Applied Economics
The study of economic principles when they are applied to specific scenarios or situations
What is Applied Economics?
Applied economics is generally considered to be the study of economic principles when they are applied to specific scenarios or situations. In the study and research of economics, there exist two fundamental areas of distinction. The first being “core,” and the second being “applied.”
When something is a part of applied economics, one is taking academic principles discussed on the core side of economics and applying them to real-life and practical examples. It helps to better contextualize and exemplify the theoretical, and often abstract, concepts that are put forth within the core field of economic study.
Understanding Applied Economics
Applied economics reduces abstract concepts into examples that can be discussed and related to the business community at large. However, depending on whom you ask, what constitutes applied economics versus what constitutes core economics is open to interpretation.
A popular philosophy taught in many business schools as to what constitutes the field of economics more broadly is that economics is the study of whatever economists themselves do. For simplicity’s sake, the mainstream view of applied economics is generally thought of as consisting of the below:
- Labeling variables as core-specific
- Providing numerical estimates
- Interpreting real-world events
- Providing a structure to draw conclusions
Why is Mainstream Economics Important?
Understanding the world in which we live is pivotal to many economic theories. Economics helps explain market phenomena, such as corrections and recessions , or even why we as consumers are more inclined to purchase one product or another. Applied economics is at the center of everything we do, and it is pivotal to explaining and conveying market principles.
Business leaders and managers can draw on the lessons in applied economics in order to better avoid potential pitfalls and make stronger decisions as managers. Even everyday consumers can better understand the prices they are paying at the grocery store. It can help explain why certain prices rise and fall and why sales occur.
Variability in the Usage of the Term
Historically, the term applied economics is often applied to different areas of study. It is important to understand that the term is fluid and can depend on what period it is referencing or which author is writing about it.
The definition of the term is not fixed, and thus, the reader must also understand its possible wide range of uses and contextualization that may present themselves. The list below represents some classical uses of the term from the latter part of the 20 th century:
- Economic areas that are more specific and require more detail
- Demographics
- Accounting, actuarial science , and insurance
Real-World Problems Understood: The Value of Applied Economics
Applied economics helps us deal with real-world problems by making the abstract tangible. Understanding abstract theory is often not enough, and it must be tested and put into practice in order to effectively understand and critique economic concepts. Consumers, economists , and scholars alike can use applied economic theories to test existing concepts or even come up with new ones.
Understanding Applied Economics: A Summary
- In the study of economics, there exist two fundamental areas of distinction – core and applied.
- Applied economics is at the center of everything we do, and it helps explain economic theory and apply it to our everyday lives.
- Applied economics can help us understand more about the prices we pay, how delivery charges work, and why things may go on sale.
- Business leaders and managers can draw on the lessons from applied economics to make them better managers.
- Applied economic theories allow us to test and formulate hypotheses.
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3 Basic Economic Problems and Philippine Socioeconomic Development in The 21st Century
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Solution to the Basic Economic Problems: Capitalistic, Socialistic and Mixed Economy
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Solution to the Basic Economic Problems: Capitalistic, Socialistic and Mixed Economy!
Uneven distribution of natural resources, lack of human specialization and technological advancement etc., hinders the production of goods and services in an economy. Every economy has to face the problems of what to produce, how to produce and for whom to produce. More or less, all the economies use two important methods to solve these basic problems.
These methods are:
(a) Free price mechanism and
(b) Controlled price system or State intervention.
Price mechanism is defined as a system of guiding and coordinating the decisions of every individual unit within an economy through the price determined with the help of the free play of market forces of demand and supply. Such system is free from state intervention.
Price of goods and services are determined when quantity demanded becomes equal to the quantity supplied. Price mechanism facilitates determination of resource allocation, determination of factor incomes, level of savings, consumption and production. Price mechanism basically takes place in a capitalistic economy.
On the other hand, Controlled price mechanism is defined as a system of state interventio n of administering or fixing the prices of the goods and services. In a socialist economy, the government plays a vital role in determining the price of the goods and services. The government may introduce ‘ceiling price’ or ‘floor price’ policy to regulate prices.
However, how a capitalist, a socialist and a mixed economic system solve their basic problems is given below:
1. Solution to Basic Problems in a Capitalistic Economy:
Under capitalistic economy, allocation of various resources takes place with the help of market mechanism. Price of various goods and services including the price of factors of production are determined with help of the forces of demand and supply. Free price mechanism helps producers to decide what to produce.
