Is an absolute number or a relative one more illuminating? The issue arises as frequently in everyday life as in economics. A short, overweight person drops from 130 to 120 pounds. A tall one goes from 320 to 300. Who lost more? In absolute terms, the taller person lost twice as much weight, 20 lbs versus 10. But the short person lost 7.7 percent of starting body weight versus 6.25 percent for the tall one. Who was the more successful dieter?
Conor Masterson, the Minnesotan recently killed in Afghanistan, was the nation’s 311th death in that area. The same day, Canada suffered its 51st Afghanistan death. The United States has lost six times as many people in that war, but our population is nine times as large. Who is making the greater sacrifice?
More U.S. economists have won the Nobel Prize than those of any other nation. The U.S. tally of 31 is more than four times that of runner-up Britain, with seven. On a per-capita basis, however, we would need 130 laureates to match Norway, which has had two, out of a population of 4.6 million. Which country produces more great economists?
Suppose the Army Corps of Engineers can build Project A at a cost of $1 million. The benefits, all converted to today’s dollars, total $1.25 million. It can build Project B for $20 million. The benefits are $20.6 million. Project B has more than double the net present value of A, $600,000 versus $250,000. The benefit/cost ratio for A is 1.25 to 1, however, while that of B only 1.03 to 1. Which should the government choose?
A few years ago when some European leaders said the United States gives little in foreign aid, then-Secretary of State Colin Powell disagreed. Didn’t they know, he argued, that the United States gives more assistance than the French and British–the next two largest donors–combined? This is true, but compared to gross domestic product, those two nations give at a rate triple that of the United States. Sweden’s percentage is six times as high.
In most cases you have to consider both absolute and relative measures to put most things in context. Taking either in isolation often gives an incomplete picture.
Be careful about computing rates over very small bases. The economics Nobel champion, by birth if not citizenship, is the Caribbean Island of St. Lucia. The United States would have to have 1,923 laureates to match the per-capita rate represented by Arthur Lewis, St. Lucia’s one winner.
Similarly, very short-term growth can look enormous when translated into effective annual rates. If you sold December corn futures on Thursday, March 29, before a key USDA report came out, and bought them back the next Monday, you earned a $2,000 profit on a margin deposit of $1,350 in just four days. Converted to an annualized rate, the return on investment is astronomical. But don’t jump into futures markets unless you have at least one shirt to lose.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.