Posts
Scientists, economists, and detectives have much in common: they all want to
figure out what’s going on in the world around them. To do this, they rely on
both theory and observation. They build theories in an attempt to make sense of
what they see happening. They then turn to more systematic observation to evaluate
the theories’ validity. Only when theory and evidence come into line do
they feel they understand the situation. This chapter discusses the types of observation that economists use to develop and test their theories.
Casual observation is one source of information about what’s happening in
the economy. When you go shopping, you see how fast prices are rising. When
you look for a job, you learn whether firms are hiring. Because we are all participantsin the economy, we get some sense of economic conditions as we go
about our lives.
A century ago, economists monitoring the economy had little more to go on
than these casual observations. Such fragmentary information made economic
policy making all the more difficult. One person’s anecdote would suggest the
economy was moving in one direction, while a different person’s anecdote
would suggest it was moving in another. Economists needed some way to combine
many individual experiences into a coherent whole. There was an obvious
solution: as the old quip goes, the plural of “anecdote” is “data.”
Today, economic data offer a systematic and objective source of information,
and almost every day the newspaper has a story about some newly released statistic.
Most of these statistics are produced by the government. Various government
agencies survey households and firms to learn about their economic activity—
how much they are earning, what they are buying, what prices they are charging,
whether they have a job or are looking for work, and so on. From these surveys,
various statistics are computed that summarize the state of the economy. Economists use these statistics to study the economy; policymakers use them to monitor developments and formulate policies.
This chapter focuses on the three statistics that economists and policymakers use
most often. Gross domestic product, or GDP, tells us the nation’s total income and the total expenditure on its output of goods and services. The consumer
price index, or CPI, measures the level of prices. The unemployment rate tells
us the fraction of workers who are unemployed. In the following pages, we see
how these statistics are computed and what they tell us about the economy
figure out what’s going on in the world around them. To do this, they rely on
both theory and observation. They build theories in an attempt to make sense of
what they see happening. They then turn to more systematic observation to evaluate
the theories’ validity. Only when theory and evidence come into line do
they feel they understand the situation. This chapter discusses the types of observation that economists use to develop and test their theories.
Casual observation is one source of information about what’s happening in
the economy. When you go shopping, you see how fast prices are rising. When
you look for a job, you learn whether firms are hiring. Because we are all participantsin the economy, we get some sense of economic conditions as we go
about our lives.
A century ago, economists monitoring the economy had little more to go on
than these casual observations. Such fragmentary information made economic
policy making all the more difficult. One person’s anecdote would suggest the
economy was moving in one direction, while a different person’s anecdote
would suggest it was moving in another. Economists needed some way to combine
many individual experiences into a coherent whole. There was an obvious
solution: as the old quip goes, the plural of “anecdote” is “data.”
Today, economic data offer a systematic and objective source of information,
and almost every day the newspaper has a story about some newly released statistic.
Most of these statistics are produced by the government. Various government
agencies survey households and firms to learn about their economic activity—
how much they are earning, what they are buying, what prices they are charging,
whether they have a job or are looking for work, and so on. From these surveys,
various statistics are computed that summarize the state of the economy. Economists use these statistics to study the economy; policymakers use them to monitor developments and formulate policies.
This chapter focuses on the three statistics that economists and policymakers use
most often. Gross domestic product, or GDP, tells us the nation’s total income and the total expenditure on its output of goods and services. The consumer
price index, or CPI, measures the level of prices. The unemployment rate tells
us the fraction of workers who are unemployed. In the following pages, we see
how these statistics are computed and what they tell us about the economy