*1998; Last Modified 14 August 1998*

Given

a mass of numbers, how do you make sense of them? The quantities of macroeconomic

data that are available are far beyond the ability of any person to understand

without condensing and summarizing them in some way. The numbers in the accompanying

data set represents only a tiny fraction of the available macroeconomic data,

but even so, they are far too many for us to see patterns without condensing

them into just a few well chosen summary measures. There are several standard

measures that we can use. Statisticians call these measuresdescriptive statistics.

In this chapter we examine several of the more common ways to describe datasets,

including graphical methods.Before we begin,

it is helpful to tell the SPSS program that our data is annual data from 1929

to 1996. This will make it easier when we want to select a subset of years and

look at them alone, or perhaps compare them to a different time period. The

method for specifying that the data are annual time series is straightforward.

- After you

have started the program and loaded the dataset, click on Data in the

menu bar.- Click on

Define Dates;- In the

Cases Are box, select Years;- In the

First Case Is box type 1929;- Then, click

OK.SPSS will define

two new variables, Year_ and Date_, which are added to the data set.As a first step

in analyzing data, it is useful to look at a visual presentation of the numbers.

SPSS allows its users to easily create graphs, so let's begin by plotting GDP

over the entire period, 1929-1996. The following steps will accomplish this.

- Choose

Graphs from the menu bar;- Click Line;
- In the

Line Chart Box that appears, select the button for Values of individual

cases;- Click Define;
- Highlight

GDP in the alphabetical list of variables and click the arrow to put it

into the Line Represents box;- In the

Category Labels box, select the button for Variable;- Highlight

year (not year_) in the variable list on the left, and click the arrow

to put it into the Variable box;- Click OK.
At this point, SPSS

will create a chart. If you want to edit the chart (for example, change the

labels of the axes), click on Edit. SPSS puts the chart into edit mode where

you can double click on anything you want to change. After editing, your chart

should look likeChart 1.

In Chart 1, GDP

ranges from a little more than 50 billion to nearly 8,000 billion. The scale

covers such a wide range of values that GDP in the early years looks as if

it is close to zero, and the Great Depression of the 1930s doesn't appear

on the graph in any meaningful way. When graphs cover such a wide range of

values, they hide a lot of detail and may be very misleading.As an illustration

of this point, let's re-create the GDP graph for a subset of the years in

the data set. We will follow the same steps as above, but this time before

we create the graph, we will tell SPSS to use only the years between 1929

and 1940. This will give a close-up picture of the Great Depression. In order

to select 1929-1940, do the following:

- Click on

Data in the menu bar;- Choose

Select Cases;- Click the

button "Based on time or case range . . ." and click Range;- In the

First Case box, type 1929 and type 1940 in the Last Case box;- Click Continue,

and then OK. (Make sure the Unselected Cases Are "Filtered" is Selected;

this is the default and otherwise, all other years will be deleted!)Once you have selected

the subset of years, 1929-1940, you can repeat the steps in creating the graph.

As long as you do this right after the previous graph, everything will be set

up to produce the same kind of graph and you will not have to repeat all the

steps. With some editing of axes labels, your graph should look likeChart.

2

Note the difference

in the impressions created by Charts 1 and 2. Both are graphs of GDP for the

same country over a similar set of years. However, since Chart 1 has a much

larger scale (56 to 7,576) than Chart 2 (56 to 103), the tragedy and devastation

of the Great Depression is lost in the graph of the longer period.GDP is a variable

that continually grows over time. As a consequence, earlier values get swallowed

by the huge increases that take place over a long time period, and dramatic

changes in the early periods do not even show up. This is not true for every

variable, however. Unemployment rates, for example, may experience a trend

over a decade or more, but in general they tend to fluctuate within a relatively

narrow range. InChart 3, unemployment rates are graphed for the entire

time period, 1929-1996. Note how the Great Depression stands out.How big is GDP?