The goods which are more in demand and on which consumers can afford to spend more, are produced in larger quantity than those goods or services which have lower demand. The price of various factors of production including technology helps to decide production techniques or methods of production. Rational producer intends to use those factors or techniques which has relatively lower price in the market.
Factor earnings received by the employers of factors of production decides spending capacity of the people. This helps producers to identify the consumers for whom goods could be produced in larger or smaller quantities. Price mechanism works well only if competition exists and natural flow of demand and supply of goods is not disturbed artificially.
2. Solution to Basic Problems in a Socialistic Economy:
Under socialistic economy, the government plays an important role in decision making. The government undertakes to plan, control and regulate all the major economic activities to solve the basic economic problems. All the major economic policies are formulated and implemented by the Central Planning Authority.
In India, Planning Commission was entrusted with this task of planning. The Planning Commission of India has now been replaced by another central authority NITI Ayog (National Institution for Transforming India). Therefore, the central planning authority takes the decisions to overcome the economic problems of what to produce, how to produce and for whom to produce.
The central planning authority decides the nature of goods and services to be produced as per available resources and the priority of the country. The allocation of resources is made in greater volume for those goods which are essential for the nation. The state’s main objectives are growth, equality and price stability. The government implements fiscal policies such as taxation policy, expenditure policy, public debt policy or policy on deficit financing in order to achieve the above objectives.
The methods of production or production techniques are also determined or selected by the central planning authority. The central planning authority decides whether labor intensive technique or capital intensive technique is to be used for the production. While deciding the appropriate method, social and economic conditions of the economy are taken into consideration.
Under socialistic economy, every government aims to achieve social justice through its actions. All economic resources are owned by the government. People can work for wages which are regulated by the government as per work efficiency. The income earned determines the aggregate demand in an economy. This helps the government in assessing the demand of goods and services by different income groups.
3. Solution to Basic Problems in a Mixed Economy:
Practically, neither capitalistic economy nor socialistic economy exists in totality. Both the economic systems have limitations. Consequently, a new system of economy has emerged as a blend of the above two systems called mixed economy. Therefore, mixed economy is defined as a system of economy where private sectors and public sectors co-exist and work side by side for the welfare of the country.
Under such economies, all economic problems are solved with the help of free price mechanism and controlled price mechanism (economic planning).
Free price mechanism operates within the private sector; hence, prices are allowed to change as per demand and supply of goods. Therefore, private sector can produce goods as per their demand and their price in the market. The government may control and regulate production of the private sector through its monetary policy or fiscal policy.
On the other hand, controlled price mechanism (economic planning) is used for the public sector by the planning authority. The goods and services to be produced in the public sector, hence, are determined by the central planning authority.
Private sector determines the production technique or production method on the basis of factor prices, availability of technology etc. On the other hand, production technique or production method for the public sector is determined by the central planning authority. While determining the production technique for the public sector, national priority, national employment policy and social objectives are major considerations.
Private sector allocates its resources to produce those goods which are demanded by people who command high purchasing power. Although, production by the private sector is sometimes controlled and regulated by the government through various policies such as licensing policy, taxation policy, subsidy etc., the price determined by free price mechanism may go beyond the purchasing power of low or marginal income group.
Therefore, the government may undertake production of certain goods in its hands. The rationing policy is also introduced to provide essential goods at reasonable price to the poor people. The government, thus, ensures social justice by its actions in the mixed economy.
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The Philippine economy under the pandemic: From Asian tiger to sick man again?
In 2019, the Philippines was one of the fastest growing economies in the world. It finally shed its “sick man of Asia” reputation obtained during the economic collapse towards the end of the Ferdinand Marcos regime in the mid-1980s. After decades of painstaking reform — not to mention paying back debts incurred under the dictatorship — the country’s economic renaissance took root in the decade prior to the pandemic. Posting over 6 percent average annual growth between 2010 and 2019 (computed from the Philippine Statistics Authority data on GDP growth rates at constant 2018 prices), the Philippines was touted as the next Asian tiger economy .
Ronald U. Mendoza
Dean and professor, ateneo school of government - ateneo de manila university.
That was prior to COVID-19.
