What Statistics Does?
It is understood that Statistics is an indispensable tool for an economist that helps him to understand an economic problem. After using its various methods, effort is made to find the causes behind it with the help of the qualitative and the quantitative facts of the economic problem. After identifying the causes of problem , it is easier to formulate certain policies to tackle it. But there is more to Statistics. It enables an economist to present economic facts in a precise and definite form that helps in proper comprehension of what is stated. When economic facts are expressed in statistical terms, they become exact. Exact facts are better than vague statements. For example, if we say that with precise figures, 2300 people died in the recent earthquake in Gujarat, is actual fact and it is called statistical data. Whereas, saying thousands of people died, is not. Statistics also helps in contract the mass of data into a few numerical measures (such as mean, variance etc., about which you will learn later). Such measures help summarise the given data.
For example, if the number of people is very large, then it is impossible for you to remember the incomes of all the people in a data. But, it is easy to remember a summary figure like the average income that is obtained statistically. In this way, Statistics summarises and gives meaningful data which also gives overall information about a mass of data.
But statistics is used in finding relationships between different economic factors. An economist is interested in finding out what happens to the demand for a commodity when its price increases or decreases? Or, would the supply of a commodity be affected by the changes in its own price? Or, would the consumption expenditure increase when the average income increases? Or, when the government expenditure increases? what will happen to the general price level. If any relationship exists between the various economic factors that have been stated above, then in that case such questions can be answered. After applying statistical methods to their data, we can easily verify whether such relationships exist or not. In some cases, the economist might assume certain relationships between them and like to test whether the assumption she/ he made about the relationship is valid or not. Only by using statistical techniques, the economist can solve this.
In another instance, the economist might be interested in predicting the changes in one economic factor due to the changes in another factor. For instance, she/he might be interested in knowing the impact of today's investment on the national income in future. Such an exercise cannot be undertaken without the knowledge of Statistics. Sometimes, formulation of plans and policies requires the knowledge of future trends.
For example, an economic planner has to decide in 2005 that how much the economy should produce in 2010. In other words, one must know could be the expected level of consumption in 2010 in order to decide the production plan of the economy for 2010. In this situation, one might make subjective judgement based on the guess about consumption in 2010. Or a person must use statistical tools to predict consumption in 2010.
This may be based on the data of consumption of past years or of recent year obtained by surveys. Thus, statistical methods help to create appropriate economic policies that solve economic problems.
Statistical methods are no substitute for common sense!
There is an interesting story which is told to make fun of statistics. It is said that a family of five persons (father, husband, wife and two children). Once they set out to cross a road. The father knew the average width of the pit. So he calculated the average height of his family members. Since the average height of his family members was greater than the average width of the pit, he thought they could jump safely. But on the other hand, some members of the family (children) were fallen down while jumping the pit. Is the fault lie with the statistical method of calculating averages or with the misuse of the averages?