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How can you use scatter plots to analyze economic trends?

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Scatter plots are an effective way to explore the relationship between two variables. With this tool, you can detect patterns, trends, outliers, and correlations in economic data. In this article, you will learn how to use scatter plots to analyze economic trends and answer questions such as how income affects consumption, inflation affects interest rates, education affects unemployment, and trade affects growth.

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1 What is a scatter plot?

A scatter plot is a type of graph that shows the values of two variables as points on a coordinate plane. The horizontal axis (x-axis) represents one variable, and the vertical axis (y-axis) represents another variable. Each point on the graph corresponds to a pair of values for the two variables. For example, if you want to compare the income and consumption of different countries, you can plot the income on the x-axis and the consumption on the y-axis, and each point will represent a country.

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David A.

Economía y Empresa | Docencia | Ciencia de datos |Tecnología | Behavioral Economics
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Elaborar un gráfico de dispersión es el primer paso para identificar la relación existente en cuanto al comportamiento de dos variables. Visualmente permite identificar mediante los puntos representados en los eje x, y si hay algún patrón o comportamiento representativo, tanto en posibles casos de dependencia o independencia.

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Carson Sugden, MBA

MBA Honors Graduate | Project Management Expert | Operations Management Enthusiast | Bridging Theory to Practice | Seeking Opportunities for Impact
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A scatter plot is essential in economic analysis as it visually represents the relationship between two variables, providing insights into their correlation and trends. By plotting data points on a two-dimensional graph, it allows analysts to identify patterns, outliers, and potential trends, aiding in the recognition of economic dynamics. The visual simplicity of a scatter plot makes it a powerful tool for quickly grasping the direction and strength of relationships between variables, facilitating informed decision-making in economic analysis.

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Michael Palacios, MBA, MAcc

Vice President - Capital Planning / Forecasting at Citi
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Scatter plots are powerful tools in analyzing economic trends as they allow for the visual representation of the relationship between two variables. In the context of economic analysis, scatter plots can be employed to illustrate correlations between different economic indicators or variables. By observing the pattern of the points, analysts can discern trends, patterns, or potential outliers that may signify economic phenomena. Scatter plots can also be valuable in identifying potential cause-and-effect relationships or correlations between economic factors. Additionally, they can be instrumental in detecting potential anomalies or shifts in economic trends, providing valuable insights into the overall health and dynamics of an economy.

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2 How to interpret a scatter plot?

A scatter plot can reveal several aspects of the relationship between two variables, such as the direction, strength, shape, and outliers. For instance, if the points form a tight line, it suggests a strong relationship between the variables. Or if the points form a curve that bends upward, it indicates a nonlinear relationship. Additionally, outliers may be identified if there is a point with a very high or low value for one or both variables. By analyzing these aspects of the relationship between two variables, you can gain valuable insights into how they are related.

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3 How to create a scatter plot?

Creating a scatter plot from your data can be done with various software tools and online platforms like Excel, Google Sheets, R, Python, and Tableau. The process involves choosing two numerical and continuous variables to compare, organizing them in a table or spreadsheet, selecting the data range to insert a scatter plot chart from the menu or toolbar of your software tool, customizing the chart with labels, titles, axes, gridlines, legends, and other elements as needed, and finally analyzing the chart for the direction, strength, shape, and outliers of the relationship between the two variables.

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4 How to use a scatter plot for economic analysis?

A scatter plot can help you answer various economic questions by comparing different indicators, such as GDP, inflation, unemployment, trade, education, health, and so on. For instance, you can use it to explore the consumption function, examine the Phillips curve, investigate the human capital theory, and analyze the trade-off between trade and growth. For example, when plotting consumption on the y-axis and income on the x-axis for the consumption function, you can expect to see a positive and linear relationship - meaning that higher income leads to higher consumption. When plotting inflation on the y-axis and unemployment on the x-axis for the Phillips curve, you can expect to see a negative and nonlinear relationship - meaning that lower unemployment leads to higher inflation. And when plotting growth on the y-axis and trade on the x-axis for the trade-off between trade and growth, you can expect to see a positive and nonlinear relationship - meaning that higher trade leads to higher growth but at a decreasing rate.

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David A.

Economía y Empresa | Docencia | Ciencia de datos |Tecnología | Behavioral Economics
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El principal indicador que permite confirmar el sentido de la correlación que justifica el sentido o signo implícito en la relación de dos variables es la covarianza. La covarianza es resultado de calcular la media aritmética respecto a los productos en las desviaciones respecto a sus medias de cada una de las variables representadas. Una covarianza de valor 0 implicará independencia estadística. Un resultado mayor de cero implicará correlación positiva, en ese caso ambas variables aumentarán o disminuirán a la par. Menor de cero implicará que las variables crecen o decrecen inversamente una respecto a la otra.

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5 How to improve your scatter plot skills?

A scatter plot is a versatile and useful tool for economic analysis, but it also has some limitations and challenges. For example, a scatter plot cannot show causality, only correlation, which means that you cannot infer that one variable causes another based on the scatter plot alone. You also need to be careful about choosing the appropriate scale, range, and units for your axes, as they can affect how you interpret the data. Moreover, you need to be aware of the potential sources of error and bias in your data, such as measurement errors, sampling errors, omitted variables, and confounding factors.

To improve your scatter plot skills, you can practice by creating and interpreting scatter plots from different data sets and sources. You can also learn from other experts and researchers who use scatter plots in their work. You can find many examples of scatter plots in economic journals, reports, blogs, and websites. You can also use interactive tools and platforms that allow you to explore and manipulate scatter plots in real time. Some of the most popular ones are Gapminder, Our World in Data, and The World Bank Data Visualizer.

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David A.

Economía y Empresa | Docencia | Ciencia de datos |Tecnología | Behavioral Economics
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En mi experiencia personal me ha resultado fundamental la fase previa de preparación de los datos. Los valores atípicos, en cualquiera de las dos variables, pueden distorsionar los resultados y la visualización de la figura lineal o de otra índole que soporta la relación existente entre ambas xy. Por tanto un esfuerzo en esta fase de depuración retornará sin duda una mayor fiabilidad en la interpretación posterior.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you use scatter plots to analyze economic trends?

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1 What is a scatter plot?

2 How to interpret a scatter plot?

3 How to create a scatter plot?

4 How to use a scatter plot for economic analysis?

5 How to improve your scatter plot skills?

6 Here’s what else to consider

Economics

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How can you use scatter plots to analyze economic trends?

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6

1 What is a scatter plot?

2 How to interpret a scatter plot?

3 How to create a scatter plot?

4 How to use a scatter plot for economic analysis?

5 How to improve your scatter plot skills?

6 Here’s what else to consider

Economics

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