We know that production is composed of consumption goods, investment goods,

government purchases of final goods and services, and net exports, but which

of these are the largest? The smallest? Has consumption or investment become

a larger or smaller share of GDP over time? Do their shares vary? Similar questions

can be posed on the income side of GDP measures. For example, are wages and

salaries (labor income), or profits, a larger share of total income? Have their

shares changed? Do they vary much? These are some of the questions that can

be answered with descriptive statistics.Let's compare

the relative size of the shares of GDP that are made up by consumption, investment,

government, exports, and imports. In order to do this, we first must compute

each components share of GDP. The following steps accomplish this.

- Select

Transform from the menu bar;- Choose

Compute . . .;- In the

Target Variable box, type the name of the variable that will be consumption's

share of GDP; it is always a good idea to give new variables names that

will remind you what they are, so call it cs;- In the

Numeric Expression box type the formula: (c/gdp)*100;- Click OK;
- Repeat

the steps for investment share: is = (i/gdp)*100;- Repeat

for government share: gs = (g/gdp)*100;- Repeat

for export share: exs = (ex/gdp)*100;- Repeat

for import share: ims = (im/gdp)*100.Now, we are ready

to summarize this data. This is the easy part.

- Select

Statistics from the menu bar;- Choose

Summarize, and then Descriptives . . .;- Highlight

cs and click it into the box labeled Variables;- Do the

same for is, gs, exs, and ims;- Click OK.
SPSS brings to the

front the output window whenever you run a routine that generates output. The

output window presents the data summary in a table with seven columns, and rows

for each variable. The columns list the variable names, themean

of each variable, thestandard(Std Dev), the minimum value, the maximum value, the number

deviation

of observations, and the variable labels, if any. The SPSS output is in Table

4. Most of these summary measures are either self explanatory, or you probably

know them from other sources.Table

4Shares of GDP

VariableMeanStd

DevMinimumMaximumValid

NEXS

6.08

2.38

1.97

11.29

68IMS

6.20

3.05

2.85

12.59

68IS

13.844.04

1.8818.8

68GS

20.99

6.71

8.96

48.07

68CS

65.31

6.33

49.39

83.11

68

The mean is one

type of measure ofcentral tendency. It is also an average, although

it is nottheaverage. In fact, there several measures called "average,"

each one of which is a measures of the "center" of the data, or central tendency.

The mean of a variable X is usually symbolized with the Greek letter m (mu)

for an entire population or, for a sample which is a subset of the population,

the letter x with a bar over it. (I cannot reproduce this, so I call it x-bar.)

Algebraically, it is defined asx-bar = (x

_{1}

+ x_{2}+ . . . + x_{n})/n = (å_{i}x_{i})/n.Other commonly

used averages are themedian

and themode. The median puts

½ of all observations below it and the other half above when they are

arrayed from lowest to highest. For example, since there are 68 observations,

the median of cs is the midpoint between the 34th and 35th values, when cs

is arrayed in order from smallest to largest (andnotby date or year).

The mode is the most common observation. For data such as this, it is not

a relevant or commonly used measure because no value is repeated.The standard

deviation is a measure ofdispersion,

or variation, of a variable around its mean. The larger the standard deviation,

the greater the amount of variation in the variable being measured. For example

the standard deviation of the export share is 2.38, while for the import share

it is 3.05. We can say from this that exports vary less than imports as a

share of GDP. The standard deviation is usually symbolized with the roman

letter s for a sample, and the Greek letter s (sigma) for a population. Algebraically,

it is defined as the square root of the variance, where the variance equalss

^{2}

= [å_{i}(x_{i}- x-bar)^{2}]/(n-1).By definition

s = Ö s^{2}.The next two

values, the minimum and maximum, are used to find therange

of a variable. The range is another measure of variation, or dispersion. It

is defined in two ways:range = (minimum

value, maximum value),or alternatively,

range = (maximum

value - minimum value).For example,

for the share of consumption in GDP, the range is (49.39, 83.11), or 33.72

(calculated as 83.11-49.39)Note that in

Table 4, the components of GDP that

have the largest range (and standard deviations) are government and consumption.

