Chapter 2 The tools of economic analysis David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 2.2 Models and data ■ Model – a framework based on simplifying assumptions – helps to organize our economic thinking ■ Data – the economist’s link with the real world – time series – cross section 2.3 Real and nominal ■ Many economic variables are measured in money terms ■ Nominal values – measured in current prices ■ Real values – adjusted for price changes compared with a base year – measured in constant prices 2.4 Diagrams Real fares 1979-1998 0 2 4 6 8 10 12 14 16 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 Real fare (1998 pence) … help to analyze patterns and trends in data 2.5 Economic models: an example ■ To organize our thinking we need a simplified picture of reality ■ focusing on key elements ■ Quantity of tube journeys demanded = f(Prices, income, preferences) 2.6 Relationships Fares and revenues 1979-98 9 10 11 12 13 14 15 500 600 700 800 900 1000 Real revenue (£mn 1998 prices) Real fare (1998 pence) Diagrams help economists to explore relationships between economic variables 2.7 Evidence in economics ■ Scatter diagrams help us to confront economic theory with empirical reality ■ Economet rics takes this further using statistical techniques ■ Evidence may allow us to reject a theory ■ or accumulate support for it . Chapter 2 The tools of economic analysis David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 20 00 Power Point presentation by Peter Smith 2. 2 Models and. constant prices 2. 4 Diagrams Real fares 1979-1998 0 2 4 6 8 10 12 14 16 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 Real fare (1998 pence) … help to analyze patterns and trends in data 2. 5 Economic. elements ■ Quantity of tube journeys demanded = f(Prices, income, preferences) 2. 6 Relationships Fares and revenues 1979-98 9 10 11 12 13 14 15 500 600 700 800 900 1000 Real revenue (£mn 1998 prices) Real