Trends are everything

As the new year begins we must start watching what is going on in the world. This is vital as any study of economics divorced from the real world is hardly relevant.

For VCE the key variables are inflation, unemployment, the current account and national output. It is necessary to look carefully at these figures and understand them and we will spend some time of this as the year progresses.

An important point to make is that we should look at trends and try to look past short term fluctuations. One or two observations do not make a trend, it takes six months to see a new trend in employment and thirty years to see a new trend in climate change. Often we need to look at data on the right scale.

Further the general principle of watching what is going on in the world means noticing a far wider set of variables. The Age has an article on some economic trends to watch. The interesting thing about this article is that many of the trends are heading in the opposite direction to the one you might expect.

Take the rubbish that was talked about 'Peak Oil' in recent years. The argument was that the supply of oil had got to the point where more oil had been used than was left in the Earth. There were numerous obvious flaws with this argument, not least of which was that the price mechanism would cause the price of oil to rise and this makes new sources of supply profitable.

Since the idea of 'Peak Oil' was first put forward each year has seen more new oil reserves discovered than the world has used up in consumption. People are now realising the flaw in the 'Peak Oil' argument, but the simple application of economic theory and using the right data would have shown this before (see my blog posts in 2010 and 2011 for proof).

The Age article is here. Please look at the various suggestions for what is important in the coming year.