(Government's variation is centered around a much smaller mean, however.)

This may be somewhat surprising, since we do not ordinarily think of our consumption

as varying a lot. In order to follow up on this, it is useful to graph the

variables cs, gs, and is, to see how they moved over time.

- Choose

Graphs from the menu bar;- Click Area;
- In the

Area Chart Box that appears, select Stacked, then select the button for

Values of individual cases, then click Define;- Highlight

cs in the alphabetical list of variables and click the arrow to put it

into the Area Represents box; do the same for gs and is;- In the

Category Labels box, select the button for Variable;- Highlight

year in the variable list on the left, and click the arrow to put it into

the Variable box;- Click OK.
A lot of the variation

in gs and cs occurs during World War II (seeChart 4).

This is not surprising

if you think about it. On the one hand, consumption was held down artificially

through rationing, and through a lack of production of consumer goods. On

the other hand, government spending on final goods and services skyrocketed

due to the purchase of tanks, airplanes, ships, rifles, uniforms, and the

services of millions of soldiers.If we re-calculate

the descriptive statistics using data from 1950-1996, a different picture

emerges. The standard deviations of both the consumption share of GDP and

the government share are less than other variables. Any guess which have the

largest standard deviation?Before moving

on, you may find it of interest to perform similar types of analyses on the

income side of GDP. Remember from Chapter 2 andTable 3

that national income is divided into the five main components: wages and salaries,

proprietor's income, rental income, corporate profits, and interest income.

Divide each of these by national income (ni in the data set), and proceed

along the same lines as above.

Chart 3plotted

the unemployment rate for the entire labor force from 1929 to 1996. The outstanding

feature of that graph was the extraordinarily high rates that occurred during

the 1930s, reaching nearly 25 percent in 1933. Other recessionary periods (for

example, 1974-75 or 1981-82) show higher than usual unemployment rates, but

they are small hills in comparison to the Mt. Everest of the 1930s.The fact that

unemployment increases during a recession is one commonly studied pattern.

Since the 1960s and the Civil Rights movement, economists have also been more

aware of the patterns of employment and unemployment by race, ethnicity, and

gender. Official government statistics of unemployment began to identify the

race and ethnicity of non-whites and Hispanics in the early 1970s. Statistics

for whites began in the 1950s, along with separate measures for (white) males

and females.Because unemployment

measures vary over the course of the business cycle, as well as by age, by

race, and by gender, it is important that comparisons of descriptive statistics

are based on the same set of years. For example, suppose we want to compare

unemployment rates for blacks and whites. We could compare black and white

men, women, or teens. In either of these comparisons, the limiting series

is the one for blacks since it begins in 1972. We will compare all three cases

(men, women, and teens), along with the measure of unemployment for the whole

labor force.

- Choose

Data from the menu bar;- Choose

Select Cases, and set the cases to 1972 to 1996;- Click okay.
- Select

Statistics from the menu bar;- Choose

Summarize, and then Descriptives . . .;- Highlight

bm20u and click it into the box labeled Variables;- Do the

same for bw20u, btu, wm20u, ww20u, wtu, and ur;- Click OK.
Note that there

is a hierarchy of unemployment rates which essentially contains four categories.

From lowest to highest, they are white adults, black adults, white teens and

black teens. White adults have rates below the economy-wide average (ur) while

black adults are far above it. White teens somewhat above black adults and black

teens are in an entirely different universe of unemployment rates.Why do teens

have higher unemployment than adults? One reason is because teens change jobs

more often than adults. They may be searching for that first really good job

and are also less likely to be tied down with family responsibilities. But

why are black teen rates so much higher than the rate for white teens? And

why are white rates so much lower than black rates? I leave it to the reader

to supply their own conjectures. It is clear, however, that proving something

beyond the shadow of a doubt will require additional data beyond that contained

in this dataset.One change in

our economy is the increase in women's labor force participation rates. Recall

that the labor force is made up of the subset of non-institutionalized adults

(16+ in age) that are either working or looking for work. (The institutionalized

population is composed of people in jail, the military, and mental institutions.)

