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October 01, 2007

Beware of comparisons

Economic comparisons are made all the time. But N.C. State University economist Mike Walden says that you need to be careful when making such comparisons. Listen

There are ... two big things here. One is to make sure that when you are comparing anything in dollar value -- income, price, cost, profits, whatever -- that you adjust for inflation," says Dr. Walden, a professor of agricultural and resource economics. "Another way of saying it (is) you adjust for the rising cost of living.

"So what this means of course is $1,000 in the year 2000 is actually higher in purchasing power than $1,000 today. And you need to make that adjustment to account for inflation," he explains. "And fortunately, fortunately many media stories now do that. So you'll read an article, and you'll see in parentheses 'in inflation-adjusted dollars' or 'in 2007 dollars.' That means inflation has been accounted for.

"The second thing you need to be careful of is the business cycle," he adds. "Our economy goes through a pattern of economic ups and downs, and if, for example, you choose some dollar value in a past year when the economy is up and you compare it to this year when the economy is down, then obviously this year is going to look worse.

"So what you want to try to do is to compare dollars in years when we were at the same point in the business cycle," he concludes. "That's a little trickier, but again it's something to keep in mind.

Posted by deeshore at October 1, 2007 08:01 AM