Understanding Economic Methodology: Thinking Like an Economist
School
University of Ottawa**We aren't endorsed by this school
Course
ECO 1104
Subject
Economics
Date
Dec 11, 2024
Pages
63
Uploaded by ConstableSnowZebra26
ObjectivesEach discipline has its own language and way of thinking. Mathematicians talkabout integrals, vectors, physicists talk about atoms etc.....Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E2 / 38
ObjectivesEach discipline has its own language and way of thinking. Mathematicians talkabout integrals, vectors, physicists talk about atoms etc.....Like all these disciplines, economics also has its own language : supply, demand,business cycle etc...Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E2 / 38
ObjectivesEach discipline has its own language and way of thinking. Mathematicians talkabout integrals, vectors, physicists talk about atoms etc.....Like all these disciplines, economics also has its own language : supply, demand,business cycle etc...Before delving into the substance and details of economics, it is helpful to have anoverview of how economists approach the world.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E2 / 38
ObjectivesEach discipline has its own language and way of thinking. Mathematicians talkabout integrals, vectors, physicists talk about atoms etc.....Like all these disciplines, economics also has its own language : supply, demand,business cycle etc...Before delving into the substance and details of economics, it is helpful to have anoverview of how economists approach the world.This chapter, therefore, discusses the field’s methodology.What is distinctive about how economists confront a question ?What does it mean to think like an economist ?Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E2 / 38
The economist as scientistThe scientific method : observation, theory and the return to observationEconomists try to address their subject with thescientistsmethod.The scientific methodThe scientific method involves observation, theory, and more observation.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E3 / 38
The economist as scientistThe scientific method : observation, theory and the return to observationEconomists try to address their subject with thescientistsmethod.The scientific methodThe scientific method involves observation, theory, and more observation.Economists use theory and observation like other scientists.→For example an economist who lives in a country where prices are increasing.→He will probably want to develop a theory of inflation. He might argue thatinflation occurs when the government issues too much money.But economists do face an obstacle that makes their task especiallychallenging :Experiments are often di!cult in economics.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E3 / 38
The economist as scientistThe role of assumptionsThe art ofscientific thinkinglies in the development ofassumptions, decidingwhich assumptions to make.The role of assumptionsAssumptions can simplify the complex world and make it easier to understand.Economists useassumptionsto allow them to simplify reality in order tounderstand it.Example : Case study on international trade.Economists assume that the world is made up of two countries each producingtwo goods.But the reality is that the world is made up of dozens of countries, eachproducing thousands of goods.→By limiting themselves to two goods they can better focus on the heart of theproblem. After understanding international trade in this imaginary world, theyare able to better understand it in this complex world in which we live.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E4 / 38
The economist as scientistECONOMIC MODELSEconomists also use models to learn about the world that are most oftencomposed of diagrams and equations.Economic models omit many details to allow us to see what is trulyimportant.All the models are built with assumptions.Theeconomic modelsthat economists use to explain reality can besummarized as follows :→They are based onassumptions.→They arediagramsandequations.→Models sacrifice many details in order to concentrate on the essentials.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E5 / 38
The economist as scientistOUR FIRST MODEL :THE CIRCULAR-FLOW DIAGRAMOne of the fundamental models used in economics is thecircular-flowdiagram.The circular-flow diagram: a visual model of the economy that shows howdollars flow through markets among households and firms.Economic reality consists of millions of people devoting themselves to amultitude of activities : buying, selling, working, renting, producing, etc.To interpret how it works, you need to find a way of simplifying our perceptionof this myriad of activities.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E6 / 38
The economist as scientistA first model : the circular flow diagram (continued)The circular-flow diagram includestwo types of economic agents:households and firms.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E7 / 38
The economist as scientistA first model : the circular flow diagram (continued)The circular-flow diagram includestwo types of economic agents:households and firms.Firms produce goods and services using inputs such as labor, land, capital(buildings and machinery) acquired from households.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E7 / 38
