Talk­ing Fi­nance

The num­bers game

Business Spotlight - - CONTENTS -

Num­bers can cause a lot of prob­lems in eco­nomic and fi­nan­cial dis­cus­sions. Look at the fol­low­ing state­ments and think about what may be mis­lead­ing. 1. “Spend­ing on the health ser­vice has never been higher; we have never spent more on pa­tients.”

2. “Over the past year, in­ter­est rates have in­creased by two per cent — from one per cent to three per cent.”

3. “The value of the com­pany Pears is now higher than the GDP of 90 of the world’s economies.”

4. “Eco­nomic growth is a dis­as­ter. The lat­est fig­ure shows a GDP in­crease of just 0.8 per cent.”

5. “In­vestors shouldn’t panic about the re­cent 20 per cent fall in the value of the stock mar­ket. Share prices can eas­ily rise again by 20 per cent over the next year, wip­ing out the losses.”

6. “The num­ber of stu­dents who grad­u­ated in­creased by 2,000 last year — a great suc­cess.”

Com­ments

1. Be­cause prices gen­er­ally rise, it is nor­mal for spend­ing in money/nom­i­nal terms al­ways to be at its high­est level. More in­ter­est­ing is whether spend­ing is higher in real terms — or, in this case, in real terms per capita. Les­son: Dis­tin­guish be­tween nom­i­nal in­creases, real in­creases and real in­creases per head.

2. An in­crease in in­ter­est rates from one per cent to three per cent is not a two per cent in­crease but a 200 per cent in­crease. More typ­i­cally, we would speak here of a rise of “two per­cent­age points”.

Les­son: Be clear about the dif­fer­ence be­tween a per­cent­age change and per­cent­age-point change.

3. This is a clas­sic case of com­par­ing ap­ples and or­anges. It is like com­par­ing the wealth of one per­son with the an­nual in­come of an­other. The value of a com­pany should be com­pared to the net worth of a coun­try, not its GDP, which is its yearly out­put/in­come.

Les­son: Make sure you are com­par­ing equiv­a­lent con­cepts.

4. Whether or not 0.8 per cent GDP growth is a dis­as­ter de­pends on the time pe­riod. If it is an an­nual fig­ure, it re­ally isn’t very good. If it is an in­crease from one quar­ter to the next, it is very re­spectable, equiv­a­lent to more than three per cent a year.

Les­son: Be clear about the rel­e­vant time pe­riod.

5. In­vestors may or may not panic, but the maths don’t add up. Imag­ine the orig­i­nal level of the stock mar­ket was 10,000. A 20 per cent fall would take it down to 8,000. To get back to 10,000 would re­quire a 25 per cent in­crease — 2,000 is 25 per cent of 8,000 — not a 20 per cent in­crease.

Les­son: Cal­cu­late per­cent­ages cor­rectly.

6. An in­crease of 2,000 in the num­ber of grad­u­ates may be good, but we might also want to know about the pass rate — the per­cent­age who passed their ex­ams. We don’t know this here, as we aren’t told how many more (or fewer) stu­dents there were in to­tal. The pass rate could, in fact, have fallen.

Les­son: Think about whether ab­so­lute or per­cent­age fig­ures are more rel­e­vant.

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