Increasing women's labor force participation is a phenomena that goes back

to the 19th century. The changes we see today are reflective of the fact that

women have always worked, albeit not for pay, nor in a formal market economy.

As more and more production that used to occur inside households is moved

out to the market economy, more women work in the market economy. You can

view this change by doing the following:

- Choose

Data from the menu bar;- Choose

Select Cases . . ., then select All Cases, and click OK.- Choose

Graphs from the menu bar;- Click Line;
- In the

Line Chart Box that appears, select Multiple; then select the button for

Values of individual cases; then click Define;- Highlight

wm20 (labor force participation rate of white males, 20 and older) in

the alphabetical list of variables and click the arrow to put it into

the Line Represents box; do the same ww20;- In the

Category Labels box, select the button for Variable;- Highlight

year in the variable list on the left, and click the arrow to put it into

the Variable box;- Click OK.
The series are white

men's labor force participation (wm20) and white women's labor force participation

(ww20). The results, after some editing, should look likeChart 5.Note the upward

trend in women's rates. Surprisingly, perhaps, is the slight downward trend

in men's rates. This may be evidence of the truth contained in the joke: "Beware

a man who supports women's rights; he's usually just about ready to quit his

job."Chart 5 was created

using data for whites because that is the longest series in the dataset with

gender specific labor force participation rates. It naturally leads to the

question: Are participation rates for black men and women changing in a similar

way?Recall from Chapter

1 and your macro textbook that inflation is the percentage change in a price

index. In most cases, we use the CPI to measure inflation because price changes

for consumer goods directly affects us while price changes in producer goods

or GDP only have an indirect affect. Since producer price inflation may be passed

on through an increase in consumer prices, it seems reasonable to expect that

the two indexes would move together. Let's check, and while we are at it, we

might as well see if the GDP deflator also tracks along with the other two.First we need

to calculate the percentage change in the CPI, PPI, and GDP deflator. Before

you do this, however, make certain that the Select Cases is set to All Cases.

SPSS will do the Compute routine we specify on all cases regardless of the

setting of the Select Cases, but we will want to graph all the available data.

The formula for calculating the rate of inflation is

[(CPI_{t}

- CPI_{t-1})/CPI_{t-1}] * 100,which is the

simple percentage change formula:

[(new value

-old value)/old value] * 100.In SPSS, the

way to specify the previous value of a variable is with the Lag operator.

We will do this as follows:

- Choose

Transform from the menu bar;- Select

Compute . . .;- In the

Target Variable box type pcpi;- In the

Numeric Expression box, type ((cpi - lag(cpi))/lag(cpi))*100;- Click OK.
Note that the expression

for the calculation of the inflation rate uses lag(cpi) as the previous value

of the cpi; in the definition of the formula, it is equivalent to CPI_{t-1}.After you have

calculated the rate of inflation for the CPI, do the same for the PPI and

the GDP deflator (gdpef). Call these new variables the pppi and the pgdp.

As a first check, lets calculate the descriptive statistics for all three.

You should get means and standard deviations that are PGDP(3.30, 4.01), PPPI(3.40,

3.93) and PCPI(3.45, 4.34). Note the similarity in their means and variation.