The rude awakening from the pandemic was that a services- and remittances-led growth model doesn’t do too well in a global disease outbreak. The Philippines’ economic growth faltered in 2020 — entering negative territory for the first time since 1999 — and the country experienced one of the deepest contractions in the Association of Southeast Asian Nations (ASEAN) that year (Figure 1).
Figure 1: GDP growth for selected ASEAN countries
Source: Asian Development Outlook
And while the government forecasts a slight rebound in 2021, some analysts are concerned over an uncertain and weak recovery, due to the country’s protracted lockdown and inability to shift to a more efficient containment strategy. The Philippines has relied instead on draconian mobility restrictions across large sections of the country’s key cities and growth hubs every time a COVID-19 surge threatens to overwhelm the country’s health system.
What went wrong?
How does one of the fastest growing economies in Asia falter? It would be too simplistic to blame this all on the pandemic.
First, the Philippines’ economic model itself appears more vulnerable to disease outbreak. It is built around the mobility of people, yet tourism, services, and remittances-fed growth are all vulnerable to pandemic-induced lockdowns and consumer confidence decline. International travel plunged, tourism came to a grinding halt, and domestic lockdowns and mobility restrictions crippled the retail sector, restaurants, and hospitality industry. Fortunately, the country’s business process outsourcing (BPO) sector is demonstrating some resilience — yet its main markets have been hit heavily by the pandemic, forcing the sector to rapidly upskill and adjust to emerging opportunities under the new normal.
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Second, pandemic handling was also problematic. Lockdown is useful if it buys a country time to strengthen health systems and test-trace-treat systems. These are the building blocks of more efficient containment of the disease. However, if a country fails to strengthen these systems, then it squanders the time that lockdown affords it. This seems to be the case for the Philippines, which made global headlines for implementing one of the world’s longest lockdowns during the pandemic, yet failed to flatten its COVID-19 curve.
At the time of writing, the Philippines is again headed for another hard lockdown and it is still trying to graduate to a more efficient containment strategy amidst rising concerns over the delta variant which has spread across Southeast Asia . It seems stuck with on-again, off-again lockdowns, which are severely damaging to the economy, and will likely create negative expectations for future COVID-19 surges (Figure 2).
Figure 2 clarifies how the Philippine government resorted to stricter lockdowns to temper each surge in COVID-19 in the country so far.
Figure 2: Community quarantine regimes during the COVID-19 pandemic, Philippine National Capital Region (NCR ), March 2020 to June 2021
Note: From most severe mobility restriction to least severe , the regimes are Enhanced Community Quarantine (ECQ), ECQ* (similar to ECQ but with slightly fewer restrictions), Modified Enhanced Community Quarantine (MECQ), MECQ* (similar to MECQ but with slightly fewer restrictions), GCQ* (similar to GCQ but with slightly heightened restrictions), General Community Quarantine (GCQ). Sources: Philippine Department of Health, Rappler, CNN Philippines, ABS CBN News, Inquirer, Sunstar, PNA, cebudailynews.
If the delta variant and other possible variants are near-term threats, then the lack of efficient containment can be expected to force the country back to draconian mobility restrictions as a last resort. Meanwhile, only two months of social transfers ( ayuda ) were provided by the central government during 16 months of lockdown by mid-2021. All this puts more pressure on an already weary population reeling from deep recession, job displacement, and long-term risks on human development . Low social transfers support in the midst of joblessness and rising hunger is also likely to weaken compliance with mobility restriction policies.
Third, the Philippines suffered from delays in its vaccination rollout which was initially hobbled by implementation and supply issues, and later affected by lingering vaccine hesitancy . These are all likely to delay recovery in the Philippines.
By now there are many clear lessons both from the Philippine experience and from emerging international best practices. In order to mount a more successful economic recovery, the Philippines must address the following key policy issues:
- Build a more efficient containment strategy particularly against the threat of possible new variants principally by strengthening the test-trace-treat system. Based on lessons from other countries, test-trace-treat systems usually also involve comprehensive mass-testing strategies to better inform both the public and private sectors on the true state of infections among the population. In addition, integrated mobility databases (not fragmented city-based ones) also capacitate more effective and timely tracing. This kind of detailed and timely data allows for government and the private sector to better coordinate on nuanced containment strategies that target areas and communities that need help due to outbreak risk. And unlike a generalized lockdown, this targeted and data-informed strategy could allow other parts of the economy to remain more open than otherwise.
