Some Techniques of Economics Analysis

Some Techniques of
Economic Analysis
SOME TECHNIQUES OF ECONOMIC
ANALYSIS
• Use of diagrams in economics
Effect of a rise in income
Entertainment
Food
Expenditure (£)
O
Individual’s income (£)
ANALYSIS
• Representing statistics
ANALYSIS
– time-series data
UK Unemployment and economic growth: 1998 Q1 – 2002 Q1
Unemployment (millions)
1998 1999 2000 2001 2002

1998 1999 2000 2001 2002

Economic growth (%)

1998 1999 2000 2001 2002
Economic growth (%)

1998 1999 2000 2001 2002
ANALYSIS
– cross-section data
Cross-section data:
The distribution of UK pre-tax income
Cross-section data:
60
Percentage of total
household income
50
40
30
20
10
0
Poorest 20% Next 20% Middle 20% Next 20% Richest 20%
Cross-section data:
1977
42%
4%
10%
18%
26%
Cross-section data:
1977 2000/1
42%
4% 51% 2%
7%
10%
15%
18%
26%
25%
ANALYSIS
• Getting a true picture from statistics
– selective use of data
ANALYSIS
– graphical presentation
Using graphs with different scales: scale 1
100
75
Kg purchased per year
50 Consumer Kg purchased
income (£) per year
0 10
5 000 25
25 10 000 45
15 000 70
20 000 100
0
0 10 000 20 000 30 000 40 000 50 000 60 000
Consumer income (£ per year)

100
Consumption of a foodstuff
(per person)
75
50 Consumer Kg purchased
income (£) per year
0 10
5 000 25
25 10 000 45
15 000 70
20 000 100
0
0 10 000 20 000 30 000 40 000 50 000 60 000

400
Consumer Kg purchased
300 income (£) per year
0 10
5 000 25
10 000 45
200 15 000 70
20 000 100
100
0
0 5000 10 000 15 000 20 000

400
Consumer Kg purchased
300 income (£) per year
0 10
5 000 25
10 000 45
200 15 000 70
20 000 100
Consumption of a foodstuff
100 (per person)
0
0 5000 10 000 15 000 20 000

ANALYSIS
– absolute and proportional values
ANALYSIS
– questions of distribution
ANALYSIS
– questions of distribution
– real and nominal values
ANALYSIS
• Index numbers
– constructing an index
Constructing an index:
UK manufacturing and service industry output: 1995 = 100
Constructing an index:
UK manufacturing and service industry output: 1995 = 100
ANALYSIS
• Index numbers
– using index numbers to measure
percentage changes
ANALYSIS
• Index numbers
percentage changes
– price index
ANALYSIS
• Index numbers
percentage changes
– price index
– use of weighted averages
Constructing a weighted average index
ANALYSIS
• Index numbers
percentage changes
– price index
• Functional relationships
ANALYSIS
• Index numbers
percentage changes
– price index
– simple linear functions
• as a table
• as a graph
• as an equation
Graph of the saving function: S = 0.2Y
14
National income Total saving

12 (£bn per year) (£bn per year)
a 0 0
10 10 2 S = 0.2Y
20 4
30 6
Saving (£bn)
8
40 8
50 10
6
a
0
0 10 20 30 40 50
National income (£bn)
14

0 0
10 b 10 2 S = 0.2Y
20 4
30 6
Saving (£bn)
8
40 8
50 10
6
b
2
0
0 10 20 30 40 50
14

0 0
10 10 2 S = 0.2Y
c 20 4
30 6
Saving (£bn)
8
40 8
50 10
6
c
4
0
0 10 20 30 40 50
14

