Economic Development PDF

**ECONOMIC DEVELOPMENT** **Absolute Poverty** - A situation of being unable to meet the minimum levels of income, food, clothing, health care, shelter, and other essentials. **Subsistence Economy** - An economy in which production is mainly for personal consumption and the standard o...

**ECONOMIC DEVELOPMENT** **Absolute Poverty** - A situation of being unable to meet the minimum levels of income, food, clothing, health care, shelter, and other essentials. **Subsistence Economy** - An economy in which production is mainly for personal consumption and the standard of living yields little more than basic necessities of life---food, shelter, and clothing. **Development** - The process of improving the quality of all human lives and capabilities by raising people's levels of living, self-esteem, and freedom. **Developing Countries** - Countries of Asia, Africa, the Middle East, Latin America, eastern Europe, and the former Soviet Union that are presently characterized by low levels of living and other development deficits. Used in the development literature as a synonym for *less developed countries.* **Traditional Economics** - An approach to economics that emphasizes utility, profit maximization, market efficiency, and determination of equilibrium. **Political Economy** - The attempt to merge economic analysis with practical politics--- to view economic activity in its political context. **Development Economics** - The study of how economies are transformed from stagnation to growth and from low- income to high-income status, and overcome problems of absolute poverty. **More Developed Countries (MDCs)** - The now economically advanced capitalist countries of western Europe, North America, Australia, New Zealand, and Japan. **Less Developed Countries** - A synonym for *developing countries.* **Globalization** - The increasing integration of national economies into expanding international markets. **The Important Role of Values in Development Economics** - Economics is a social science. It is concerned with human beings and the social systems by which they organize their activities to satisfy basic material needs (e.g., food, shelter, clothing) and nonmaterial wants (e.g., education, knowledge, spiritual fulfillment). It is necessary to recognize from the outset that ethical or normative value premises about what is or is not desirable are central features of the economic discipline in general and of development economics in particular. - The very concepts of economic development and modernization represent implicit as well as explicit value premises about desirable goals for achieving what Mahatma Gandhi once called the "realization of the human potential." **Social System** - The organizational and institutional structure of a society, including its values, attitudes, power structure, and traditions. **Values** - Principles, standards, or qualities that a society or groups within it considers worthwhile or desirable. **Attitudes** - The states of mind or feelings of an individual, group, or society regarding issues such as material gain, hard work, saving for the future, and sharing wealth. **Institutions** - Norms, rules of conduct, and generally accepted ways of doing things. Economic institutions are humanly devised constraints that shape human interactions, including both informal and formal \"rules of the game\" of economic life in the widely used framework of Douglass North. **Income Per Capita** - Total gross national income of a country divided by its total population. **Gross National Income (GNI)** - The total domestic and foreign output claimed by residents of a country. It comprises gross domestic product (GDP) plus factor incomes accruing to residents from abroad, less the income earned in the domestic economy accruing to persons abroad. **Gross Domestic Product (GDP)** - The total final output of goods and services produced by the country\'s economy, within the country\'s territory, by residents and nonresidents, regardless of its allocation between domestic and foreign claims. **Functionings** - What people do or can do with the commodities of given characteristics that they come to possess or control. **Capabilities** - The freedoms that people have, given their personal ceatures and their command over commodities. **Three Core Values of Development** **Sustence** - The basic goods and services, such as food, clothing, and shelter, that are necessary to sustain an average human being at the bare minimum level of living. **Self-Esteem** - The feeling of worthiness that a society enjoys when its social, political, and economic systems and institutions promote human values such as respect, dignity, integ-rity, and self-determination. **Freedom** - A situation in which a society has at its disposal a variety of alternatives from which to satisfy its wants and individuals enjoy real choices according to their preferences. **Sustenance: The Ability to Meet Basic Needs** - All people have certain basic needs without which life would be impossible. These life-sustaining basic human needs include food, shelter, health, and protection. **Self-Esteem: To Be a Person** - A second universal component of the good life is self-esteem---a sense of worth and self-respect, of not being used as a tool by others for their own ends. All peoples and societies seek some basic form of self-esteem, although they may call it authenticity, identity, dignity, respect, honor, or recognition. **Freedom from Servitude: To Be Able to Choose** - A third and final universal value that we suggest should constitute the meaning of development is the concept of human freedom. Freedom here is to be understood in the sense of emancipation from alienating material conditions of life and from social servitude to nature, other people, misery, oppressive institutions, and dogmatic beliefs, especially that poverty is predestination. 