Now let's graph them, following the steps for a multiple series line chart.The results are

displayed inChart 6.Several important

patterns are displayed in Chart 6. First, note how prices fell during the

1930s. Falling prices are called negative inflation or, more correctly,deflation.Second, there were two major periods of high inflation. This was during

and after World War II, and again in the 1970s. Can you explain why?One of the primary

reasons for calculating inflation is to enable us to adjust GDP and other

monetary variables for changes in prices. Looking back at Chart 1 for example,

we see an ever rising GDP. Yet much of the increase over time is a result

of higher prices for our output. In other words, not all the increase in GDP

that shows up in Chart 1 actually represents more goods and services. Some

of it is just higher prices for the same goods and services. If we want to

understand how our economy has grown, we really need to look at variables

after the effects of inflation are taken out. This distinction, between variables

which are not corrected for inflation and those that are, is the difference

betweennominalandreal variables. Real GDP, for example, is

the value of GDP after all the effects of higher prices have been removed.Real variables

are nominal variables that have been adjusted so that they are valued at constant

prices. This sounds a lot harder to do than it actually is, given that we

have price indexes that allow us to easily do the necessary adjustment. Using

GDP for our example, we can define real GDP as: Real GDP = (Nominal GDP/GDP

deflator) * 100.In SPSS this

is easily done:

- Choose

Transform from the menu bar;- Select

Compute . . .;- In the

Target Variable box type rgdp;- In the

Numeric Expression box, type (gdp/gdpdef)*100- Click OK.
This gives a new

series, called rgdp, which is real GDP. Since the GDP deflator has 1992 as its

base year, real GDP is the value of GDP, 1929-1996, when all goods are measured

in 1992 prices. Economists sometimes speak of real GDP as constant price GDP,

or constant dollar GDP; the reason for this terminology should be obvious. We

can compare real GDP to the unadjusted, or nominal GDP, but the results would

not tell us much. Of greater interest is a comparison of the growth rates of

GDP in real and nominal terms. In order to do this, we must first calculate

the growth rates, and then perform the descriptive statistics routine.

- Choose

Transform from the menu bar;- Select

Compute . . .;- In the

Target Variable box type rgdpg;- In the

Numeric Expression box, type ((rgdp-lag(rgdp))/lag(rgdp))*100;- Click OK.
Do the same for

the nominal value of GDP (gdp in the dataset). Note that the formula is, once

again, the percentage change formula.After calculating

the growth rates, we are ready to run the Descriptives routine:

- Select

Statistics from the menu bar;- Choose

Summarize, and then Descriptives . . .;- Highlight

rgdpg and click it into the box labeled Variables;- Do the

same for gdpg;- Click OK.
The results will

be displayed in the output window which comes to the top after the calculations

are performed. The means and standard deviations should be RGDPG(3.43, 5.53)

and GDPG(6.91, 7.72). In other words, from 1929 to 1996, the average rate of

growth of real GDP was 3.43 percent and the average for nominal GDP was 6.91

percent. The difference is approximately equal to the rate of inflation as measured

by the GDP deflator.The quantity of

money in circulation varies over time and is proportional to GDP. It is not

a constant proportion of GDP, however, because banks and other lending institutions

(for example, credit unions) create our money supply and, when times are good,

they tend to create more of it. A complete description of the mechanism through

which banks create money is beyond the scope of this workbook, but the basics

are fairly easy to explain. When I deposit my paycheck in the bank, I behave

as if it is still my money, and indeed, it is. Because we operate under a fractional

reserve banking system, banks do not keep every penny of every deposit on hand.

They lend out their deposits, which is how they make profits. After all, they

have to operate my checking account and pay me 2.0% interest on the money in

my savings account.From the standpoint

of the bank, they are obligated to pay me my money whenever I ask for it,

or to honor any checks I write on my account, and transfer the money to another

bank where my check is deposited. When they loan out my deposit, they create

new money. This follows because there is another person, the borrower, who

is walking around spending the loan they just received. They may use it to

buy a new car, or a refrigerator, or whatever; the point is that both myself

(the depositor) and the other person (the borrower) have money--and it is

the same dollars.Obviously, if

every depositor showed up at the same time and requested their money, the

bank would not be able to pay up. This happened in the 1930s when rumors of

insolvent banks spread through a town, everyone rushed down to the bank to

get their money out before it went broke, and the ensuing withdrawals caused

the bank to collapse long before every depositor was paid off. Waves of bank

failures were one of the main causes of the spread and intensification of

the Great Depression.In response,

the federal government created the Federal Deposit Insurance Corporation (FDIC).

