The Data of Macroeconomics

17

It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to fit facts.

—Sherlock Holmes

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 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 notice whether prices are rising, falling, or staying the same. When you look for a job, you learn whether firms are hiring. Every day, as we go about our lives, we participate in some aspect of the economy and get some sense of economic conditions.

A century ago, economists monitoring the economy had little more to go on than such casual observations. Such fragmentary information made economic policymaking difficult. One person’s anecdote would suggest the economy was moving in one direction, while another’s would suggest otherwise. 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 you can hear or read 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, how much they are producing, and so on. From these surveys, the government computes various statistics that summarize the state of the economy. Economists use these statistics to study the economy; policymakers use them to monitor developments and formulate policies.

18

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.