The economist as scientistA first model : the circular flow diagram (continued)The circular-flow diagram includestwo types of economic agents:households and firms.Firms produce goods and services using inputs such as labor, land, capital(buildings and machinery) acquired from households.→These inputs are calledfactors of production.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E7 / 38
The economist as scientistA first model : the circular flow diagram (continued)The circular-flow diagram includestwo types of economic agents:households and firms.Firms produce goods and services using inputs such as labor, land, capital(buildings and machinery) acquired from households.→These inputs are calledfactors of production.Households buy goods and services produced by firms.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E7 / 38
The economist as scientistA first model : the circular flow diagram (continued)The circular-flow diagram includestwo types of economic agents:households and firms.Firms produce goods and services using inputs such as labor, land, capital(buildings and machinery) acquired from households.→These inputs are calledfactors of production.Households buy goods and services produced by firms.Households and firms interact intwo types of markets, taking turns asbuyersandsellers.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E7 / 38
The economist as scientistA first model : the circular flow diagram (continued)The circular-flow diagram includestwo types of economic agents:households and firms.Firms produce goods and services using inputs such as labor, land, capital(buildings and machinery) acquired from households.→These inputs are calledfactors of production.Households buy goods and services produced by firms.Households and firms interact intwo types of markets, taking turns asbuyersandsellers.→Themarket factor of productionwhere households sell firms inputs to producegoods and services.→Themarket for goods and serviceswhere households buy goods and servicesproduced by firms.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E7 / 38
FIGURE 2.1The Circular FlowTheinner loopof the diagram represents theflow of inputs or outputsbetween households and firms.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E8 / 38
FIGURE 2.1The Circular FlowTheinner loopof the diagram represents theflow of inputs or outputsbetween households and firms.→Households sellfactors of productionto firms which use them to producegoods and services, which are then sold tohouseholds in the market for goods and services.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E8 / 38
FIGURE 2.1The Circular FlowTheinner loopof the diagram represents theflow of inputs or outputsbetween households and firms.→Households sellfactors of productionto firms which use them to producegoods and services, which are then sold tohouseholds in the market for goods and services.Theouter loopof the diagram represents theflow of dollars.→Households spend money to buy goods and services produced by firms. Firms use that revenue to acquire factorsof production such as employees buy paying wages and rents to landlords. What remains corresponds to the profitof the stakeholders who are part of the households.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E8 / 38
A second model : The Production Possibilities Frontier(PPF)OUR SECOND MODEL :THE PRODUCTION POSSIBILITIES FRONTIERProduction Possibilities Frontiera graph that shows all thepossiblecombinationsof output that the economy can produce given theavailablefactors of production and theavailableproduction technology.In chapter 1 :Households, firms, and governments constantly face trade-o!because ofresource scarcity.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E9 / 38
A second model : The Production Possibilities Frontier(PPF)OUR SECOND MODEL :THE PRODUCTION POSSIBILITIES FRONTIERProduction Possibilities Frontiera graph that shows all thepossiblecombinationsof output that the economy can produce given theavailablefactors of production and theavailableproduction technology.In chapter 1 :Households, firms, and governments constantly face trade-o!because ofresource scarcity.Scarcity, requiring trade-o!, implies that the the totality of goods andservices that can be produced islimited.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E9 / 38
A second model : The Production Possibilities Frontier(PPF)OUR SECOND MODEL :THE PRODUCTION POSSIBILITIES FRONTIERProduction Possibilities Frontiera graph that shows all thepossiblecombinationsof output that the economy can produce given theavailablefactors of production and theavailableproduction technology.In chapter 1 :Households, firms, and governments constantly face trade-o!because ofresource scarcity.Scarcity, requiring trade-o!, implies that the the totality of goods andservices that can be produced islimited.Economics teaches us a simple tool for describingthese limits: theProduction Possibilities Frontier (PPF).Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E9 / 38
A second model : the production possibilities frontier(continued)Let’s take as an example an economy that produces onlytwo goods:computersandautomobiles, these two industries requiring all the factors ofproduction.2.2The ProductionPossibilities FrontierAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E10 / 38