1. To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health, and protection 2. To raise levels of living, including, in addition to higher incomes, the provision of more jobs, better education, and greater attention to cultural and human values, all of which will serve not only to enhance material wellbeing but also to generate greater individual and national self-esteem 3. To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence, not only in relation to other people and nation-states, but also to the forces of ignorance and human misery. **Millennium Development Goals (MDGs)** - A set of eight goals adopted by the United Nations in 2000: to eradicate extreme poverty and hunger; achieve universal primary education; promote gender equality and empower women; reduce child mortality; improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure environmental sustainability; and develop a global partnership for development. The goals are assigned specific targets to be achieved by 2015. **Sector** - A subset (part) of an economy, with four usages in economic development: technology (modern and traditional sectors); activity (industry or product sectors); trade (export sector); and sphere (private and public sectors). **World Bank** - An organization known as an \"interna-tional financial institution\" that provides development funds to developing countries in the form of interest-bearing loans, grants, and technical assistance. **Low-income countries (LICs)** - In the World Bank classification, countries with a GNI per capita of less than \$1,025 in 2011. **Middle-income countries** - the World Bank classification, countries with a GNI per capita between \$1,025 and \$12,475 in 2011. **Newly industrializing countries (NICs) Countries** - at a relatively advanced level of economic development with a substantial and dynamic industrial sector and with close links to the international trade, finance, and investment system. **Least developed countries** - A UN designation of countries with low income, low human capital, and high economic vulnerability. **Value added** - The portion of a product\'s final value that is added at each stage of production. **Human capital** - Productive investments in people, such as skills, values, and health resulting from expenditures on education, on-the-job training programs, and medical care. **Purchasing Power Purity** - Calculation of GNI using a common set of international prices for all goods and services, to provide more accurate comparisons of living standards. **Gross national income (GNI)** - The total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP) plus factor incomes earned by foreign residents, minus income earned in the domestic economy by non-residents. **Depreciation (of the capital stock)** - The wearing out of equipment, buildings, infra-structure, and other forms of capital, reflected in write-offs to the value of the capital stock. **Capital stock** - Thetotal amount of physical goods existing at a particular time that have been produced for use in the production of other goods and services. **Gross domestic product (GDP)** - The total final output of goods and services produced by the country\'s economy within the country\'s territory by residents and nonresidents, regardless of its allocation between domestic and foreign claims. **Human Development Index (HDI)** - An index measuring national socioeconomic devel-opment, based on combining measures of education, health, and adjusted real income per capita. **Diminishing Marginal Utility** - The concept that the subjective value of additional consumption lessens as total consumption becomes higher. **HDI Ranking** - Low Human Development (0.0-0.535) - Medium Human Development (0.536-0.711) - High Human Development (0.712-0.799) - Very High Human Development (0.80-1.0) There are two steps in computing for the HDI, first we need to calculate the three indexes which are: the life expectancy index, the education index, and the income index. In computing these indexes, we will use the formula: - Dimension index = actual value - minimum value / maximum value - minimum value In the case of the country Ghana, the indicators and values given are: - Life expectancy at birth 64.6 - Mean years of schooling 7.0 - Expected years of schooling 11.4 - GNI per capita 1,684 **Life Expentancy Index** - To compute the life expectancy index, we will use the dimension index formula. - The actual value is 64.6, and the minimum value is 20, and the maximum value is 83.6. - The minimum and maximum values are the observed values for each country. **Education Index** - The education has two sub indexes which are; the mean years of schooling index, and the expected years of schooling index. - For the mean years of schooling index. The actual value is 7.0, the minimum value is 0, and the maximum value is 13.3. Again the minimum and maximum value are the observed values for each country. For the expected years of schooling index. The actual value is 11.4, minimum value is 0, and the maximum value is 18. We will substitute these given indicators to the formulas to get the answer. - To compute the education index, we will use the mean years of schooling index and the expected years of schooling index. We will get the square root of the product of the MYSI and the EYSI, then minus 0 over the maximum value (0.971) minus 0. **Income Index** - To compute the income index, we will also use the dimension index formula, however, the values will be with the natural log (ln). For example the actual value will be the natural log of 1,684 \[ln(1,684)\]. **Human Development Index** - And finally to compute for the HDI, we will simply get the cube root of the product of the three indexes. **Computing the