Economic terms useful for policy
HT to Kanchan Bandyopadhyay for this piece from Bloomberg by Noah Smith entitled ‘5 Economics Terms We All Should Use’
He suggests that rather than the usual economic terms that are banded about like recession, downturn, boom, unprecedented trade deficit etc, there are other words that are far more useful especially when you think about policy. He suggests the following:
Something is endogenous when you don’t know whether it’s a cause or an effect (or both). For example, in the simple supply and demand model, suppose that there is a change in consumer tastes or preferences (an exogenous change). This leads to endogenous changes in demand and thus the equilibrium price and quantity.
Marginal versus average
Economists like to say “on the margin.” This refers to small changes instead of big overall effects. Another example is the importance of effort versus natural talent. Natural talent might matter a lot on average, but a little more effort could go a long way.
Present value and discounting
Present value means trying to figure out how much some long-term thing is worth today. Discounting means you have to decide how much less you value things that come far in the future.
Conditional versus unconditional
One common example of this is life expectancy. People like to point out that life expectancy in the Middle Ages was only about 35. But that includes lots of infant mortality. If you lived in the Middle Ages and you made it to adulthood, you would probably live well past 35. While conditional life expectancy has increased since then, it hasn’t gone up by nearly as much as the unconditional version — reductions in infant mortality have been the biggest difference.
Economists say that something that works individually doesn’t work in aggregate. Another good example is debt. Individually, borrowing and spending money reduces your wealth. But in aggregate, debt doesn’t reduce the value of the whole world’s wealth, since one person’s debt is another person’s asset.
I do like his comment at the end of the article:
So there are five econ terms I think should enter our everyday vocabulary. As long as this doesn’t happen endogenously, the marginal increase in the aggregate present discounted value of our public discourse would have a high conditional probability of being positive!