APPENDIX 1: HOW TO READ GRAPHS A picture is worth a thousand words Chinese proverb SUMMARY TO APPENDIX 1.

Graphs are an essential tool of modern economics. They provide a convenient presentation of data or of the relationship among variables. 2. The important points to understand about a graph are: What is on each of the two axes (horizontal and vertical)? What are the units on each axis? What kind of relationship is depicted in the curve or curves shown in the graph? 3. The relationship between the two variables in a curve is given by its slope. The slope is defined as the rise over the run, or the increase in Y per unit increase in X. If it is upward- (or positively) sloping, the two variables are directly related; they move upward or downward together. If the curve has a downward (or negative) slope, the two variables are inversely related. 4. In addition, we sometimes see special types of graphs: time series, which show how a particular variable moves over time; scatter diagrams, which show observations on a pair of variables; and multicurve diagrams, which show two or more relationships in a single graph. CONCEPTS FOR REVIEW Elements of Graphs Horizontal, or X, axis, vertical, or Y, axis, slope as rise over run, slope (negative, positive, zero), tangent as slope of curved line Examples of Graphs Time-series graphs, scatter diagrams, multicurve graphs

QUESTIONS FOR DISCUSSION 1. Consider the following problem: After your 8 hours a day of sleep, you have 16 hours a day to divide between leisure and study. Let leisure hours be the X variable and study hours be the Y variable. Plot the straight-line relationship between all combinations of X and Y on a blank piece of graph paper. Be careful to label the axes and mark the origin.

A Plot of Leisure vs Study Time (Hours)

18 16 14 12 10 8 6 4 2 0

Origin 0

Study (hours)

4 hours of leisure

6 hours of leisure

10

12

14

16

18

Leisure (hours) 2. In question 1, what is the slope of the line showing the relationship between study and leisure hours? Is it a straight line? The slope is the rise over the run. Taking the two end points as where the line crosses the axes, the rise is 16 (the line starts at 16 on the vertical axis and goes down to 0), and the run is 16 (the line starts at 0 on the horizontal axis and ends at 16). Slope =
16 16

= 1.

It is a straight line. 3. Let us say that you absolutely need 6 hours of leisure per day, no more, no less. On the graph, mark the point that corresponds to 6 hours of leisure. Now consider a movement along the curve: Assume that you decide that you need only 4 hours of leisure a day. Plot the new point. See the yellow and green points above. 4. Next show a shift of the curve: Assume that you need less sleep, so you have 18 hours a day to devote to leisure and study. Draw the new (shifted curve).

A Plot of Leisure vs. Study Time (hours)

20 18 16 14 12 10 8 6 4 2 0 0 5 10 15 20

Study (hours)

Leisure (hours)

5. Keep a record of your leisure and study for a week. Plot a time-series graph of the hours of leisure and study each day. Next plot a scatter diagram of hours of leisure and hours of study. Do you see any relationship between the two variables? This information is private. 6. Go to the website of the Bureau of Economic Analysis at www.bea.gov. Then click on Gross Domestic Product. On the next page, click on Interactive NIPA data. Then click on Frequently Requested NIPA Tables. Click on Table 1.2 (Real Gross Domestic Product), which is the total output of the economy. This will probably come up with the quarterly data. a. Construct a graph that shows the time series for real GDP for the last six quarters. Is the general trend upward or downward? (In macroeconomics, we will learn that the slope downwards is recessions.) The Bureau of Economic Analysis website has changed since the question was set. I have looked at Table 1.1.6. Real Gross Domestic Product, Chained Dollars, which has data in Billions of chained (2005) dollars. Seasonally adjusted at annual rates. I have put the relevant figures in the following table and plotted the time series below.
Period 2011 Q IV 2012 Q I 2012 Q II 2012 Q III 2012 Q IV 2013 Q I Real GDP 13,441.0 13,506.4 13,548.5 13,652.5 13,665.4 13,725.7

Real GDP Time Series

14,000.0 12,000.0 10,000.0

Real GDP

8,000.0
6,000.0 4,000.0 2,000.0 0.0 2011 Q IV 2012 Q I 2012 Q II 2012 Q III 2012 Q IV 2013 Q I

Quarter

The general trend is (very slightly) upwards. Current Real GDP growth in the US is positive but small. If I were to zoom in to the line, so the vertical axis does not show from the origin, the upward trend is more noticeable:

Real GDP Time Series

13,750.0 13,700.0 13,650.0 13,600.0 13,550.0 13,500.0 13,450.0 13,400.0 13,350.0 13,300.0 13,250.0 2011 Q IV 2012 Q I 2012 Q II 2012 Q III 2012 Q IV 2013 Q I

Real GDP

Quarter Note, this is exactly the same graph, just zoomed in higher up on the vertical axis. b. Construct a scatter plot showing Imports on the vertical axis and Gross domestic product on the horizontal axis. Describe the relationship between the numbers. (In macroeconomics, this will be the marginal propensity to import.) This information is gathered from the same tables (Real GDP is broken into its different components including Imports). The units are as part a.

Period 2011 Q IV 2012 Q I 2012 Q II 2012 Q III 2012 Q IV 2013 Q I

Real GDP 13,441.0 13,506.4 13,548.5 13,652.5 13,665.4 13,725.7

Imports 2,217.3 2,234.2 2,249.6 2,246.1 2,222.3 2,220.3

A Scatter Diagram of Imports vs. Real GDP

2,255.0 2,250.0 2,245.0

Imports

2,240.0 2,235.0 2,230.0 2,225.0 2,220.0 2,215.0 13,400.0 13,450.0 13,500.0 13,550.0 13,600.0 13,650.0 13,700.0 13,750.0

Real GDP

I have used Excel to fit a trendline to these points. It is slightly downward sloping. This suggests that as Real GDP increases, Imports decrease very slightly. However, I would not make an inference about this relationship (the marginal propensity to import) from the small sample of six points, and taken from a time of exceptional economic circumstances (2011-2013, recovering from The Great Recession.) 7. For those who have studied calculus: The slope of a smooth line or curve is its derivative. The following are the equations for two inverse demand curves (where price is a function of output). For each curve, assume that the function holds only when P 0 and X 0. a. = b. = + For each demand curve, determine its slope when X = 0 and when X = 1. For linear demand curves such as a, what is the condition under which the law of downwardsloping demand holds? Is curve b concave (like a dome) or convex (like a cup)? Lets plot each curve:

P = 100 - 5X
120 100 80 60 40 20 0 0 5 10 15 20 25

P = 100 - 20X + 1X2

120 100 80 60 40 20 0

10

15

20

25

Using calculus to find the derivative of the functions: a.

= 5

The slope is everywhere 5, as could be seen by inspection. So the slope is 5 at X = 0 and X = 1. For a linear demand curve, downward-sloping demand holds where the coefficient of the X term is negative. b.

= 20 + 2

When X = 0, = 20, so the slope is 20. When X = 1, = 18, so the slope is 18. The curve is convex (like a cup).