Interpreting economic data critically

Overview

Difference between a stock and a flow and economist reading a table of figures always check the units.

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

   You are given real gross domestic product for eight successive years and asked to show how fast the economy grew. Explain what you would plot and why plotting the level answers a different question.

   Model answer

   Plot the annual percentage change against the year, as bars or a line, with a clearly marked zero line so that any year of contraction appears below the axis. Plotting the level shows how large the economy is and whether it has recovered its previous peak, which is a question about size rather than speed. The two can move in opposite directions: a rising level with a falling growth rate is an economy that is still expanding but doing so more slowly each year.

2. 2

   A chart shows house prices in cash terms rising in every year of a twenty-year period. What further information is needed before concluding that houses became steadily less affordable?

   Model answer

   You would need a general price index, because a cash rise smaller than inflation is a fall in real terms, and you would need earnings, because affordability is the price of a house relative to what buyers earn, usually expressed as a ratio of price to income. Mortgage interest rates matter too, since the monthly cost of buying depends on the rate as well as on the price, so falling rates can make a dearer house cheaper to own.

3. 3

   A report states that a country's exports rose 8% while its imports rose 5%, and concludes that the trade deficit narrowed. Why does that not follow?

   Model answer

   The two percentages are applied to different bases, and it is the cash amounts that determine the balance. If exports of £300 billion rise 8 per cent they add £24 billion, while imports of £400 billion rising 5 per cent add £20 billion, so the deficit does narrow by £4 billion. But if imports are £600 billion, the same 5 per cent adds £30 billion and the deficit widens despite the faster percentage growth of exports. Where a country already imports far more than it exports, exports must grow considerably faster merely to hold the gap steady.

4. 4

   One economy's output grows 3% and another's 1%. What else must be established before saying living standards improved faster in the first?

   Model answer

   Population growth is the first thing to establish, because it is output per head that matters and a 3 per cent rise shared among 3 per cent more people leaves the average person no better off. It also matters whether the figures are real or nominal, since a nominal figure may be mostly inflation. You would also want to know how the extra output is distributed, since a rise concentrated at the top leaves the typical household unchanged, and what happened to hours worked, the environment and public services, none of which the output figure captures.

5. 5

   What is the difference between a stock and a flow, and which of government debt and the government deficit could a chart showing one figure per year be plotting?

   Model answer

   A flow is measured over a period of time and a stock at a single point in time. The deficit is a flow: the amount borrowed during a year. The debt is a stock: the total owed on a particular date. A chart with one figure per year could show either, the deficit for each year or the debt outstanding at each year end, so the axis label is essential. The relationship between them explains a common confusion: debt keeps rising for as long as the deficit is positive, so the deficit can fall sharply in a year in which the debt still grows.

6. 6

   In a market the price falls from £8 to £6 and the quantity traded rises from 500 to 620 units. Why can you not conclude from this alone that demand is price elastic?

   Model answer

   Price and quantity are jointly determined by supply and demand, so two observations do not identify a demand curve. If supply shifted to the right while demand stood still, the two points do lie on the same demand curve and the elasticity calculation is valid. If demand shifted as well, the two points lie on different demand curves and the ratio of the changes measures nothing about the response of buyers to price. You would need evidence that the determinants of demand were unchanged between the two observations.

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