirical
work.

Quantitative vs. qualitative (the latter is rare in

economics)

Quantitative research deals with data that can be

quantified, i.e., expressed in terms
of numbers and strict categories, often with
hierarchical relationships.

Qualitative research is rarely done in modern

economics. It relies on “softer” forms of
data like interviews that cannot be reduced to a
number or parameter, and cannot be
dealt with using statistical techniques.

METHODOLOGICAL RESEARCH

Methodological research is aimed at producing and

evaluating techniques and approaches that can be
used by other researchers. Most methodological
research in economics is done by econometricians,
who develop and evaluate techniques for
estimating relationships using data.

MARY J.