The Language of Economics How economists communicate

The Language of Economics:

  • Precise and concise.

  • Objective [based on facts, theory and evidence not personal opinions]

  • Involves a great deal of terminology which needs to be used correctly - the major HSC texts have excellent and details glossary of terms.

  • also communicate using, diagrams, models and equations - these can help to clarify, explain and illustrate complex concepts and theories.

Diagrams

When using diagrams in economics essays the following rules should apply.
1. Reference the diagram [Figure 1].
2. Draw the diagram with a pencil and ruler.
3. Ensure the diagram is clearly labeled.
4. Clearly show the direction of change that has occurred.
5. Avoid putting too many changes on one diagram, it can become confusing.
6. Refer to the diagram in the written text.


For Example

Explain how the rising demand for commodities can cause an appreciation of the Australian dollar.

Economists use demand and supply analysis to help explain the factors that influence exchange rates. The equilibrium exchange rate is determined by the interaction of the forces of demand and supply. In recent years the increased demand for Australian commodities from countries such as China has resulted in an increase in the demand for Australian dollars. This is illustrated in Figure 1. The increase in demand for the currency shifts the demand curve D1D1 to D2D2, this in turn exerts upward pressure on the currency. In this hypothetical example, causing an appreciation of the Australian dollar from 0.50 to 0.60 US dollars.

The Language of Economics

Equations

In a similar way equations can help illustrate economic concepts and hence add to the quality of economics essays. The guidelines for using equations are.
1. Clearly introduce the concept.
2. Define the terms or variables to be used.
3. State the equation clearly.
4. Illustrate the concept with a simple mathematical example.


For Example

The multiplier is an important economic concept that explains how a change in government spending can lead to a significantly larger ultimate change in the level of economic activity. The formula for the simple multiplier is outlined below.

Equation

K represents the multiplier, MPS the marginal propensity to save and MPC the marginal propensity to consumer. The size of the multiplier is thus determined by the relative sizes of the MPC and the MPS. In the above example if the MPS was 0.5 the size of the multiplier would be [1/0.5 ] which equals 2. The theory developed by the economist John Maynard Keynes explains that a change in government spending will have a larger [multiplied] impact on the level of economic activity. This can be explained by the equation as follows.

Change in GDP = K * Change in Government Spending [G]. Hence an increase in government spending of $20 billion would lead to an increase in GDP of $40 billion. The concept of the multiplier effect has been particularly important to governments around the world in recent years as they have attempted to recover from the GFC with the use of Fiscal stimulus packages.

Quotes

Quotes are also a useful way to illustrate concepts and relate economic theory to contemporary issues. Listed below are some guidelines for using quotes.

1.Ensure the quote is referenced to the correct source and has the correct date.
2.Quotes are difficult to remember so it is best to keep them short.
3.Refer to the quote to help support the argument you are developing. For example, this quote:

‘The Australian economy slowed significantly during the global downturn, but weathered the crisis better than most other advanced economies, supported by timely and substantial policy stimulus.' Budget Paper 1 2010 Federal Budget

could be used to evaluate the effectiveness of Fiscal Policy as follows:

“As indicated by the quote the recent fiscal stimulus has had the desired effect of reducing the impact of the global down turn on the Australian economy, and hence it can be concluded the policy has been effective.”

4.Good sources to quote include, The Governor of the RBA, The Federal Treasurer, Ross Gittens and Dr Ken Henry.
5.Be careful with quotes that are politically loaded!