Choosing and reading economic charts and diagrams

Overview

Stacked bar chart of consumption, two limitations of using pie charts to present economic data and long-run output series sometimes plotted on a logarithmic vertical scale.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   State which graphical form best shows the unemployment rate each quarter for ten years, the split of government spending between departments in one year, and whether higher inflation is associated with higher unemployment across countries, giving a reason in each case.

   Model answer

   For the quarterly unemployment rate, a line chart with time on the horizontal axis and the rate on the vertical, because a line makes the direction, turning points and trend of a continuous series visible. For the split of spending, a pie chart or a single stacked bar, because both show the shares of one total adding to a hundred per cent. For the relationship between two variables across countries, a scatter diagram with one point per country, because it shows whether the two move together without imposing a time dimension that is not present in the data.

2. 2

   A chart of gross domestic product begins its vertical axis at £2,300 billion rather than zero, and the line appears to climb steeply. How does this affect the impression given, and what should a reader check?

   Model answer

   Truncating the axis magnifies the visual slope, so a rise of two or three per cent can fill the whole height of the chart and look dramatic. The reader should look at the axis labels, note the starting value, and convert the movement into a percentage of the level before judging whether it is large. Truncation is not always improper, since a series that never comes near zero would otherwise show as a flat line, but it must be visible to the reader.

3. 3

   A scatter diagram of countries shows higher investment as a share of national income associated with faster growth. Explain three reasons why this does not prove that investment causes growth.

   Model answer

   The causation may run the other way, since fast-growing economies generate the profits, confidence and savings that finance investment. A third factor, such as political stability or the quality of institutions and education, may be driving both variables at once. And the pattern may be an artefact of this particular sample, produced by a handful of outlying countries or by the choice of years. A scatter establishes association only, and says nothing about the direction of any causal link.

4. 4

   A line chart of the annual inflation rate slopes downwards from 9% to 3% over two years while staying above zero throughout. What has happened to prices?

   Model answer

   The line plots the rate at which prices are changing, not their level. Because it remains above zero, prices rose in every period, and because it slopes downwards, they rose by less each time. The price level is therefore higher at the end than at the start: multiplying 1.09 by 1.03 gives 1.1227, so prices are about 12.3 per cent higher over the two years. Only if the line crossed below zero would the price level itself be falling.

5. 5

   When is a bar chart preferable to a line chart, and what does a line imply that bars do not?

   Model answer

   Bars suit comparisons between separate categories, such as output by industry or unemployment by region, where the horizontal axis has no natural order and the reader is comparing heights. A line joins its points and so implies that the variable passes through every value between them, which is appropriate for something measured continuously through time but misleading for distinct categories, where there is nothing in between one category and the next.

6. 6

   What does a stacked bar chart of consumption, investment, government spending and net exports across several years show that four separate line charts would not?

   Model answer

   It shows the total and the composition at the same time: the height of each bar is aggregate demand and the segments show where it came from, so a reader can see at a glance whether an increase was driven by consumption or by investment. Separate line charts show each component's path but force the reader to add them mentally. The weakness is that net exports can be negative, which a stacked bar handles awkwardly and which the reader must watch for.

Other ways to work this

The same content, four other ways.

What is inside Levo

Six ways to work the same material.