0 0 f
10 10 2 S = 0.2Y
20 4
d 30 6
e
Saving (£bn)
8
e 40 8
f 50 10 d
6
0
0 10 20 30 40 50
y Graph of the function: y = 4 + 2x
16
x y
14 Y = 4 + 2x
a 0 4
12 1 6
2 8
10 3 10
4 12
8 5 14
4
a
2
0
0 1 2 3 4 5
x
16
x y
14 Y = 4 + 2x
0 4
12 b 1 6
2 8
10 3 10
4 12
8 5 14
6
b
4
0
0 1 2 3 4 5
x
16
x y
14 Y = 4 + 2x
0 4
12 1 6
c 2 8
10 3 10
4 12
8 5 14
c
6
0
0 1 2 3 4 5
x
16
x y
14 Y = 4 + 2x
0 4 f
12 1 6
2 8
e
10 d 3 10
e 4 12 d
8 f 5 14
0
0 1 2 3 4 5
x
16
x y
14 Y = 4 + 2x
0 4
12 1 6
c 2 8 d
10 d 3 10
4 12 c 2
8 5 14
1
6
0
0 1 2 3 4 5
x
ANALYSIS
• Index numbers
percentage changes
– price index
– simple linear functions
• as a table
• as a graph
• as an equation
– non-linear functions
y Graph of the function: y = 4 + 10x – x2
30
25
20
x y
15
a 0 4
1 13
2 20
10
3 25
4 28
a 5 29
5
6 28
0
0 1 2 3 4 5 6
x
30
25
20
x y
15
b 0 4
b 1 13
2 20
10
3 25
4 28
5 5 29
6 28
0
0 1 2 3 4 5 6
x
30
25
c
20
x y
15
0 4
1 13
c 2 20
10
3 25
4 28
5 5 29
6 28
0
0 1 2 3 4 5 6
x
y A total cost function: C = 20 + 5Q + Q2
110
100
90
80
70
60 Q C
50 a 0 20
1 26
40 2 34
3 44
30
4 56
a 5 70
20
6 86
10 7 104
0
0 1 2 3 4 5 6 7
x
110
100
90
80
70
60 Q C
50 0 20
b 1 26
40 2 34
b 3 44
30
4 56
20 5 70
6 86
10 7 104
0
0 1 2 3 4 5 6 7
x
110
100
90
80
70
60 Q C
50 0 20
1 26
40 c c 2 34
3 44
30
4 56
20 5 70
6 86
10 7 104
0
0 1 2 3 4 5 6 7
x
110
h
100
90 g
80
f
70
60 e Q C
50 a 0 20
d b 1 26
40 c c 2 34
d 3 44
30 b e 4 56
a f 5 70
20
g 6 86
10 h 7 104
0
0 1 2 3 4 5 6 7
x
110
Q C
100
0 20
90 1 26
2 34
80 d 3 44
70 4 56 11
5 70
60 6 86 1
7 104
50
d
40
30
20
10
0
0 1 2 3 4 5 6 7
x
DIFFERENTIATION
• Elementary differentiation
– the rules
• Finding the maximum or minimum point
of a curve
– differentiating the equation
– setting it equal to zero
• Is it a maximum or a minimum?
– differentiating a second time
Π A total profit function: Π = –20 + 12Q – Q 2
20
15
10
0
0 1 2 3 4 5 6 7 8 9 10 Q
-5
-10
Q 0 1 2 3 4 5 6 7 8 9 10
-15 Π -20 -9 0 7 12 15 16 15 12 7 0
-20
-25
Π A total profit function: Π = –20 + 12Q – Q 2
20
dΠ / dQ = 0
15
10
0
0 1 2 3 4 5 6 7 8 9 10 Q
-5
-10
Q 0 1 2 3 4 5 6 7 8 9 10
-15 Π -20 -9 0 7 12 15 16 15 12 7 0
-20
-25
DIFFERENTIATION
• Elementary differentiation
– the rules
• Finding the maximum or minimum point
of a curve
– differentiating the equation
– setting it equal to zero
• Is it a maximum or a minimum?
– differentiating a second time
– the second derivative test
When is good news really good?
12 15
11
10
10
Unemployment (%)
9
5
0
7
Unemployment
6
-5
5
4 -10
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
1989 1990 1991 1992
12 15
Rate of change
11
Rate of change in unemployment (%)

in unemployment
10
10
Unemployment (%)
9
5
0
7
Unemployment
6
-5
5
4 -10
1989 1990 1991 1992
12 15
Rate of change
11
Rate of change in unemployment (%)

in unemployment
10
10
Unemployment (%)
9
5
0
7
Unemployment
6
-5
5
4 -10
1989 1990 1991 1992

Some Techniques of Economics Analysis

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Some Techniques of Economics Analysis

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Some Techniques of

1998 1999 2000 2001 2002

1998 1999 2000 2001 2002

Economic growth (%)

Economic growth (%)

Consumer income (£ per year)

Consumer income (£ per year)

Consumer income (£ per year)

Consumer income (£ per year)

National income Total saving

National income Total saving

National income Total saving

National income Total saving

Rate of change in unemployment (%)

Rate of change in unemployment (%)

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