Focuses on objective and fact-based analysis. It describes and explains economic phenomena without incorporating value judgments.
Example: “The unemployment rate is 6%.”
Normative
Involves value judgments about what the economy should be like. It deals with opinions on economic policies and outcomes.
Example: “The government should reduce unemployment to 4%.”
Theoretical vs Empirical Economics
Theoretical
Involves the creation and use of models and theories to understand and predict economic behaviour. This includes abstract reasoning to explain how economies function.
Empirical
Uses data, statistics, and econometrics to test theories and analyze real-world economic issues. It involves collecting and interpreting data to support or refute economic hypotheses.
Ceteris Paribus:
A Latin phrase meaning “all other things being equal.”
It is used in economic modelling to isolate the effect of one variable by holding others constant.
Simplification and Assumptions: Economists make assumptions to simplify reality and focus on the most important factors.
This helps in creating models that are easier to analyze and understand.
Diagrams and Graphs:
Visual tools used to represent economic models and theories.
They help illustrate relationships between variables and make complex concepts more comprehensible.
Economic Growth:
An increase in the production of goods and services over time, leading to higher national income and improved living standards.
Economic Stability:
Achieving steady growth, low inflation, and low unemployment. It aims to avoid large fluctuations in the economy.
Fiscal Policy:
Government policy on taxation and spending to influence economic activity. It includes adjusting tax rates and government spending levels.
Monetary Policy:
Central bank policy on controlling the money supply and interest rates. It includes adjusting interest rates and conducting open market operations to influence economic conditions.
