Excerises in Pcgive 10

Bo Sjö 2013-10-31

Exersise 0: Ms. Klein the ‘Astronomical Costs’ of Advertising – Can you call her bluff?

There is no hand-in for this exercise.

Introduction

Econometrics is a powerful tool but so is also simple graphics. This is an exercise in how to use simple graphics to reveal obvious lies and present a more accurate picture of the real world. It is also an exercise in using econometric programs to transform data series. The data for this exercise is in an Excel file called klein.xls.

Learning Objectives

Lear how to enter and transform data in Eviews (and PcGive), create graphs. Eviews is not that developed in creating graphs, compared to (Pcgive) but it is ok.

Any economist needs to know how to use econometric software, to transform data in various ways, take logs, create ratios, calculate real values etc, and make graphs to show what you want to show, which is single data series, data plotted against each other, and graphs with a regression line. This is a simple exercise aiming at make you familiar with the program so you can work with the other exercises.

Background

In 1999, Ms Naomi Klein wrote book called “No Logo”. The book was one of the many anti- globalisation books published in the 90s. A revised second edition was published in 2009. A scared middle class in the rich world started to fear that they could loose their jobs and/or be forced to reduce their wages because of greater competition from a raising educated middle class in countries like India and China.

Ms Klein made a small fortune from her book and became highly celebrated by the anti- globalisation movement. Needles to say, Ms Klein has never studied economics, or marketing.

In the book Ms Klein storms against big multinational companies, global capitalism and in particular the use of brand names (No Logo) etc. etc.

In her book, page 19 (paperback ed. 1999), she claims that the spending on advertising of US firms has risen astronomically during the last 20 years. She supports the claim with a graph of total add expenditure by US firms over 1979-1998.1 Let us check Ms Klein claims.

1 The actual figure in the book starts from the 1930s, but there not that many data points in her sample before 1979.

1 200 Total Ad Expenditure in the U.S. 1979-1998

1980 1985 1990 1995 2000

Let us investigate Ms Klein’s “astronomical” figures, first by redoing the graph and put advertise expenditure in relation to consumer prices, consumption and GDP. Redo the graph.

Can you call her bluff?

Getting the data into and out of the program

Input data

The file Klein.xls contains three data series:

Usadexp: total expenditure on advertising in the U.S. 1979-1998, nominal values. CPI: U.S consumer price index, base year 1995. GDP: U.S. Real gross domestic product for the U.S. as an index series with base year 1995.

Redo the graph

As you observe, the data is non-stationary, the mean is constantly changing (growing) over the sample. Transform the graph into log difference to see how the growth rate is behaving over time.

The advertise series is in nominal terms. And, you know that nominal values cannot be compared over time. Any person with a basic understanding in economics knows what to do next.

To transform the nominal figures into real figures, use the CPI series. To make the outcome look nice, first divide CPI with 100 to make the base year 1995 become 1.0 instead of 100, and save it as a new series.

Next transform the USadexp series, by dividing it with cpi_100. You have now created a series of advertising expenditure in real terms.

Now graph this series. Is there a difference, compared to the nominal series?

It seems that ad expenditure is increasing, not as much in real terms as in nominal. However, a person with basic understanding in economics would say that ad expenditure is increasing with the growth of the economy. Over time, the US economy is growing in real terms, so all types of expenditure might rise with the increased GDP. If the US economy is growing in an astronomical way, so will most likely the costs of promoting the sales of goods.

2 To see if ad expenditure is really growing, compare real ad expenditure (Usadexp) with real GDP in a graph. Next put ad expenditure in relation to the overall growth of the economy. Now, ask where is the astronomical growth in ad expenditure?

Let us redo the content of the graph in a different way. In graphics menu pick real us ad expenditure and U.S. GDP. Do a scatter plot between GDP and real ad exp. together. This illustrates how advertising follows GDP in the ling run.

Next, add text to the graph.

To confirm this, and really prove our point, create log differences of real ad expenditure (=% growth), and log differences of GDP. Next, redo the scatter plot with these growth rates, put in a regression line.

With this final graph, you are able to demonstrate that ad expenditure is simply a function of the business cycle. When GDP goes up so does ad expenditure, when GDP goes down so does ad expenditure. Life is tough for people working with marking.

And, by the way, you just pulverized Ms Klein's most basic argument for writing the book.

If you graph Ad expenditure over total consumption you something like this:

This graph is from PcGive, whatever te program you should be able to do a similar graph with the same information.

Final technical note:

Remember, in this exercise our target audience was “the general public”. If we address a more scientific forum, we should also transform the real variables to logs (natural logarithms). This is so because series such as GDP has a tendency to grow over time so that not only the mean is increasing over time but also the variance. Logarithmic transformation will transform changes into approximately percentage changes. Thus, log transformation make the variance even and comparable over time, and a regression model and the tests of the model will behave in a better way.