"Numbers don't lie," goes the old adage. I don't think that is true.
Numbers do lie. Or more specifically, numbers can be made to lie. Or mean more than what they are supposed to mean. Allow me to elaborate. Today's edition of The Economic Times, India's largest business daily and the second largest business daily in the world, has this headline "Exports enter positive zone after eight months."
Prima facie there is nothing wrong with the statement. Exports grew by 0.82 percent in January 2013 to $25.5 billion. This is just little more than stagnant. But then exports can never be looked at in isolation.
How much did imports grow by? Imports rose 6.1 percent to $45.6 billion. This means that India had a trade deficit (the difference between imports and exports) of more than $20 billion ($45.6 billion - $25.5 billion). This is the second highest trade deficit the country has ever seen and you don't need to be an economist to understand that that can't be good.
While the The Economic Times story does go onto elaborate about the imports and the trade deficit without sounding negative, the headline is simply overoptimistic and partly misleading.
Let's try and convert percentages to absolutes and see what we can come up with. Exports grew by around $207.4 million in January 2013 in comparison to exports during the same period last year. What about imports? Imports grew by nearly $2.62 billion in January 2013 in comparison to the imports during the same period last year.
This means that the growth of imports was 12.6 times the growth of exports in January 2013. That is the real number. It doesn't lie. And it is worrying.
The question now is why did The Economic Times choose to highlight a minuscule (and probably even statistically insignificant) 0.82 percent rise in exports, than a rise in imports which was many times more, and clearly a sign of worry?
The first reason could be that the newspaper has a policy of highlighting positive news when there is a choice between positive and negative news. Now that I am in no position to comment on.
But the second reason, which I have clearly more proof for across newspapers, is that a lot of journalists do not understand basic fifth standard mathematics and end up committing mistakes like the one above.
I have seen stock market reporters get excited on the Sensex (India's premier stock market index) registering the highest gains during the course of a particular trading day. When you quiz them about whether they are talking percentages or absolutes, they sheepishly answer absolutes.
And how does that matter? When the Sensex is at 20,000 points, a rally of 500 points means a gain of 2.5%. When Sensex is at 10,000 points, a rally of 250 points can mean a gain of 2.5%. So while reporting losses or gains it is very important to talk in percentages and not absolutes. Obviously, saying that the Sensex has risen by 500 points makes a much better headline than saying that the Sensex rose by 2.5 percent.
Talking about headlines, a prospect of a great headline can even turn non-stories into stories in a newspaper. A story that was widely reported across the Indian media in late March 2006 was when the Sensex crossed the Dow Jones Industrial Average (the premier index of American stocks) for the first time. The Sensex was then at 11,183.48 points and the Dow was at 11,154.54 points. And so the Sensex was at a higher level than the Dow.
Nobody really asked what the two numbers actually meant? Both the Sensex and the Dow were constructed very differently and given that there was no way they could be compared. (You can read why here). But "have numbers-will compare" is a syndrome that is visible across newspapers.
Another common mistake which I have talked about earlier as well is that people tend to add or subtract percentages. My favourite example on this is that of Jerry Rao's column which appeared in The Indian Express on 6 October 2008.
"If stock market wealth drops by 50 percent in six months, we get concerned. We conveniently forget that it went up by 200 percent over the previous two years. At the end of 30 months, we are still 150 percent ahead," wrote Rao. (Read the full article here)
This is absolutely wrong. Let me explain. Let us say a particular stock is selling at Rs 100. It goes up by 200 percent to Rs 300 ( Rs 100 + 200 percent of Rs 100). After that it falls by 50 percent. The new price of the stock is Rs 150 ( Rs 300 - 50 percent of Rs 300).
This means a stock which was at Rs 100 is now quoting at Rs 150. Hence, the gain on the stock is 50 percent and not 150 percent.
Another favourite example of mine is on inflation. I don't remember how many times I have been asked "how can you say inflation is falling when prices are going up?" In fact, during the writing of this article a few years back, it took me some time to explain the concept to the individual editing the story.
What is inflation? It is the rate at which prices rise. So let us say you bought a kg of rice in 2011 at Rs 20 per kg. In 2012, the same rice is selling at Rs 30. Hence the inflation in the price has been 50 percent (Rs 10 expressed as a percentage of Rs 20). In 2013, the same rice is selling at Rs 40, which means the inflation in the price of rice has been 33 percent (Rs 10 expressed as a percentage of Rs 30). What do we have here? The price of rice has gone up by Rs 10, year on year, in both the cases. But the inflation during the first year was 50 percent. And the inflation during the second year was 33 percent.
The point here being that the rate at which prices are rising has fallen. If inflation had been 50 percent even during the second year then the price of one kilogram of rice would have been Rs 45 and not Rs 40. This is a basic point which a lot of people find it difficult to comprehend.
So yes, prices go up, even when the inflation rate goes down!
Lest I be accused of only highlighting problems with Indian newspapers here is a gem I came across in The New York Timesrecently. I am reproducing three paragraphs from the story below.
Kristina Collins, a chiropractor in McLean, Va, said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.
Ms Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.
"If we're really close and it's near the end-year, maybe we'll just close down for a while and go on vacation," she said.
What these paragraphs tell us is that Kristina Collins, the person quoted in the story, does not understand how marginal tax rates work. And neither do The New York Times journalists who wrote the story, otherwise they wouldn't have used the example in the first place.
What Collins is effectively saying in the story is that she and her husband shut shop the moment their income starts to approach $250,000. Why? The moment the income crosses $250,000 a higher rate of tax kicks in.
What Collins and the journalists have assumed is that the higher rate of tax is applicable on the total income. And that is clearly wrong. It is only applicable on the amount of income greater than $250,000. So if for the sake of argument the couple makes $260,000 during the course of the year, then the higher rate of tax is not applicable on the entire $260,000 but on $10,000 ($260,000 - $250,000).
And here is my all-time favourite mathematical blooper in a newspaper, having saved the best for the last. In a story published by The Economic Timeson 3 January 2012, it was reported that "The markets have punished the two companies. Network18' s market cap is down 171.57 percent since 5 January 2009 while TV18's has fallen 560.23 percent in the same period." (Disclosure: Network 18 is the publisher of Firstpost).
How can the market capitalisation of any company fall by more than 100 percent? Market capitalisation of a company is the number of shares the company has multiplied by its stock price. So let us say a stock is quoting at Rs 1,000. The price falls to zero (for the sake of argument) and so does the market capitalisation. In that case the price has fallen by 100 percent (Rs 1,000 expressed as a percentage of Rs 1,000) and so has the market capitalisation.
The price of any stock cannot go below zero. So the question is how can the market capitalisation fall by 171.57 percent or 560.23 percent? I have no clue. If you do, please let me know.
Vivek Kaul is a writer. He can be reached at firstname.lastname@example.org. He has worked with The Economic Times in the past.
Published Date: Feb 14, 2013 01:21 pm | Updated Date: Dec 20, 2014 03:56 pm