Economic theories are a. useful because they are as exact as theories in the phy
ID: 1222563 • Letter: E
Question
Economic theories are
a.
useful because they are as exact as theories in the physical sciences
b.
useless because they are based on abstractions
c.
useful because they allow us to make predictions
d.
too complex to understand because they include all of reality
e.
useful in predicting events only if their assumptions are realistic
a.
useful because they are as exact as theories in the physical sciences
b.
useless because they are based on abstractions
c.
useful because they allow us to make predictions
d.
too complex to understand because they include all of reality
e.
useful in predicting events only if their assumptions are realistic
Explanation / Answer
The problem has indicated different features related with economic theory. some of them are true. Consider them one by one.
1. Economic theory is not a physical science. It is a social science. So it cannot be as exact as physical science. Lots of assumptions are required to simplify the economic environment. On the basis of such assumptions base theory is formed. Then subsequently assumptions are waived as per requirement.Objective is to link the base theory with real life situation. If it is carried out properly and rationally, then the conclusion will be very close to total accuracy. Thus if used properly, it may give equally useful results like a physical science.
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b. It is wrong to state that economic is useless due to abstraction. It is true that some assumptions made in economics appear to have no relevance in the real life situation. But it is not true. Without those assumptions, theory will hold good. Such assumptions are made to simplify the environment and make the theory easily understandable.
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c. Definitely economic theory is useful as it has predictive power. It can help you to develop mathematical model. By using those model you can forecast productivity, national income, inflation, exchange rate and many other things.
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d. No doubt the theory is complex. But it has made lots of assumptions to simlufy the economic environment and to make the theory undferstandable to all. Thus if studied carefully, the theory of economics is as effective as other areas of knowledge.
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e. As stated economic model can predict a lot about future. But the success of such model will depend upon the assumptions made. They should be relevant to the situation and justifiable. Otherwise model will loss lots of its effectiveness. While developing a sell forecast model, independent variables should be properly selected. Omission of a vital variablke, may make the model useless. Different checks are also available to control such errors. So application of the theory properly will make it more efective.
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