A second model : the production possibilities frontier(continued)Due toscarcity, certain combinations of automobiles and computers are not accessible as pointCshows.We consider that an allocation ise!cientif the economy makes the most of the resources availableto it.→Points locatedon the PPFrather than inside correspond toe!cientproduction levels. PointA represents ane!cientallocation while point D represents anine!cientallocation becausefor some reason, perhaps unemployment, the economy is producing less than it could given itsresources.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E11 / 38
Active LearningProduction Possibilities Frontier ExamplePoint ongraphProductionComputersWheatA5000B4001000C2502500D1004000E05000Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E12 / 38
Active LearningDiscussion QuestionsA.On the graph, find the point that represents 100 computers, 3000 tons ofwheat ; label itF. Would it be possible for the economy to produce thiscombination of the two goods ? Why or why not ?B.Next, find the point that represents 300 computers, 3500 tons of wheat ;label itG. Would it be possible for the economy to produce this combinationof the two goods ?Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E13 / 38
Active LearningAnswersPointF: 100 computers,3000 tons of wheatPointFrequires 40 000hours of labour. Possiblebut not e"cient ; could getmore of either good withoutsacrificing any of the other.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E14 / 38
Active LearningAnswers (cont’d)PointG: 300 computers,3500 tons of wheatPointGrequires 65 000hours of labour. Notpossible because economyhas only 50 000 hours.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E15 / 38
Figure 2.3 : A Shift in the Production Possibilities FrontierSeveral factors can influence the Production Possibilities Frontier :Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E16 / 38
Figure 2.3 : A Shift in the Production Possibilities FrontierSeveral factors can influence the Production Possibilities Frontier :Technological progress: development of better techniques of production.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E16 / 38
Figure 2.3 : A Shift in the Production Possibilities FrontierSeveral factors can influence the Production Possibilities Frontier :Technological progress: development of better techniques of production.Increasing human capital: improving the quality of work that results from instruction,field training and work experienceAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E16 / 38
Figure 2.3 : A Shift in the Production Possibilities FrontierSeveral factors can influence the Production Possibilities Frontier :Technological progress: development of better techniques of production.Increasing human capital: improving the quality of work that results from instruction,field training and work experienceAccumulation of physical capital: increase in resources in capitalAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E16 / 38
Figure 2.3 : A Shift in the Production Possibilities FrontierSeveral factors can influence the Production Possibilities Frontier :Technological progress: development of better techniques of production.Increasing human capital: improving the quality of work that results from instruction,field training and work experienceAccumulation of physical capital: increase in resources in capitalIncrease in the labor forceAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E16 / 38
Figure 2.3 : A Shift in the Production Possibilities FrontierSeveral factors can influence the Production Possibilities Frontier :Technological progress: development of better techniques of production.Increasing human capital: improving the quality of work that results from instruction,field training and work experienceAccumulation of physical capital: increase in resources in capitalIncrease in the labor forceWhen one of these phenomena a"ects one or more sectors : there isshiftof the productionpossibilities frontier.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E16 / 38
Figure 2.3 : A Shift in the Production Possibilities FrontierSeveral factors can influence the Production Possibilities Frontier :Technological progress: development of better techniques of production.Increasing human capital: improving the quality of work that results from instruction,field training and work experienceAccumulation of physical capital: increase in resources in capitalIncrease in the labor forceWhen one of these phenomena a"ects one or more sectors : there isshiftof the productionpossibilities frontier.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E16 / 38
QUICKQUIZIn what sense is economics like a science ?Draw a production possibilities frontier for a society that produces foodand clothing. Show an e"cient point, an ine"cient point, and an infeasiblepoint. Show the e!ects of a drought.Define microeconomics and macroeconomics.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E17 / 38
The economist as Policy AdviserPositive analysis and normative analysisWhen economists are trying to explain the world, they arescientists.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E18 / 38
The economist as Policy AdviserPositive analysis and normative analysisWhen economists are trying to explain the world, they arescientists.When they are trying to help improve it, they arepolicy advisers.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E18 / 38