The FDIC requires banks to pay into an insurance pool an amount that varies

with the size of the bank's deposits. Since we know our money is insured,

we tend not to worry about it, even if our own bank fails. As a result, runs

on banks are nonexistent. (This system creates its own hazards due to the

lack of incentives for depositors to be vigilant in watching their banks;

this is almost certainly a lesser problem than bank runs.)So, to summarize

the story so far, banks create money and the quantity of money varies with

GDP. We can be more explicit. The relationship between the money supply and

GDP is summarized in theequation of exchange:MV = PY,

where M is the

money supply (usually M1 or M2), V is velocity (we will return to this in

a moment), P is the price level, and Y is real GDP. Given the definitions

of P and Y, it follows that PY is nominal GDP. Velocity is defined as the

rate at which money turns over. That is, it tells us the average number of

times each dollar bill gets spent in the creation of nominal GDP. For example,

if PY is 500, and M is 100, then V would be 5, implying that on average each

dollar bill is spent five times on elements of GDP.If velocity were

constant, and if we had good control over how much money banks created, then

we could predict fairly closely what nominal GDP would be. Economists that

belong to the school known asmonetarismuse this relationship fairly

successfully to predict GDP. (That is, they fail about as badly as everyone

else that predicts GDP, but no worse.)Initially, when

monetarism presented itself as an alternative to Keynesianism in the 1950s

and 1960s, monetarists held that velocity was relatively stable, or at least

predictable. Lets examine that claim. We can calculate velocity by dividing

nominal GDP by the money supply. Depending on whether we use M1 or M2 as our

definition, we will get a different set of values for velocity; that is not

a problem as long as we are consistent in the definition of money. Lets compare

M1 and M2 velocity.

- Choose

Transform from the menu bar;- Select

Compute . . .;- In the

Target Variable box type vm1;- In the

Numeric Expression box, type gdp/m1.- Click OK.
- Repeat

the procedure for the M2 definition, and call it vm2.- Choose

Statistics from the menu bar;- Choose

Summarize, and then Descriptives . . .;- Highlight

vm1 and vm2 and click them it into the box labeled Variables;- Click OK.
Note that the velocity

of M1 is quite a bit higher than M2. Algebraically, this follows from the fact

that M2 includes M1 and therefore it must be at least as big. A graph of vm1

and vm2 shows that they have grown significantly over time (Chart 7).When velocity

grows, it implies that households and businesses are conserving on their holding

of money so each dollar turns over more often.People are more

likely to conserve on their money holdings when the opportunity cost of holding

money rises, or when it becomes easier to get along with less due to institutional

changes such as credit and debit cards, money market accounts, and so forth.

Given the scope of these changes, as well as the high interest rates of the

1970s which made it expensive to hold money (opportunity cost of money is

foregone interest), velocity has been on an upward trend. As a result, the

calculated descriptive statistics are meaningless. This follows from the fact

that the variable is constantly growing. The mean of velocity, 1947-1994,

is equivalent to calculating your average height between the ages of 2 and

15. We can do it, but it is not clear what it tells us. The graph (Chart 7)

is far more insightful.The point was

made above that it costs money to hold money. That is, money is a store of

value--wealth--that could potentially be held in many different forms, many

of which pay interest. When someone chooses to hold money instead of an interest

paying asset, they forgo the interest payment they could earn in return for

having the convenience of holding money. Money is the most easily spent form

of wealth, or in economic jargon, the most liquid. Bonds and other interest

paying assets cannot be spent directly but must be exchanged for money first.In addition to

serving as the cost of holding money, interest rates are also important because

the are the price at which firms can borrow money from financial institutions,

or lend out money if they are a financial institution. Lenders and borrowers

recognize, however, that since the value of money changes over time, the dollars

that are paid back are never worth the same as the dollars that were borrowed.