NHDI** - The use of a geometric mean in computing the New HDI is very important. When using an arithmetic mean (adding up the component indexes and dividing by 3) in the HDI, the effect is to assume perfect substitutability across income, health, and education. For example, a higher value of the education index could compensate, one for one, for a lower value of the health index. **Lower Levels of Living and Productivity** - As we noted at the outset of the chapter, there is a vast gulf in productivity between advanced economies such as the United States and developing nations, including India and the DRC, but also a wide range among these and other developing countries. **Lower Levels of Human Capital** - Human capital-health, education, and skills---is vital to economic growth and human development. We have already noted the great disparities in human capital around the world while discussing the Human Development Index. **Higher Population Growth Rates** - Global population has skyrocketed since the beginning of the industrial era, from just under 1 billion in 1800 to 1.65 billion in 1900 and to over 6 billion by 2000. World population topped 7 billion by 2012. **Absolute poverty** - The situation of being unable or only barely able to meet the subsistence essentials of food, clothing, shelter, and basic health care. **Dependency burden** - The proportion of the total population aged 0 to 15 and 65+, which is considered economically unproductive and therefore not counted in the labor force. **Greater Social Fractionalization** - Low-income countries often have ethnic, linguistic, and other forms of social divisions, sometimes known as fractionalization. This is sometimes asso-societies to divert considerable energies to working for political accommodations if not national consolidation. **Fractionalization** - Significant ethnic, linguistic, and other social divisions within a country. **Larger Rural Populations but Rapid Rural-to-Urban Migration** - One of the hallmarks of economic development is a shift from agriculture to manufacturing and services. **Lower Levels of Industrialization and Manufactured Exports** - One of the most widely used terminologies for the original Group of Seven (G7) countries?8 and other advanced economies such as smaller European countries and Australia is the \"industrial countries.\" **Adverse Geography** - Many analysts argue that geography must play some role in problems of agri-culture, public health, and comparative development more generally. Landlocked economies, common in Africa, often have lower incomes than coastal economies. **Resource Endownment** - A nation's supply of usable factors of production, including mineral deposits, raw materials, and labor. **Underdeveloped Markets** - Imperfect markets and incomplete information are far more prevalent in developing countries, with the result that domestic markets, notably but not only financial markets, have worked less efficiently, as examined in Chapters 4, 11, and 15. In many developing countries, legal and institutional foundations for markets are extremely weak. **Infrastructure** - Facilities that enable economic activity and markets, such as transportation, and distribution networks, utilities, water, sewer, and energy supply systems. **Imperfect market** - A market in which the theoretical assumptions of perfect competition are violated by the existence of, for example, a small number of buyers and sellers, barriers to entry, and incomplete information. **Incomplete information** - The absence of information that producers and consumers need to make efficient decisions resulting in underperforming markets. **Lingering Colonial Impacts and Unequal** **International Relations** **Colonial Legacy** - Most developing countries were once colonies of Europe or otherwise dominated by European or other foreign powers, and institutions created during the colonial period often had pernicious effects on development that in many cases have persisted to the present day. **Property rights** - The acknowledged right to use and benefit from a tangible (e.g., land) or intangible (e.g., intellectual) entity that may include owning, using, deriving income from, selling, and disposing. **External Dependence** - Relatedly, developing countries have also been less well organized and influential in international relations, with sometimes adverse consequences for development. For example, agreements within the World Trade Organization (WTO) and its predecessors concerning matters such as agricultural subsidies in rich countries that harm developing-country farmers and one-sided regulation of intellectual property rights have often been relatively unfavorable to the developing world. **Physical and Human Resource Endowments** Contemporary developing countries are often less well endowed with natural resources than the currently developed nations were at the time when the latter nations began their modern growth. **Relative Levels of Per Capita Income and GDP** The people living in low-income countries have, on average, a lower level of real per capita income than their developed-country counterparts had in the nineteenth century. First of all, nearly 40% of the population of developing countries is attempting to subsist at bare minimum levels. **Climatic Differences** Almost all developing countries are situated in tropical or subtropical climatic zones. It has been observed that the economically most successful countries are located in the temperate zone. **Population Size, Distribution, and Growth** By contrast, the populations of many developing countries have been increasing at annual rates in excess of 2.5% in recent decades, and some are still rising that fast today. **The Historical Role of International Migration** In the nineteenth and early twentieth centuries, a major outlet