The economist as Policy AdviserPositive analysis and normative analysisWhen economists are trying to explain the world, they arescientists.When they are trying to help improve it, they arepolicy advisers.Scientists and policy advisers pursue di!erent goals, so it is not surprisingthat they use distinct vocabulary or di!erent statements.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E18 / 38
The economist as Policy AdviserPositive analysis and normative analysisWhen economists are trying to explain the world, they arescientists.When they are trying to help improve it, they arepolicy advisers.Scientists and policy advisers pursue di!erent goals, so it is not surprisingthat they use distinct vocabulary or di!erent statements.The statements are classified into two categories :POSITIVE VERSUS NORMATIVE ANALYSISAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E18 / 38
The economist as Policy AdviserPositive analysis and normative analysisWhen economists are trying to explain the world, they arescientists.When they are trying to help improve it, they arepolicy advisers.Scientists and policy advisers pursue di!erent goals, so it is not surprisingthat they use distinct vocabulary or di!erent statements.The statements are classified into two categories :POSITIVE VERSUS NORMATIVE ANALYSISPositive statements :claims that attempt to describe the world as it is.→Example : “If we increase the tax on gasoline, then gasoline consumption willdecrease.”Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E18 / 38
The economist as Policy AdviserPositive analysis and normative analysisWhen economists are trying to explain the world, they arescientists.When they are trying to help improve it, they arepolicy advisers.Scientists and policy advisers pursue di!erent goals, so it is not surprisingthat they use distinct vocabulary or di!erent statements.The statements are classified into two categories :POSITIVE VERSUS NORMATIVE ANALYSISPositive statements :claims that attempt to describe the world as it is.→Example : “If we increase the tax on gasoline, then gasoline consumption willdecrease.”Normative statements :claims that attempt to prescribe how the world shouldbe.→Example : “The income tax should be abolished.”Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E18 / 38
The economist as Policy AdviserPositive analysis and normative analysisWhen economists are trying to explain the world, they arescientists.When they are trying to help improve it, they arepolicy advisers.Scientists and policy advisers pursue di!erent goals, so it is not surprisingthat they use distinct vocabulary or di!erent statements.The statements are classified into two categories :POSITIVE VERSUS NORMATIVE ANALYSISPositive statements :claims that attempt to describe the world as it is.→Example : “If we increase the tax on gasoline, then gasoline consumption willdecrease.”Normative statements :claims that attempt to prescribe how the world shouldbe.→Example : “The income tax should be abolished.”Consider the extract from a dialogue on minimum wage legislation.Jean-Benoît : Minimum wage legislation is a cause of unemployment.→positive statementAnne-Marie : The government should increase the minimum wage.→normativestatementAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E18 / 38
Active LearningDiscussion QuestionsWhich of these statements are “positive” and which are “normative” ? How canyou tell the di!erence ?A.Prices rise when the government increases the quantity of money.B.The government should print less money.C.A tax cut is needed to stimulate the economy.D.An increase in the price of burritos will cause an increase in consumerdemand for video rentals.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E19 / 38
Active LearningAnswersA.Prices rise when the government increases the quantity of money.Positive : describes a relationship, could use data to confirm or refuteB.The government should print less money.Normative : this is a value judgment, cannot be confirmed or refuted.C.A tax cut is needed to stimulate the economy.Normative : another value judgmentD.An increase in the price of burritos will cause an increase in consumerdemand for video rentals.Positive : describes a relationshipNote : A statement does not need to be true to be positiveAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E20 / 38
WHY ECONOMISTS DISAGREEGeorge Bernard Shaw : "Even if we put all the economists together they wouldnot reach a conclusion." There are two basic reasons :Economists can disagree about the validity of alternative positive theoriesabout how the world works.→Economics is a very recent science where much remains to be discovered.They can have di!erent values and, therefore, di!erent normative viewsabout what a policy should try to accomplish.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E21 / 38
WHY ECONOMISTS DISAGREEDIFFERENCES IN SCIENTIFIC JUDGMENTSEconomists often disagree about the direction in which truth lies.For example, economists disagree about whether the government should levytaxes based on a household’s income or its consumption.DIFFERENCES VALUESSuppose that Peter and Paula both take the same amount of water from thetown well. To pay for maintaining the well, the town taxes its residents. Peterhas income of $50 000 and is taxed $5000, or 10% of his income. Paula hasincome of $10 000 and is taxed $2000, or 20% of her income.Is this policy fair ?If not, who pays too much and who pays too little ?Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E22 / 38
