This document provides an overview of key economic concepts for analyzing data and developing economic models. It introduces economic data, time-series graphs, correlation vs causation, and economic models. The objectives are to discuss how economists use data and graphs, differentiate correlation from causation, introduce economic models, explain positive vs normative economics, and discuss how economics informs government policy design. Examples on health care spending are provided to illustrate these concepts.

1. Economic
Data
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2. Observing and
Explaining the
Economy
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3. OVERVIEW
• These slides describe the tools needed to
begin forming an economic analysis
• The foundation of all economic analysis is
the use of economic data, graphs, and
models. These topics are introduced and
discussed with the issue of health care
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4. Teaching Objectives
• Discuss how economics makes use of data and
graphs
• Discuss negative and positive correlation
between variables. Differentiate between
correlation and causation
• Introduce economic models
• Explain normative versus positive economics
• Discuss the role of economics in designing
government policies
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5. 1. Observations: What Economist Endeavor to Explain
• Virtually all the questions economists seek
to answer come from observing the
economy. They document and quantify their
observations by collecting and examining
data
• A standard measure of the size and activity
of an economy is gross domestic product
(GDP)
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6. Figure 2.1
Gross Domestic Product (GDP) in the United States, 1990-1999
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7. Time-Series Graphs
• Any series of data that is measured over
time is called a time-series. A series that is
plotted over time is called a time-series
graph.
• We use a time-series graph to describe the
behavior of a series over time. Economic
models are used to explain the behavior.
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8. Figure 2.2
Spending on Health Care in the United States, 1990-1999
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9. Figure 2.3
Health-Care Spending as a Percentage of GDP
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10. Figure 2.4
Relative Price of Health Care
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11. Correlation
• Two series of data may be related.
Correlation (positive and negative)
measures the potential relationship.
• What can you say about the correlation
between good grades on economic tests and
time spent partying?
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12. Figure 2.5
Relative Price of Health Care
versus Health-Care Spending
Share
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13. Correlation and Causation
• Correlation and causation are not the same.
To say that two series are correlated does
not mean that once causes (leads) another.
Correlation between two series may be
caused by a third series.
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14. Economic Data
• Data measure the interaction of households
(consumers), firms, and governments. Most
interaction occurs in markets.
• A market is a mechanism in which
exchange between buyers and sellers take
place.
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15. Figure 2.6
A Circular Flow
Diagram
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16. 2. Economic Models
• A model is an explanation of how the
economy, or part of the economy, works.
• Models are built on theories and tell
economists whether variables are negatively
or positively related.
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17. Figure 2.7
A Model with Two Positively Related Variables
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18. Figure 2.8
A Model with Two Negatively Related Variables
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19. Figure 2.9
Economic Models in
Four Ways
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20. More on Economic Modeling
• Scarcity is a common element in all
economic models: to do something,
something else must be given up. Scarcity
forces individuals to make choices
• A standard economic model that includes
scarcity is supply and demand
• Models are simplifications of (complex)
reality. Many other factors must be held
constant (ceteris paribus).
.
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21. More on Economic Modeling
• Economic models may be classified
according to whether they seek to explain
an economy (macroeconomics) or seek to
explain aspects of individual behavior
(microeconomics).
• Theories and models are not stagnant. New
models and theories evolve often.
.
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22. 3. Using Economics for Public Economic Policy
• Ever since the Wealth of Nations by Adam Smith
(1776), economists have been motivated by a
desire to improve government policy.
• Positive economics simply explains the results of
policy (What it is)
• Normative economics attempts to develop and
recommend policy (What it should be).
• Economics is independent of political parties. It
has a set of tools that aid in thinking.
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