for rural populations was international migration, which was both widespread and large-scale. **Brain Drain** The emigration of highly and skilled professionals and technicians from the developing countries to the developed world. **The Growth Stimulus of International Trade** International free trade has been called the \"engine of growth\" that propelled the development of today\'s economically advanced nations during the nineteenth and early twentieth centuries. Rapidly expanding export markets provided an additional stimulus to growing local demands that led to the establishment of large-scale manufacturing industries. **Free trade** Trade in which goods can be imported and exported without any barriers in the forms of tariffs, quotas, or other restrictions. **Terms of trade** The ratio of a country\'s average export price to its average import price. **Basic Scientific and Technological Research and Development Capabilities** Their high rates of growth have been sustained by the interplay between mass applications of many new technological innovations based on a rapid advancement in the stock of scientific knowledge and further additions to that stock of knowledge made possible by growing surplus wealth. **Research and Development (R&D)** Scientific investigation with a view toward improving the existing quality of human life, products, profits, factors of production, or knowledge. **Efficacy of Domestic Institutions** Another ditterence between most developing countries and most developed countries at the time of their early stages of economic development lies in the efficacy of domestic economic, political, and social institutions. **Divergence** - A tendency for per capita income (or output) to grow faster in higher-income countries than in lower-income countries so that the income gap widens across countries over time (as was seen in the two centuries after industrialization began). **Convergence** - The tendency for per capita income (or output) to grow faster in lower-income countries than in higher-income countries so that lower-income countries are \"catching up\" over time. When countries are hypothesized to converge not in all cases but other things being equal (particularly savings rates, labor force growth, and production technologies), then the term conditional convergence is used. **Relative Country Convergence** - The most widely used approach is simply to examine whether poorer countries are growing faster than richer countries. As long as this is happening, poor countries would be on a path to eventually "catch up" to the income levels of rich countries. In the meantime, the relative gap in incomes would be shrinking, as the income of richer countries would become a smaller multiple of income of poorer countries (or looked at from the other perspective, incomes of poor countries would become an increas- ingly large fraction of income of rich countries). **Absolute Country Convergence** - With the recent rapid growth in China, and the acceleration of growth in South Asia as well, these regions are currently on a path of relative country convergence. **Population-Weighted Relative Country Convergence** - The high growth rate in China and India is particularly important, because more than one- third of the world's people live in these two countries. **World-as-One-Country Convergence** - An alternative approach to the study of convergence is to think of the world as if it were one country. In the first such study, Branko Milanovic stitched together household data sets from around the world and concluded that global inequality rose significantly in the period 1988 to 1993. **Sectoral Convergence** - Despite evidence that economies are not converging unconditionally, there can be cross-national convergence of economic sectors, which in turn may signal the potential for future convergence. **Economic Institutions** - "Humanly devised\" constraints that shape interactions (or \"rules of the game\") in an economy, including formal rules embodied in constitutions, laws, contracts, and market regulations, plus informal rules reflected in norms of behavior and con-duct, values, customs, and generally accepted ways of doing things. **Physical Geography (including climate)** - This refers to the natural environment of a place, including its climate, which affects how societies develop. **Pre-Colonial Institutions** - These are the political, economic, and social structures that existed in a region before colonization. They can influence how a society adapts to new challenges. **Local Features Affecting Types of Colonies Established** - Factors like climate, disease, and geography influenced the type of colony that was established (e.g., settler colonies vs. exploitation colonies). **Type of Colonial Regime** - This indicates whether a region was governed by a harsh colonial regime focused on extraction or a more inclusive one that allowed for settler participation. **Pre-Colonial Labor Abundances, Production Structure, and Potential Comparative Advantage** - This includes factors like the availability of labor and the kinds of goods produced, which impacted the region\'s role in the global economy. **Evolution and Timing of European Development** - This represents how Europe\'s development over time influenced its ability to colonize and its impact on the colonized regions. **Postcolonial Institutional Quality** - After independence, the quality of institutions (governance, law, etc.) that developed in former colonies was influenced by the colonial experience **Effective Civil Society** - This refers to how active and organized the population is in demanding rights and holding the government accountable **Inequality** - The differences in wealth and power within a society, which is often a result of the colonial experience. **Human