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Week 2: Economic ways of thinking & ‘gains from trade’.

The first class this week introduced background ideas that are useful for feeling your way around in the broad area of economics.

An important idea was the use of scientific method in economics: making claims about the world as theories or hypotheses. These are then tested by confronting the claims with evidence. If evidence is inconsistent with the claims there theories are rejected or refuted. If the evidence is consistent with the claims the theories are tentatively accepted.

An important idea (not discussed in class) is that hypotheses should be framed so that they can potentially be refuted by data. Thus to say 1+1=2 is a true statement but not a scientific statement because it cannot be refuted. On the other hand to saqy that all people in Microeconomics 1IMI have blue eyes is a scientific claim – it can be refuted by looking at the colour of eyes in the class and potentially rejecting the claim. This scientific claim will easily, in fact, be refuted.

The idea that science consists of a set of propositions which are potentially refutable but which have not yet been refuted is basic to the philosophy of science – it is Sir Karl Popper’s so-called refutation criterion.

The ‘gains-from-trade’ class introduces very important material. It shows why trade is so prevalent in an economy and why trade occurs on the basis of comparative advantage – on the basis of differences in opportunity cost.

In a sense the result is trivial – if you give me the option to trade some of the things I can produce I certainly cannot be worse-off since I can always reject the option. Provided I produce things with different relative efficiencies to you I should be able to enjoy gains by trading with you.

This is the reason economists like free trade and don’t like tariffs (taxes on imports) that act to restrict trade. You will return to discuss these sorts of ideas throughout your economics studies.

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