Principles of Economics/Miscellaneous Topics
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[edit] Ceteris paribus
This idea leads into another basic tenet of economics. In any economic analysis, we usually assume that everything outside of the problem at hand remains constant. For instance, some variables in our unemployment and inflation model will actually erase the tradeoff. This happened in the 1980s and 1990s in the United States, where there was low unemployment and low inflation at the same time. However, for the most part the model is almost always correct. Thus, for the purposes of examining those two variables, economists usually assume that all of the other possible variables effecting those remain the same. Economists call this ceteris paribus or the other things being equal assumption. When considering economics, it is helpful to first evaluate only two variables, and then to examine the effects of other upon the model.
[edit] Methodology
As a science, economics follows the scientific method. Hypotheses are developed from observations, and are tested to ensure validity (usually in economics this simply involves more observation). For results to be valid, an hypothesis must be capable of predicting an outcome more than once.
Economists are usually involved in theoretical economics and use their observation of facts to interpret them in a meaningful way. They use cause and effect relationships to establish economic theories or principles. Over time, a theory or principle may become accepted as universally true, at which point it becomes a law. A law is generally always considered to be true. A caveat to all of this is that all economic theories, principles, and laws are generalizations or abstractions. They simplify the actual picture, even more so because of ceteris paribus. A law, though almost always true, may prove false under special circumstances. Like other social sciences, economics cannot apply universal rules because humans sometimes act irrationally.
[edit] Defining Unemployment
Unemployment has several definitions, one being those members of the population that are actively looking for work and have not found it in a certain period. The main problem with this definition is that people who become disappointed and are no longer actively looking for a job are not counted as unemployed even though they might still want to work. The way unemployment is measured also has several versions. Some are using official payroll numbers of hirings and firings, others use the number of people who apply for unemployment benefits. Other methods include sampling through phone calls, etc that inquire if any able members of the household are unemployed and looking for work. The informal sector of the economy also create problems since these are done mainly by estimates.
Economists use a term called NAIRU (Non Accelerating Inflation Rate of Unemployment) which attempts to establish a level of unemployment such that reducing the level would create a shortage of available labor causing upward pressure on wages and potentially generating inflation.