- Strengthen the sufficiency and transparency of direct social protection in order to give immediate relief to poor and low-income households already severely impacted by the mishandling of the pandemic. This requires a rebalancing of the budget in favor of education, health, and social protection spending, in lieu of an over-emphasis on build-build-build infrastructure projects. This is also an opportunity to enhance the social protection system to create a safety net and concurrent database that covers not just the poor but also the vulnerable low- and lower-middle- income population. The chief concern here would be to introduce social protection innovations that prevent middle income Filipinos from sliding into poverty during a pandemic or other crisis.
- Ramp-up vaccination to cover at least 70 percent of the population as soon as possible, and enlist the further support of the private sector and civil society in order to keep improving vaccine rollout. An effective communications campaign needs to be launched to counteract vaccine hesitancy, building on trustworthy institutions (like academia, the Catholic Church, civil society and certain private sector partners) in order to better protect the population against the threat of delta or another variant affecting the Philippines. It will also help if parts of government could stop the politically-motivated fearmongering on vaccines, as had occurred with the dengue fever vaccine, Dengvaxia, which continues to sow doubts and fears among parts of the population .
- Create a build-back-better strategy anchored on universal and inclusive healthcare. Among other things, such a strategy should a) acknowledge the critically important role of the private sector and civil society in pandemic response and healthcare sector cooperation, and b) underpin pandemic response around lasting investments in institutions and technology that enhance contact tracing (e-platforms), testing (labs), and universal healthcare with lower out-of-pocket costs and higher inclusivity. The latter requires a more inclusive, well-funded, and better-governed health insurance system.
As much of ASEAN reels from the spread of the delta variant, it is critical that the Philippines takes these steps to help allay concerns over the country’s preparedness to handle new variants emerging, while also recalibrating expectations in favor of resuscitating its economy. Only then can the Philippines avoid becoming the sick man of Asia again, and return to the rapid and steady growth of the pre-pandemic decade.
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Acknowledgments:
Adrien Chorn provided editing assistance on this piece. The author thanks Jurel Yap and Kier J. Ballar for their research assistance. All views expressed herein are the author’s and do not necessarily reflect the views and policies of his institution.
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- Coronavirus (COVID-19) Economics
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The Roots of the Philippines' Economic Troubles
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THE ROOTS OF THE PHILIPPINES' ECONOMIC TROUBLES,
THE ROCKY ROAD TO MODERNITY
Since gaining independence in 1946, the Philippines has been beset by two difficulties encountered by all developing countries. The first is how to plan and implement economic development, while maintaining political stability; the second is how to stay on course with a development strategy while fostering political modernization. Very few countries have successfully realized either, and both have proved troublesome for the Philippines.
Between 1946 and 1972, the Philippines (unlike Japan , South Korea, and Taiwan ) failed to initiate land reform or develop an export-led strategy that gradually would industrialize the country and eliminate underemployment. The government lacked the political muscle to eliminate the powerful rural oligarchy and the mobiliza- tion capabilities to redirect more budget expenditure into expand- ing the infrastructure and promoting development in the countryside. At the same time, the government initiated policies counterproduc- tive to economic development: overvaluing the peso, imposing high tariffs to protect urban manufacturing, and undertaxing the cities while making the farm population pay for development projects. And the strategy of import substitution' failed to stimulate economic growth so that the country's fledgling pro- ducers missed the'opportunity to expand along with the rising world economy after World War II.
Political problems also contributed to this lackluster economic performance. Through the 1950s and 1960s, each succeed- ing President was faced with a recalcitrant legislature, which impeded such policies as land reform, agricultural innovations, and the development of a more competitive and efficient urban manufacturing sector. No President until Marcos was reelected to more than one term. Further complicating the situation was the violence of communist guerrilla activities which necessitated unplanned huge state expenditures.
Following the imposition of martial law in 1972, President Marcos was able to implement a multifaceted economic modernization program. On October 21, 1972, his government passed the Tenants' Emancipation Act, which transferred to rice and corn farming tenants the ownership of land they tilled if it exceeded 3 hectares (about 7.5 acres) of irrigated land or 5 hectares (about 12.5 acres) of dry land. Other legislation protected tenants of smaller plots. The government also expanded the activities of the Land Bank to provide loans for tenants to buy land. Loans were available to resettle farmers on other islands of the archi- pelago and provide them credit to buy newly available high-yield rice seeds, fertilizers, and insecticides. Village cooperatives were encouraged. As the rural economy improved and expanded, the country began to achieve self-sufficiency in rice production and even to export rice in the early 1980s.