For example, suppose the inflation rate is 10% and you borrow $1,000 for one

year. When you pay back the principal, it purchasing power will have shrunk

by 10% and only be worth $900 in terms of the dollars originally borrowed.

If the interest rate was 10%, then it just offset the loss of purchasing power

of the dollars paid back, and the real cost of the loan in terms of goods

is 0%. This follows from the fact that 10% more dollars ($1,100) buys exactly

the same quantity of goods and services after one year that $1,000 bought

at the start of the year.To be specific,

we can say that therealis equal to the interest rate minus the rate of inflation.

rate of interest

We call the interest rate charged by a lender thenominalin order to indicate that it is not inflation adjusted,

rate of interest

and to distinguish it from the real rate. The algebraic representation of

this relationship isr = i - p ,

where p is the

symbol used to signify inflation.Note that firms

must guess r since when they borrow they cannot be certain what p will be

over the life of the loan. All they know for certain is the nominal rate,

i, and their expectation of inflation. Since firms base their investment decisions

on the real rate, economists pay a lot of attention to it. It is generally

assumed that, all else equal, a higher real rate leads to less investment,

and a lower real rate leads to more. Furthermore, lenders as well as borrowers

try to anticipate inflation and adjust the nominal rate in order to earn a

desired real rate. This raises the question whether real rates of interest

change over time or not. If nominal rates and inflation move together, then

real rates would be more or less constant. We can check this with our data

set.First, lets graph

nominal rates and inflation, using the percentage change in the CPI as our

measure of inflation. For nominal interest rates, we can use theprime, which is the interest rate that banks charge their most favored

rate

corporate customers. The procedure for graphing these variables is the same

with earlier graphs of multiple series. You may want to restrict the data

using the Select Cases . . . since the prime rate is only available from 1945

to 1996. Once you obtain your graph, it should look likeChart 8.We see that when

inflation spiked in the early to mid-1970s, the real rate is zero or even

negative, indicating that lenders incorrectly anticipated the price increases

and failed to raise the nominal rates appropriately. Thereafter, however,

they appear to have played it safe by charging higher nominal rates. Given

that inflation came down, this insured relatively high real rates of return.Let's check the

changes in the real rate more directly. Using Transform from the menu bar,

then Compute. . ., calculate the real rate of interest as r = prime rate -

inflation (CPI), and then graph the result. Notice the anomaly of the early

years after World War II. What might explain the pattern? Note also the rise

in r during the early 1980s, and its subsequent decline. If we leave out the

unusual period after World War II and concentrate on 1952-1996, what is the

range for real rates?The

federal deficit

is total federal receipts - total federal outlays.Each year the

federal government runs a deficit, it adds to thefederal debt,the

total amount of all past borrowing which has not been paid off. The difference

between the debt and the deficit is fundamental; even if we balance the budget,

the debt will continue at its present level until it begins to be paid off.Contrary to everyone's

expectations of just a few years ago, the 1998 federal budget appears to be

balanced and in 1999 it is projected to be in surplus. This will be the first

surplus in nearly 30 years and after the large deficits of the 1980s and early

1990s, it almost seems miraculous. Indeed, President Clinton's 1993 economic

strategy called for several years of spending reductions and tax increases

in order to stop the growth of the deficit and reduce it somewhat. Clinton's

team projected a 1998 deficit of 200 billion, while under the policies of

his predecessor, the deficit was expected to reach 343 billion by 1998. Two

hundred billion is a lot less than 343, but still a big number.Using the graph

function in SPSS, we can easily draw a picture of the federal deficit over

time. First, make sure that all years are selected:

- Choose

Data from the menu bar, then Select Cases . . .;- Click the

All Cases button;- Click Ok.
Then, create the

deficit variable:

