Chapter 2 Tracking Economic Developments.pptVIP

Chapter 2 Tracking Economic Developments What Do Economists Do? Mark McClellan and Jim Hamilton They are two of the best economists in the world, yet are not household names. Mark’s expertise is on Health Care Policy, and has served on President Bush’s Council of Economic Advisers. Jim is well known for his work on monetary policy and oil price shocks. In this chapter, we try to understand what economists such as Mark and Jim actually do. What Do Economists Do? Economists try to answer questions such as: Why is college tuition so high? Why are there 17 different types of toothpaste? Why did the price of gasoline fluctuate so much, going over $4.00 per gallon in July 2008? Why has health-care spending increased faster than the rest of the U.S. economy? What Do Economists Do? Why is the average income of people in the United States 35 times higher than that of people in China? Why have the wages of college graduates increased much more rapidly than the wages of non-graduates since the 1970’s? Why did the U.S. go into a recession in December 2007? What Do Economists Do? Understanding Gasoline Prices in the United States Observation# 1: The price of gasoline trended upwards between 2002-2008. The gasoline price dropped at the end of 2008. Observation #2: The price of gasoline was more volatile in 2002-2008. There was little fluctuation between 1991-2000. Figure 1: Retail Price of Gasolinein the United States, 1991–2008 What Do Economists Do? Relative price of gasoline Figure 2: Relative Price of Gasoline Explaining an Economic Event Economic Variable: any economic measure that can vary over a range of values. Economic Variables: Examples GDP Health-care spending Health-care spending share of GDP Relative price of health care Explaining an Economic Event Positive Correlation: occurs when two variables move in the same direction; when one goes up, the other also goes up. Negative Correlation: occurs when two variables move in different directions; when one goes up