After 1972, the government became the driving force behind 'a new economic development strategy that stressed a free market and exports. The manufacturing sector generally benefited from this, though many other enterprises had operated inefficiently for too long to enable them to take a major role in bringing the economy into the modern era. Furthermore, the government failed to reduce tariffs and force urban manufacturers to become more efficient, as political conditions compelled the Marcos regime to go easy with the urban manufacturing elite. It was only*in 1981 when the Philippines had slid into the worst recession since 1945, and leverage was exerted by the World Bank, that the government began to reduce tariffs and increase business taxes.
Even then, the government had not implemented its new devel- opment strategy. The sugar and coconut industries remained heav- ily overregulated: the processing mills were permitted to pay farmers far less than they might have, had competitive marketing conditions prevailed, so farmers did not benefit from increased world prices. -The state discriminated against agriculture in other ways. Preferring to keep grain prices low for urban workers and consumers, the government purchased rice and corn which it resold at lower prices in urban markets. After 1972, rising oil costs pushed up the price of fertilizer and insecticides causing further problems for farmers. Hence real income for farmers barely remained constant or even declined during the 1970s.2
ORIGINS OF THE CURRENT CRISIS
Experts are trying to determine the causes of the current economic catastrophe. Certainly they date from late 1979.. What now seems clearl but was not so in 1980, is 'that excessive public and private borrowing during a period of depression pushed the. country to the brink of economic disaster. Rather than blame Marcos as so many of his critics and opponents did last fall, responsibility must be shared by all Filipinos in government, the business community, and the professions.
A Scenario Doomed to Failure
During a recession, an economic system usually contracts and reorganizes to eliminate dead weight and inefficiency. Then business inventory stocks shrink and consumers begin to save
4 Central Bank of the,Philippines, The Philippine Economy: Policies and Developments, 1975-1982 (Manila: Central Bank of the Philippines, 1983), p. 20. But in 1979-1980 the value of total Philippine imports in million of US$ rose from 6,142 to 7,727 (a 25.8 percent growth) and between 1980 5 and 1981 a 7,727 to 7,946 expansion (2.8 percent). Ibid., p. 40.
very rapid clip.6 A considerable amount of private borrowing was obtained from foreign sources as well. The upshot of these twin developments of government and private debt expansion was to increase Philippine external debt.. Even more serious, a high percentage of that debt was short term.
By 1982 the state collected far less revenue (46,947 million pesos) than in 1981 (57,166 million pesos) because of the severe impact of the depression. Total government debt in that year reached the all-time high of 63,426 million pesos, 48 percent of which was borrowed from foreign sources. In other words, the 1980-1981 scenario was reenacted in 1982. The same was true for private borrowing, which rose from 97,463 million pesos irx 1981 to 113,188 million pesos in 1982. There were few bankruptcies or business failures during these three years because the business sector was being held up by an expanding sea of debt, much of it on short term and to foreign creditors.
Misreading the Signals
Even the.experts did not understand fully what had been happening during these years. World Bank officials voiced concern about the government's need to restructure the economy and promote more efficiency in manufacturing and agriculture. For example, in June 1983 the World Bank reported that "the current account deficits of 5-8 percent of GNP which the Philippines has experi- enced during the last five years cannot be sustained indefinitely. While there is no immediate liquidi-Ey problem, fundamental struc- tural changes need to be made in the Philippine economy if future growth is not to be seriously limited by balance of payments con- straints. 117 Six months later the Philippines was in the midst of a severe balance-of-payments crisis and in desperate need of dollars to pay for imports. Since World Bank officials had not pinpointed the impending disaster, it is little wonder that Presi- dent Marcos and his advisers also misread the extent of economic damage that was in progress.
In mid-1983, then, public and private experts alike were commenting favorabl I on the economic upturn and predicting that the worst was over. As late as September 9, 1983, the Manila press was reporting on the resiliency of the Philippine economy and the favorable economic and financial indicators of economic recovery.9 By November, however, it had become clear that a disaster was in the making.