Capital** - This refers to the education, skills, and health of the people or the population, which are important for economic growth. **Public Goods Quality** - This is about the quality of things and services provided by the government, such as roads, schools and healthcare **Well-functioning Markets** - These are the efficient markets where goods and services are traded in a way that benefits the economy. **Income and Human Development** - This is the overall economic well being of the population, including income levels and access to opportunities. - The classic post--World War II literature on economic development has been dominated by four major and sometimes competing strands of thought: (1) the linear-stages-of-growth model, (2) theories and patterns of structural change, (3) the international-dependence revolution, and (4) the neoclassical, free- market counterrevolution. In recent years, an eclectic approach has emerged that draws on all these classic theories. **Stages-of-growth model of development** - A theory of economic development, associated with the American economic historian Walt W. Rostow, according to which a country passes through sequential stages in achieving development. **Rostow\'s Stages of Growth** - The most influential and outspoken advocate of the stages-of-growth model of development was the American economic historian Walt W. Rostow. According to Rostow, the transition from underdevelopment to development can be described in terms of a series of steps or stages through which all countries must proceed. **Harrod-Domar growth model** - A functional economic relationship in which the growth rate of gross domestic product (g) depends directly on the national net savings rate (s) and inversely on the national capital-output ratio (c). **Capital-output ratio** - A ratio that shows the units of capital required to produce a unit of output over a given period of time. **Net savings ratio** - Savings expressed as a proportion of disposable income over some period of time. **Necessary condition** - A condition that must be present, although it need not be in itself sufficient, for an event to occur. For example, capital formation may be a necessary condition for sustained economic growth (before growth in output can occur, there must be tools to produce it). But tor this growth to continue, social, institutional, and attitudinal changes may have to occur. **Sufficient condition** - A condition that when present causes or guarantees that an event will or can occur; in economic models, a condition that logically requires that a statement must be true (or a result must hold) given other assumptions. **Structural-change theory** - The hypothesis that underdevelopment is due to underutilization of resources arising from structural or institutional factors that have their origins in both domestic and international dualism. Development therefore requires more than just accelerated capital formation. **Structural transformation** - The process of transforming an economy in such a way that the contribution to national income by the manufacturing sector eventually surpasses the contribution by the agricultural sector. More generally, a major alteration in the industrial composition of any economy. **Lewis two-sector model** - A theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrial-ization, and stimulates sustained development. **Surplus labor** - The excess supply of labor over and above the quantity demanded at the going free-market wage rate. In the Lewis two-sector model of economic devel-opment, surplus labor refers to the portion of the rural labor force whose marginal productivity is zero or negative. **Production Function** - A technological or engineering relationship between the quantity of a good produced and the quantity of inputs required to produce it. **Average product** - Total output or product divided by total factor input (e.g., the average product of labor is equal to total output divided by the total amount of labor used to produce that output). **Marginal product** - The increase in total output resulting from the use of one additional unit of a variable factor of production (such as labor or capital). In the Lewis two-sector model, surplus labor is defined as workers whose marginal product is zero. **Self-sustaining growth** - Economic growth that continues over the long run based on saving, investment, and complementary private and public activities. **Criticisms of the Lewis Model** - Although the Lewis two-sector development model is simple and roughly reflects the historical experience of economic growth in the West, four of its key assumptions do not fit the institutional and economic realities of most contemporary developing countries. **Patterns-of-development analysis** - An attempt to identify characteristic features of the internal process of structural transformation that a \"typical\" developing economy undergoes as it generates and sustains modern economic growth and development. **Dependence** - The reliance of developing countries on developed-country economic policies to stimulate their own economic growth. Dependence can also mean that the developing countries adopt developed-country education systems, technology, economic and political systems, attitudes, consumption pat-terns, dress, and so on. **Dominance** - In international affairs, a situation in which the developed countries have much greater power than the less developed countries in decisions affecting important international economic issues, such as the prices of agricultural commodities and raw materials in world markets. **Neocolonial dependence model** - A model whose main proposition is that underdevelopment exists in developing countries because of continuing exploitative eco-nomic, political, and cultural policies of former colonial