- Choose

Transform from the menu bar, then select Compute . . .;- In the

Target Variable box, type deficit;- In the

Numeric Expression box, type fedrec - fedexp;- Click OK;
Now, make the graph:

- Choose

Graphs from the menu bar, then select Line. . .;- In the

Line Charts box, select Simple, and Values of individual cases;- Click Define;
- Highlight

deficit in the variable list box and use the arrow to move it to the Line

Represents box;- Click the

Variable button in the Category Labels box, highlight year in the variable

list box, and move it into the Category Labels box;- Click OK.
After adding titles

and adjusting the Y axis label, your graph should look likeChart 9.Judging by the

graph in chart 9, it seems that the deficit suddenly exploded in the 1980s.

This may be misleading, however, because we have not controlled for inflation.

Dollars spent in the 1940s of 1950s were far more valuable than dollars spent

in the 1980s or 1990s. If we control for inflation, then comparisons across

time are in terms of dollars with constant purchasing power, so that a 50

billion deficit in the 1940s would be equivalent in purchasing power to a

50 billion deficit in the 1990s. In order to put the deficit in real terms

(i.e., inflation adjusted terms), we must compute a new variable using the

GDP deflator:Real deficit

= [(federal receipts - federal expenditures)/(GDP deflator)] * 100.Calculate the

real deficit and graph it. What do you conclude? When were the largest deficits,

in real terms? Are the big deficits of the 1980s and 1990s still abnormally

large?Another way to

look at deficits and debts is in relation to GDP. That is, how large is the

debt or deficit when it is measured as a share of GDP? Calculating the deficit

or debt as a share of GDP is straightforward, but we first have to take into

account the different units of measurements for each variable. GDP is in billions,

while federal receipts and expenditures are in millions. The simplest procedure

is to put them both in billions by using Transform and Compute to divide Deficit

by 1000. Once the deficit is in billions, then :

Deficit as a

share of GDP = (Deficit/GDP) * 100.The advantage

of treating variables as shares of GDP is that it removes the impact of inflation

since both the numerator and denominator are measured in dollars of the same

purchasing power. Furthermore, the potential importance of variables like

debt depends on the size of the underlying economy. For example, if Bill Gates

has debts of $100 million, its pocket change, whereas for you or me, it would

be financial ruin.What is the deficit,

measured as a share of GDP, in the 1940s, 50s, 60s, 70s, 80s, and 90s? If

we compare the average deficit by decade, did it really get larger in the

1980s in relation to GDP. How does the 1980s compare to the 1970s, or 1940s?SPSS lets us

answer these questions relatively easily. First we will calculate the deficit

as a share of GDP, then we will use the Recode command to create a set of

markers for each of the decades. After that, we will be able to tell SPSS

to calculate the descriptive statistics for each decade using the Compare

Means command.Using the Recode

command, we are first going to create a new variable which will mark each

decade. For example, the new variable, called decade, will be 1 for the 1940s,

2 for the 1950s, and so forth.

- Select

Transform from the menu bar, then Recode, and Into Different Variable;- Highlight

year in the variable list and use to the arrow to move it into the Numeric

Variable -> Output box;- Type decade

in the Output Variable box and click Change;- Click Old

and New Values;- In the

Old Value box, click the Range button and put 1940 and 1949 in the two

boxes;- In the

New Value box type 1 and click Add;- Go back

to the Range boxes and type 1950 and 1959;- In the

New Value box type 2 and click Add;- Repeat

this procedure, for the 1960s and later decades;- Click Continue

and then click OK.Now we are ready

to compare the average deficits.

- Select

Statistics from the menu bar, and choose Compare Means, and then Means;- In the

Dependent List, put the name you gave to the deficit percentage variable;- In the

Independent List put decade;- Click OK.
Which decade has

the largest deficit? Did deficits really increase in the 1980s when they are

measured as a share of GDP? Which decade had the least variation in the size

of the deficit?