Difference between Applied Economics and Theoretical Economics?

Answer 1

Economics is concerned with the allocation of scarce resources. This general definition can be applied across a variety of applications including labor economics, financial economics (finance), macroeconomics, microeconomics, etc.

For each of these areas, theoretical models are built (by theoreticians) and these models are tested (by applied economists). When they are built, they are built on the basis of how a simplied world should work under certain assumptions. For example, under the assumptions that people have unlimited wants, get satisfaction from consumption of resources, consumption of the first unit brings more satisfaction than consumption of the next unit, and a certain income and prices of goods, theoretical economics will predict that consumers will but some of each good. This is a theoretical model because it is completely created in the mind and shows what will happen if all the assumptions are correct. The models are usually mathematical in nature and, although they may look complex to the outside observer, are usually very simple abstractions from reality.

Applied economics is the testing these theoretical models on real world data to see if the theoretical relationships are shown to exist in reality. One reason the theoretical model will not test well in reality is if the theoretician forgot an important assumption.

Applied economics basically tests theoretical economics. The tests usually involve taking the theoretical models and creating statistical models from them.

Theoreticians usually only work with math. Applied economics that test theoretical models usually work with statistical theory. There is also a middle ground of applied economists that use already verified theoretical models and apply real world data to it to measure some economic phenomena of interest.

Fundamentally, there is no reason that economics should be so heavily math and statistics based. Since the 50 or so years since the mathematization of economics there has been no more important discoveries made than the previous non-math years of the examination of the political economy.

Answer 2

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