rulers toward less developed countries. **Neocolonial dependence model** - A model whose main proposition is that underdevelopment exists in developing countries because of continuing exploitative eco-nomic, political, and cultural policies of former colonial rulers toward less developed countries. **Underdevelopment** - An economic situation characterized by persistent low levels of living in conjunction with absolute poverty, low income per capita, low rates of economic growth, low consumption levels, poor health services, high death rates, high birth rates, dependence on foreign economies, and limited freedom to choose among activities that satisfy human wants. **Center** - In dependence theory, the economically developed world. **Periphery** - In dependence theory, the developing countries. **Comprador group** - In dependence theory, local elites who act as fronts for foreign investors. **False-paradigm model** - The proposition that developing countries have failed to develop because their development strategies (usually given to them by Western economists) have been based on an incorrect model of development, one that, for example, overstresses capital accumulation or market liberalization without giving due consideration to needed social and institutional change. **Dualism** - The coexistence of two situations or phenomena (one desirable and the other not) that are mutually exclusive to different groups of society-for example, extreme poverty and affluence, modern and traditional economic sectors, growth and stagnation, and higher education among a few amid large-scale illiteracy. **Autarky** - A closed economy that attempts to be completely self-reliant. **Neoclassical counterrevolution** - The 1980s resurgence of neoclassical free-market orientation toward development problems and policies, counter to the interventionist dependence revolution of the 1970s. **Free markets** - The system whereby prices of commodities or services freely rise or fall when the buyer\'s demand for them rises or falls or the seller\'s supply of them decreases or increases. **Free-market analysis** - Theoretical analysis of the properties of an economic system operating with free markets, often under the assumption that an unregulated market performs better than one with government regulation. **Public-choice theory (new political economy approach)** - The theory that self-interest guides all individual behavior and that governments are inefficient and corrupt because people use government to pursue their own agendas. **Market-friendly approach** - The notion historically promulgated by the World Bank that successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene only selectively in the economy in areas where the market is inefficient. **Market failure** - A market\'s inability to deliver its theoretical benefits due to the existence of market imperfections such as monopoly power, lack of factor mobility, significant externalities, or lack of knowledge. Market failure often provides the justification for government intervention to alter the working of the free market. **Capital-labor ratio** - The number of units of capital per unit of labor. **Solow neoclassical growth model** - Growth model in which there are diminishing returns to each factor of production but constant returns to scale. Exogenous technological change generates long-term economic growth. **Closed economy** - An economy in which there are no foreign trade transactions or other economic contacts with the rest of the world. **Open economy** - An economy that practices foreign trade and has extensive financial and nonfinancial contacts with the rest of the world. **ECO 101: CHAPTER 1 NOTES​** **Definition of Economics​** - the study of how individuals and societies use limited resources to satisfy unlimited wants.​ **Fundamental Economic Problem** - scarcity - individuals and societies must choose among available alternatives.​ **Economic goods, free goods, and economic bads​** - **economic good (scarce good)** - the quantity demanded exceeds the quantity supplied at a zero price.​ - **free good** - the quantity supplied exceeds the quantity demanded at a zero price.​ - **economic bad** - people are willing to pay to avoid the item​ **Economic Resources​** - **land**​ - natural resources, the "free gifts of nature"​ - **labor**​ - the contribution of human beings​ - **capital**​ - plant and equipment ​this differs from "financial capital"​ - **entrepreneurial ability​** **RESOURCE PAYMENTS** - rent - wages - interest - profit **Rational Self-interest​** - individuals select the choices that make them happiest, given the information available at the time of a decision.​ - self-interest vs. selfishness​ **Positive and normative analysis** **POSITIVE ECONOMICS​** - attempt to describe how the economy functions​ - relies on testable hypotheses​ **NORMATIVE ECONOMICS​** - relies on value judgements to evaluate or recommend alternative policies.​ **Economic methodology​** **SCIENTIFIC METHOD​** - observe a phenomenon,​ - make simplifying assumptions and formulate a hypothesis,​ - generate predictions, and​ - test the hypothesis.​ **Simplifying assumptions​** - **ceteris paribus** -- holding everything else constant​ - **abstraction in economics​** - used to simplify reality​ **Logical fallacies** **FALLACY OF COMPOSITION​** - occurs when it is incorrectly assumed that what is true for each and every individual in isolation is true for an entire group.​ **POST HOC, ERGO PROPTER HOC FALLACY (ASSOCIATION AS CAUSATION)​** - occurs when one incorrectly assumes that one event is the cause of another because it precedes the other. **Microeconomics vs. macroeconomics​** - **MICROECONOMICS** - the study of individual economic agents and individual markets​ - **MACROECONOMICS** - the study of economic aggregates​