research methods in macroeconomics

8/11/2019 research methods in macroeconomics

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Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley

AFRAMEWORKFORANALYSIS

Chapter 2

Marco Savioli




A framework for analysis

Two inputs: labor and capital (machine, buildings)

Investment: goods and services devoted to theproduction of new capital rather than consumed

Productivity: output produced with each unit of capital

Technology: available knowledge about how inputscan be combined to produce output

Efficiency: how the available technology and inputsinto production are actually used in producing output

= ℎ ×

Fundamentals: deeper, underlying factors of growth




Key ideas

Things that can make a country richer: accumulationof inputs into production vs productivity used inputs

Break down productivity into

technology: R&D, dissemination of knowledge,

scientific advancement efficiency: organization of the economy,institutions

Proximate and ultimate factors affecting growth

proximate cause: immediately responsible ultimate cause: affects through a chain of events




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Figure 2.1 The Production Function

Factors of production:inputs into productionthat a country canaccumulate

Production function:mathematicaldescription of howthe inputs a firm usesare transformed into

its output (for usoutput of a country)




From income levels to growthrates

If two countries are the same in their fundamentals,we can expect the country with a lower level ofincome to grow faster

Discussion of policies to affect economic growth canoften be confusing

An increase in saving would raise the growth rate ofoutput in the years immediately after it took place,but eventually the growth rate would return to itsbaseline level

However, even though growth would be the same inthe long run, the level of output would be higher




What can we learn from data

Economics advances our understanding of the worldthrough a combination of theoretical reasoning andthe examination of data

Economic theories are often stated in the form ofeconomic models, simplified representations of reality

E. t. can be used to analyze how economic variablesare determined, how a change in one affect others

Data are used to test e. t., to assign magnitudes tothe different parts of an economic model

But, data on happiness or utility? Inaccurate data?Different format of data? Bias of agencies that collect?




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Figure 2.3 Relationship between Latitude and

Income per Capita

Scatter plot:one pointfor

observation,one variablefor axis;used to seethe overallrelationship

and outliers

Strongpositiverelationship




Correlation

Consider a positive correlation between X and Y

X causes Y : if it were possible to change X, Y wouldchange as well. Causation may be direct or it mayoperate through a chain of intermediate causal links

Y causes X : reverse causation (income, neckties). It isalso perfectly possible that causation runs in bothdirections (practice, ability)

no direct causal relationship, but some third (omitted)variable (Z ) causes both X and Y

Multiple regression separates out the effects of third vars




Randomized controlled trials

«treatment» (subsidy, informational campaign, accessto a program) randomly assigned to a group ofindividuals or villages; another «control» groupreceives no treatment

There is no danger that the treatment is correlatedwith omitted variables or subject to reverse causation

Allow for small-scale testing and refining of programs

Problems: external validity, limits (policies affecting

entire countries, regulation of financial markets), maymiss out on effects, not informative on deep factors




Learning from historical data

Cross sectional data: observation of different units(countries or people) at a single point in time

Alternatively, variables changing over time

Historical data problem

if two things happened at the same time, we do notknow which event caused which

history effectively provides only one data point

Nobel Prize economic historian Robert Vogel: «railroadswere an essential cause of US economic growth» is a

fallacy; he considered a counterfactual world withoutrailroads but with navigable waterways handling transportneeds




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Figure 2.5 Fogel’s Map of a Potential Water

Transport Network for 1890

research methods in macroeconomics

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