May 27, 2024 

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J CURVE: An interesting relationship that exists between the exchange rate for a nation's currency and its balance of trade. In principle, the drop in a nation's exchange rate, or price of currency, makes the currency less expensive to "buy." With "cheaper" currency the price of domestic production is less and the price of foreign stuff is more, causing an increase in exports to other countries and drop in imports coming in from foreign producers. The economy thus moves in the direction away from a trade deficit and toward a trade surplus. However, the first few months after a drop in the exchange rate the balance of trade goes in the other direction, with any existing trade deficit increasing or any trade surplus shrinking. This occurs because the quantities imported and exported don't change in the short run, but the prices do. Because more is paid for the same amount of imported goods and receive less for the same amount of exports, total spending on imports increases, total revenue received from exports declines, and the movement is in the trade deficit direction. Once those quantities start adjusting in the long run, then we see a movement in the direction of a trade surplus.

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The application of the scientific method to economic phenomena and topics related to the fundamental problem of scarcity. Economic science, also termed positive economics, is one of several social sciences that apply the scientific method to the study of human behavior.
Economic science is the scientific study of economic phenomena. While the scientific process is commonly associated with lab coats and test tubes (and the study of physical science) it is also directed toward social and human behavior in the form of social science. Economic science is a social science that uses the scientific method to explain and understand how human behavior responds to the scarcity problem.

Scientific Method

Economic science, like any science, uses the scientific method to understand how the world works. The scientific method is a systematic way of explaining phenomena by verifying theoretically derived hypotheses with real world data.

The scientific method can be separated into six steps:

  1. First, generally accepted principles form a theory. This can be a highly formal theory, involving a lot of sophisticated mathematical equations. Or it could be quite simple, based on a few "common sense" notions about the world. The market is one noted economic theory. It can be specified as words, graphs, or equations.

  2. Second, the theory inspires a hypothesis. A hypothesis is a very specific statement about how the world works that logically follows from the theory. For example, the market theory implies that an "unnaturally" low price, such as that caused by a government price ceiling, causes a shortage.

  3. Third, the hypothesis is verified with real world data. The hypothesis, which states what a theory implies will occur, is compared with real world data, which documents what actually does occur. If the market theory implies a government imposed price ceiling causes a shortage, then this can be checked against a real work market.

  4. Fourth, if supported, a hypothesis becomes a principle. However, to become a principle, the hypothesis must be verified many, many, many times. Once is not enough. The more that a hypothesis agrees with real world data, the more confident economists are that it captures a fundamental law of nature. As confidence builds, it moves from hypothesis to principle. The hypothesis that a price ceiling causes a shortage has been tested enough that economists are confident that this explains a fundamental aspect of the economy.

  5. Fifth, the new principle is added to the theory. The verified principle uncovers something new about the world, something that was not previously understood, something that can be used to generate another hypothesis. This new bit of information is then added to the original theory to create a bigger, better theory--a theory that can explain even more about the world. For example, a government imposed price ceiling implies the emergence of an illegal black market. This hypothesis can also be tested against real world events.

  6. Last, the new, improved theory, being bigger and better, inspires yet another hypothesis about another aspect of the world that has not yet been explained. This new hypothesis then goes through the same data verification process on its way to becoming another new principle. For example, an understanding of price ceilings, shortages, and black markets can be used to explain and analyze the market for illegal drugs or other criminal activity.


Economic science stands apart from other types of science (social and physical) because it studies phenomena related to the fundamental problem of scarcity. Scarcity is the pervasive condition facing humanity that arises because wants and needs are unlimited, but resources are limited.

Here is a closer look at the two sides of the scarcity problem.

  • Unlimited Wants and Needs: This is a basic characteristic of humanity which means that people are never totally satisfied with the quantity and variety of goods and services. It means that people never get enough, that there is always something else that they want or need.

  • Limited Resources: This is a basic condition of nature which means that the quantities of available resources used for production are finite. It means that the economy has only so many resources that can be used AT ANY GIVEN TIME to produce goods and services.
Economics is essentially the study of scarcity. Everything and anything studied in economics ultimately harkens back to the scarcity problem.


Although the central thread running throughout the study of economics is scarcity, the specific phenomena studied by economic science is exceedingly diverse. It includes such topics as stock prices, environmental quality, foreign trade tariffs, criminal activity, discrimination, money creation, and bureaucratic inefficiency.

The topics are commonly divided into the branches of macroeconomics and microeconomics.


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ECONOMIC SCIENCE, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: May 27, 2024].

Check Out These Related Terms...

     | science | social science | physical science | empirical | data | cause and effect | economic analysis |

Or For A Little Background...

     | scientific method | economics | positive economics | theory | verification | scarcity | phenomenon | hypothesis |

And For Further Study...

     | seven economic rules | fallacies | normative economics | graphical analysis | political views | four estates | economic thinking | circular flow | macroeconomic theories | consumer demand theory |

Related Websites (Will Open in New Window)...

     | American Economic Association | American Enterprise Institute | The Brookings Institution | National Bureau of Economic Research | American Association for the Advancement of Science |

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