10 "The Philippine economy: what did actually happen?" Bulletin Today, November 12, 1983, p. 7C1. President Fernand E. Marcos, "Report to the Nation: Agenda for Growth," Bulletin Today, August 4, 1983.
the World Bank approved the additional release of $83 million to help the country weather the dollar difficulty.
Delays.in negotiating debt rescheduling with the International Monetary Fund in the first quarter of 1984, however, f 'orced.Manila to ask for another repayment moritorium from its creditors. -A new 90-day debt postponement was approved in April, but an agree- ment on rescheduling was not reached.12 In early April an addi- tional 3 percent import tax was levied. The policy of promoting exports and limiting (and in many cases restricting) imports had produced a $106 million surplus in the balance of payments ledger during the first quarter of 1984. But this was still not enough given the size of the nation's debt. The government's goal was to reduce the deficit to 5 percent of thegross national product in 1984 and 3 percent in 1985.13
Devaluating the peso to dampen imports, reducing government spending, trying to halt the flight of capital, rescheduling the external debt,,and obtaining new loans were suitable remedies for the Marcos government, which it proceeded to implement.
12 "Manila Gets 4th Moratorium on Its Foreign Debt," Asian Wall Street Journal, April 16, 1984, p. 12. 13 "Manila Plans to Cut Current-Account Gap to 5 Percent of GNP," Asian Wall Street Journal, April 30, 1984, p. 5. 14 Guy Sacerdoti, "Tougher this time," Far Eastern Economic Review, April 26, 1984, p. 144; "Many in Philippines Lament Decline in the Quality of Life," Asian Wall Street iburnal, May 14, 1984, p. 3.
2) The recent recession and current crisis has weeded out many inefficient manufacturing companies, thereby strengthening the urban industrial sector, and giving a further boost to productivity. The quality of industrial exports,. as a consequence, will improve. Exports also will increase in quantity due to two sharp devaluations of the peso in 19B3 and this should help to strengthen Philippine competitive footing in the world market.
3) The agricultural sector is currently strong, thanks to government assistance to the rural infrastructure during the past ten years. New projects now under way to develop diversification in the rice and corn growing regions as well as to provide for more rural industry will help productivity. (Examples are pig and poultry production, improvement of root crops, and a variety of labor intensive industries such as furniture, textile, and food processing.)
All of these developments represent positive aspects that many critics have overlooked. Even so, more must be done by both government and the private sector to expand employment and to provide for the more than half a million people entering the workforce each year. Rural industrialization is one of several answers. The government's Technology Resource Center (TRC) is one of the innovative agencies already addressing this problem. In the past few years, the TRC has been providing credits and on-site training for goat breeding, feedmill production, agro- forestry products, pepper and rubber tree production, and a variety of other agro-industrial activities. Developing labor intensive export industries is also high on the TRC's agenda. Funds.have been dispersed to wood processing, light metal produc- ing, and food processing firms, leading to the construction of more than 25 new factories in 1982-1983 alone.
If more small and medium-sized firms based upon labor in- tensive technologies could be created in the immediate future, the Philippines should be able to minimize the underemployment that has steadily worsened during the recent past. Much will depend, however, upon the government's ability to avoid any further large-scale capital intensive projects like those launched in 1980, further retrenching, and sticking firmly to a holding operation in terms of public spending. Bold steps taken by the public sector would then free more resources for the private sector to utilize in the expansion of small and medium-sized entrepreneurial firms. This prescription for economic survival, of course, depends entirely upon political stability.
Election results thus far indicate that Marcos's power will not be immediately threatened, though he must now deal with a sub- stantial, though fragmented, opposition. But progress in political reform will depend on a continued economic stability. This should signal the Reagan Adminis-Eration and Congress to provide only the economic assistance that will enable the Marcos adminis- tration to continue its efforts to industrialize the countryside and deregulate much of the export manufacturing sector. This might afford the Philippines enough time and assistance to turn the corner from its present difficulties and break into the stage of sustained economic growth and stable political leadership.
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Applied Economics
Investopedia contributors come from a range of backgrounds, and over 24 years there have been thousands of expert writers and editors who have contributed.
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What Is Applied Economics?
Applied economics applies the conclusions drawn from economic theories and empirical studies to real-world situations with the desired aim of informing economic decisions and predicting possible outcomes. The purpose of applied economics is to improve the quality of practice in business, public policy, and daily life by thinking rigorously about costs and benefits, incentives, and human behavior. Applied economics can involve the use of case studies and econometrics , which is the application of real-world data to statistical models and comparing the results against the theories being tested.
