Tuesday, April 21, 2009

"Pretty Soon, You're Talkin' Real Money."

One of the problems we face when we discuss macroeconomics is the numbers. Back when I was much younger, a politician was purported to have said "a million here, a million there - pretty soon you're talking real money" when asked about the federal budget. When we begin to discuss issues like GDP, fiscal policy, monetary policy, or even trade flows, the absolute values are so large that they can lose meaning. Numbers of that magnitude are well beyound our ability to visualize them.

Often it helps if we reduce things to percentages and talk about the amount of change, but that may not help. Consequently this aspect of large numbers may prevent us from understanding the whole story. Absolute values are used to convey a sense that something is large. But from a larger perspective, the amount in question may not be as significant.

A case in point is this story from The Washington Post on a forthcoming meeting of President Obama's cabinet.

According to the story, the President will be asking his cabinet for a combined $100 million in budget cuts. As impressive and laudatory as that sounds - (I welcome the announcement) - Greg Mankiw provides this post which puts things into a larger perspective. And he does so in a way that is east to understand.

Share examples you use to clarify the big numbers.

This post refers to the following Powell Keystone Economic Principles:
1. We all make choices.
7. Economic thinking is marginal thinking.

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