The Data of Macroeconomics

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 a combination of theory and observation. They build theories in an attempt to make sense of what they see happening. Having developed these theories, they turn to more systematic observation to evaluate the theories’ validity. Only when theory and data come into line do they feel they understand the situation. This chapter discusses the types of data used to create and test macroeconomic 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 participants in 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 policymaking 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, and so on. From these surveys, various statistics are computed that summarize the state of the economy. These statistics are used by economists to study the economy and by policymakers to monitor economic developments and formulate appropriate policies.

This chapter focuses on the three economic 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. In later chapters, we focus on additional statistics that are also very important—statistics such as interest rates, the exchange rate, and the money supply.