Key Takeaways
- Applied economics is the use of the insights gained from economic theory and research to make better decisions and solve real-world problems.
- Applied economics is a popular tool in business planning and for public policy analysis and evaluation.
- Individuals can also benefit from applying economic thinking and insights to personal and financial decisions.
Understanding Applied Economics
Applied economics is the application of economic theory to determine the likely outcomes associated with various possible courses of action in the real world. By better understanding the likely consequences of choices made by individuals, businesses, and policy makers, we can help them make better choices. If economics is the science of studying how people use various, limited means available to them to achieve given ends, then applied economics is the tool to help choose the best means to reach those ends. As a result, applied economics can lead to "to do" lists for steps that can be taken to increase the probability of positive outcomes in real-world events.
The use of applied economics may first involve exploring economic theories to develop questions about a circumstance or situation and then draw upon data resources and other frames of reference to form a plausible answer to that question. The idea is to establish a hypothetical outcome based on the specific ongoing circumstances, drawn from the known implications of general economic laws and models.
Applied Economics Relevance in the Real World
Applied economics can illustrate the potential outcomes of financial choices made by individuals. For example, if a consumer desires to own a luxury good but has limited financial resources, an assessment of the cost and long-term impact such a purchase would have on assets can compare them to the expected benefit of the good. This can help determine if such an expense is worthwhile . Beyond finances, understanding the meaning of the economic theories of rational choice , game theory , or the findings of behavioral economics and evolutionary economics can help a person make better decisions and plan for success in their personal life and even relationships. For example, a person who wants to quit smoking might recognize that they are prone to hyperbolic discounting and might choose to employ precommitment strategies to support their long-term preference to quit over more powerful short-term preferences to smoke. Or a group of friends sharing a large bowl of popcorn might explicitly or implicitly agree to limits or shares on how much popcorn each will take in order to avoid a tragedy of the commons situation.
Applied economics can also help businesses make better decisions. Understanding the implications of economic laws of supply and demand combined with past sales data and marketing research regarding their target market can help a business with pricing and production decisions. Awareness of economic leading indicators and their relationship to a firm's industry and markets can help with operational planning and business strategy. Understanding economic ideas such as principal-agent problems , transaction costs , and the theory of the firm can help businesses design better compensation schemes, contracts, and corporate strategies.
Applied economics is an invaluable tool for public policy makers. Many economists are employed to predict both the macro- and microeconomic consequences of various policy proposals or to evaluate the effects of ongoing policy. Applied macroeconomic modeling is routinely used to project changes in unemployment, economic growth, and inflation at the national, regional, and state level. Understanding the way the economic incentives and compensating behaviors created by public policy impact real-world trends in things like job growth, migration, and crime rates is critical to implementing effective policy and avoiding unintended consequences . For example, understanding what the application of the laws of supply and demand imply about the effects of price floors, along with case studies and empirical research, can inform better policy regarding minimum wage laws.
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Courtesy resignations won’t solve the Philippine National Police’s problems
Author: Gemmo Fernandez, ANU and Ruby Rosselle Tugade, University of the Philippines
On 4 January 2023, Secretary of the Interior and Local Government, Benjamin Abalos, requested that the police general and colonels of the Philippine National Police (PNP) file ‘courtesy’ resignations. The move is intended to clean the ranks of the PNP — especially those involved in illegal narcotics.
It is a shortcut, given the long process of sanctioning erring members of the police that currently involves the PNP’s own Internal Affairs Service or the National Police Commission.
Under this scheme, officer resignations that have been found to have links to the drug trade will be accepted. Another committee will then be formed to recommend sanctions for these officers. The request for courtesy resignations may be an attempt to stage a credible crusade against corruption in the government. Yet in the face of long-standing issues of patronage and a lack of effective accountability mechanisms within the PNP, what is the value of this solution in addressing institutional problems?
Issues concerning the integrity of the PNP are not new. Under former president Ferdinand Marcos Sr, the Philippine Constabulary — the PNP’s militarised predecessor — committed countless acts of torture, summary execution and forced disappearances. After the fall of the martial law regime, efforts were made toward reforming the police force.