WHY ECONOMISTS DISAGREEPERCEPTION VERSUS REALITYBecause of di!erences in scientific judgments and di!erences in values, somedisagreement among economists is inevitable.But they do often share a common view.Proposition (and percentage of economists who agree)1.A ceiling on rents reduces the quantity and quality of housing available.(93%)2.Tari!s and import quotas usually reduce general economic welfare, (93%)3.Flexible and floating exchange rates o!er an e!ective international monetaryarrangement.(90%)4.Fiscal policy (e.g., tax cut and/or government expenditure increase) has asignificant stimulative impact on a less than fully employed economy.(90%)Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E23 / 38
APPENDIXGraphing : A Brief ReviewGraphs serve two purposes :1.When developing economic theories, graphs o!er a way to visually expressideas that might be less clear if described with equations or words.2.When analyzing economic data, graphs provide a way of finding how variablesare in fact related in the world.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E24 / 38
APPENDIXGraphing : A Brief ReviewGRAPHS OF SINGLE VARIABLEThree common types of graphs :Pie chart in panelBar graph in panelTime-series graphAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E25 / 38
APPENDIXGraphing : A Brief ReviewGRAPHS OF TWO VARIABLESEconomists are often concerned with the relationships between variables.The coordinate system makes possible the display of two variables on a singlegraph.The coordinate system makes the correlation between the two variables easyto see.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E26 / 38
APPENDIXGraphing : A Brief ReviewCURVES IN COORDINATE SYSTEMEconomists also often look at how one variable a!ects another, holdingeverything else constant.To see how this is done, let’s consider one of the most important graphs ineconomics—the demand curve.PriceIncome$30000$40000$50000$102 novels5 novelsBnovels969128101316714172061821245222528Demand curve,D3Demand curve,D,Demand curve,DnAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E27 / 38
APPENDIXGraphing : A Brief ReviewSuppose that Emma’s income is $40 000 per year.If the number of novels Emma purchases is placed on the x-axis and the priceof novels on the y-axis, we can graphically represent the middle column ofTable 2A.1.Figure 2A.3 is known as Emma’s demand curve for novels.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E28 / 38
APPENDIXGraphing : A Brief ReviewFigure 2A.4Shifting Demand CurvesIn economics, it is important to distinguish between movements along a curveand shifts of a curve.When a variable that is not named on either axis changes, the curve shifts.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E29 / 38
APPENDIXGraphing : A Brief ReviewFigure 2A.5Calculating the Slope of a LineSLOPEThe slope of a line is the ratio of the vertical distance covered to thehorizontal distance covered as we move along the line.Mathematically :slope=!y!xAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E30 / 38
APPENDIXGraphing : A Brief ReviewSLOPE (cont’d)What is the slope of Emma’s demand curve for novelsslope=!y!x=Firsty-coordinate→Secondy-coordinateFirstx-coordinate→Secondx-coordinate=6→821→13=→28=→14Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E31 / 38
APPENDIXGraphing : A Brief ReviewGRAPHICS FUNCTIONThe general functional form for a linear demand curve is :QD=f(P) =a→bPwhereaandbare called the parameters of the function, and representpositive numbers.For Emma’s demand curve depicted in Figure 2A.3, which assumes that herincome is $40 000, the values for a and b are 45 and 4, respectively, and theprecise functional form of her demand curve is :QD=45→4PAtP=10,QD=45→4(10) =45→40=5Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E32 / 38op=45 - 4P
Figure 2A.6Emma’s Demand Curve with Income of $40 000Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E33 / 38
Figure 2A.7Emma’s Demand Curve with Di!erent IncomesAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E34 / 38
APPENDIXGraphing : A Brief ReviewCAUSE AND EFFECTWhen graphing data from the real world, it is often more di"cult to establishhow one variable a!ects another.Omitted-variable trapReverse causality trapAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E35 / 38
APPENDIXGraphing : A Brief ReviewFigure 2A.8Graph with an Omitted VariableCAUSE AND EFFECT (cont’d)Omitted VariablesOmitting a variable can lead to a deceptive graph.Principle“When you see a graph being used to support an argument aboutcause and e!ect, it is important to ask whether the movements of an omittedvariable could explain the results you see.”Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E36 / 38
APPENDIXGraphing : A Brief ReviewCAUSE AND EFFECT (cont’d)Reverse CausalityEconomists can also make mistakesabout causality by misreading itsdirection.Observation : More dangerous citieshave more police o"cers.Does having more police causemore crime ?ORDoes having more crime causemore police hiring ?Nothing in the graph itself allows usto establish the direction ofcausality.Aissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E37 / 38
Figure 2A.9Graph Suggesting Reverse CausalityAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E38 / 38
Figure 2A.9Graph Suggesting Reverse CausalityAissata Boubacar MoumouniIntroduction to Macroeconomics - ECO1102 E38 / 38