Economics is a social science. It studies human behaviour. We usually associate science with topics such as the law of gravity, the respiratory system or chemical reactions. In each of these cases, the same outcome is guaranteed. For example, because of the law of gravity, if your pen falls off the desk it will always hit the ground. We can be less definite in our study of human behaviour because humans don’t always behave in the same way.
As economists, we ask questions such as,
‘How would consumers behave if their incomes increased – would people spend more?’
‘What might happen to water usage if we had to pay for every litre we used?’
‘If the price of postage stamps fell to 50c, would more be sold?’
‘What would be the economic effects of increasing the legal drinking age to 21 years?’
Unlike the law of gravity, we cannot be precisely sure what would happen in these scenarios. Given that we are less definite about how humans will behave when circumstances change, economics is called a social science. Let’s begin our study with something that’s absolutely crucial to economics: data.
Economic data consists of facts gathered for economic reference or analysis, such as the amount of money that individuals earn, the amount of money that companies pay in tax or how much money governments owe to other countries. Economists collect data for two main reasons. First, we need to examine if what they are proposing is actually the case. For example, an economist may propose to the government that reducing VAT will increase consumer spending. They may collect data to back up their idea with evidence, including the results when VAT was reduced in other countries. Second, economists are often required to provide context for economic decisions. Without economic data, it is difficult to make policy recommendations. What steps do you need to take?
Step 1: Collect the data
Step 2: Organise the data
Step 3: Present the data
Step 4: Analyse the data
Step 5: Interpret the data
For a thorough instruction on how to collect and interpret data, please see pages 6-9 of Positive Economics.