The 1987 Philippine Constitution was crafted to correct the mistakes made during the Marcos Sr dictatorship. It stressed the ‘civilian’ character of the police force, with the National Police Commission exercising control and possessing the power to discipline erring police. Yet, the problems persisted. Under former president Fidel Ramos, several members of the PNP were linked to organised crime . During Gloria Macapagal-Arroyo’s term, PNP officials were involved in numerous corruption scandals . Again, under Benigno Aquino, the police were associated with organised crime and illegal narcotics. More recently, the PNP was implicated in extra-judicial killings in Rodrigo Duterte’s war on drugs .
But despite the abuse and corruption perpetrated by the PNP, it still enjoys the trust of influential decisionmakers. The PNP still appears to be favoured in the 2022 national budget, receiving 190.69 billion pesos (US$3.45 billion) for its annual budget — higher than the Department of Health’s budget despite the country still reeling from the effects of the COVID-19 pandemic. With Duterte’s tough-on-crime approach, one cannot easily expect that Ferdinand ‘Bongbong’ Marcos Jr will be able or even willing to reverse his predecessor’s law enforcement policies overnight.
The PNP is a powerful institution, not only because of its law enforcement function, but also due to its historical role as an institution mobilised by the most powerful in government to wrest control over the population, most glaringly in local communities. Putting this institutional power into the larger context of patronage-driven politics in the country, the pursuit for accountability for police misconduct remains elusive . From causes like the ‘code of silence’ observed throughout the police hierarchy to its susceptibility to ‘political interventions’ from the outside owing to weak internal mechanisms, the PNP has serious integrity issues.
Top-down approaches do little to fix the long-standing problems of the PNP as an organisation. They may rid the PNP of top officials that have contributed to the problem. Yet, these measures, to which Abalos correctly referred to as ‘shortcuts’, do not address the deeply embedded culture of corruption and patronage. Indeed, it has been demonstrated that these kinds of solutions are ineffective . Rather, meaningful reforms require the overhaul of the organisation.
If Marcos Jr’s administration is serious in wanting to reform the ranks of the PNP, its priority should be the creation of a strong accountability mechanism within the organisation — preferably one that is independent, professionally trained, has ample resources and possesses oversight powers. The PNP currently has no such thing. While it has the Internal Affairs Service to deal with ‘all forms of misconduct in the police service’, its independence and effectiveness in holding police officers accountable has been called into question .
Several bills were filed in the last Congress to make Internal Affairs Service autonomous from the PNP and to give it more powers to impose measures against erring police officers. None have been passed. The Internal Affairs Service remains directly under the control of the PNP.
To incrementally earn the trust of the public in the proposed process to reform the ranks of the police force, the Marcos Jr administration must not only be transparent in its intentions but also be able to provide effective solutions. Mass resignations from the PNP’s top officials hardly qualify as an earnest effort at solving a lingering institutional problem.
Courtesy resignations may serve to shield perpetrators of misconduct in the ranks from accountability. It is also possible that the scheme will only help install people who are loyal to the present government leadership — in parallel with the game of ‘ musical chairs ’ played with the top brass of the Armed Forces of the Philippines.
As the public continues to hope for greater, sweeping institutional reforms of the police, much remains to be seen in the government’s actions. The question remains: if the PNP is here, as its motto claims, ‘to serve and protect’, to whom is service and protection owed?
Gemmo Fernandez is a Doctoral Candidate at the College of Law, The Australian National University.
Ruby Rosselle Tugade is Senior Lecturer at the University of the Philippines College of Law, University of the Philippines.
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1.1 Revisiting Economics as a social science 1.2 Economics as an applied science 1.3 economicsBasic economic problems and the Philippine socioeconomic development in the 21st century The learner demonstrates an understanding of… economics as an applied science and its utility in addressing the economic problems of the country
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However, how a capitalist, a socialist and a mixed economic system solve their basic problems is given below: 1. Solution to Basic Problems in a Capitalistic Economy: Under capitalistic economy, allocation of various resources takes place with the help of market mechanism. Price of various goods and services including the price of factors of ...
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Top-down approaches do little to fix the long-standing problems of the PNP as an organisation. They may rid the PNP of top officials that have contributed to the problem. Yet, these measures, to which Abalos correctly referred to as 'shortcuts', do not address the deeply embedded culture of corruption and patronage.