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Data needed
last updated:
Friday, March 17, 2008
(INFERENTIAL STATISTICS -- inferring from a sample to a population using the laws of probability)
How confident can one be that the sample mean (or proportion) represents the population as a whole?
confidence interval (mean)
one interval variable
inverse: given a specific confidence interval, what is the needed sample size?
confidence interval (proportion)
one nominal variable
Do differences found in a sample (a subset of the population) reflect differences in the
population as a whole? (commonly used to generalize from survey results)
two categorical variables
an interval variable divided
into two categories
a nominal variable divided
into two categories
chi-square
difference of means
difference of proportions
Cost-benefit analysis
251437191.xls.ms_office
Overview
11/17/2014 6:52 AM
that is, how confident are you that your sample estimate comes close to the populat
one interval variable
enter data
in yellow cells
Data needed:
sample mean (X)
std dev of sample (s)
sample size (n)
value of t-score for.025 (two-tail test) -- from t-table or let Excel calculate
X t.025
24,000
36,000
24,000
36,000
12,000
12,000
4
5
74,000
46,000
74,000
46,000
27,000
27,000
23,000
23,000
8
9
10
11
12
13
14
15
16
69,000
107,000
53,000
29,000
34,000
43,000
28,000
24,000
43,000
69,000
107,000
53,000
29,000
34,000
43,000
28,000
24,000
43,000
MEAN
STDEV
n
t
42,000
24,105
16
2.131
SO:
u=
42,000 +/-
0.05
20,000
40,000
60,000
X t.025
s
n
12,845
29,155
54,845
25,690
80,000
100,000
that is, how confident are you that your sample estimate comes close to the populat
one interval variable
Here we will skip using the raw data and instead calculate with the summary data (mean, std dev., n)
Data needed:
sample mean (X)
std dev of sample (s)
sample size (n)
value of t-score for.025 (two-tail test) -- from t-table or let Excel calculate
enter data
in yellow cells
MEAN 42,000
STDEV 5,000
n
384
t
SO:
u=
1.966
42,000
0.05
Confidence Interval
20,000
40,000
X t.025
+/-
s
n
502
40,000
60,000
80,000
100,000
that is, how confident are you that your sample estimate comes close to the populat
one interval variable
Here we will skip using the raw data and instead calculate with the summary data (mean, std dev., n)
Data needed:
sample mean (X)
std dev of sample (s)
sample size (n)
value of t-score for.025 (two-tail test) -- from t-table or let Excel calculate
MEAN
42,000
STDEV
5,000
c (confidence interval range) 500
t
enter data
in yellow cells
SO:
u=
1.960
lower end of co
upper end of co
range
0.05
given values of stdev and c and confidence level, we calculate "n":
384
NOTES:
1. For the value of "t", we simply
assumed a large sample size (t --> Z),
e.g., for 95% confidence interval (2tailed), t = 1.96.
2. We are also assuming a large
population size (M), so that N/M --> 0.
20,000
X t.025
s
n
42,000 +/-
500
t.025 s
n
c
Confidence Interval
t.025 s 2
n(
)
c
20,000
40,000
60,000
80,000
100,000
t.025
s
n
mple size)
t.025 s
t.025 s 2
(
)
c
Data needed:
sample proportion (P)
enter data
in yellow cells
P 1.96
0.05
P
n
50%
100
SO:
p
0.500 +/-
1.984
Confidence Interval
0%
10%
20%
30%
40%
50%
60%
70%
(nominal data)
P(1 P)
P 1.96
n
in percent
70%
80%
0.099
9.9%
0.401
0.599
0.198
40.1%
59.9%
19.8%
90%
100%
Chi-Square
rural
1
1
2
4
4
4
4
12
enter data
in yellow cells
strong
medium
weak
city suburb
1.3333 1.3333
1.3333 1.3333
1.3333 1.3333
4
4
rural
1.3333
1.3333
1.3333
4
4
4
4
12
###
fo
range: 0 to 1
strong
medium
weak
city suburb
rural
-0.6667 0.3333 0.3333
0.3333 -0.6667 0.3333
0.3333 0.3333 -0.6667
0
0
0
Page 11
fe
fe
0
0
0
0
Chi-Square
nter data 20
yellow cells
16
12
8
12
16
20
12
4
( fo fe )
fe
2
fo
observed frequencies
fe
expected frequencies
fe
Page 12
The t distribution is used for hypothesis testing with small samples (e.g., smaller than about 100 cases)
the t distribution is similar to the z distribution, but is "flatter" because of the smaller sample size.
When the sample size gets large (e.g., over 50-100), the t distribution approaches that of the Z distribution (a normal c
d.f.
tails
5
2
1.000
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3
1.000
0.950
0.924
10
2
50
1000
Probabilities
and t-scores for various degree
2
2
test)
1.000
1.000
1.000
0.922
0.921
0.920
0.849
0.845
0.842
0.842
0.900
0.776
0.770
0.765
0.764
0.706
0.698
0.691
0.689
0.850
0.638
0.628
0.619
0.617
0.800
0.575
0.562
0.551
0.549
0.515
0.500
0.487
0.484
0.750
0.460
0.442
0.427
0.424
0.409
0.389
0.372
0.368
0.700
0.363
0.341
0.322
0.318
0.321
0.297
0.277
0.272
0.650
0.284
0.258
0.236
0.230
0.600
0.250
0.223
0.200
0.194
0.220
0.192
0.168
0.162
0.550
0.194
0.165
0.140
0.134
0.170
0.141
0.116
0.110
0.500
0.150
0.120
0.095
0.089
0.132
0.102
0.078
0.072
0.450
0.116
0.087
0.063
0.058
0.400
0.102
0.073
0.051
0.046
0.090
0.062
0.041
0.036
0.350
0.079
0.052
0.032
0.028
0.070
0.044
0.026
0.022
0.300
0.062
0.037
0.020
0.017
0.054
0.031
0.016
0.013
0.250
0.048
0.026
0.012
0.009
0.043
0.022
0.009
0.007
0.200
0.038 the 0.050.019
0.007
level is by convention used0.005
as the threshold of
0.150
0.034 statistical
0.016
0.004 we use an even more
significance0.006
(though sometimes
0.030 strict level,
0.013
0.004
0.003
such as 0.01
or even 0.001
0.100
0.050
0.000
0.5
1.5
Degrees of freedom
5
10
50
1000
2
differences (t-scores)
2.5
difference of means
Factor
Case
1
2
3
4
5
6
7
8
9
10
11
12
50
Male Income
69,000
77,000
46,000
59,000
55,000
50,000
38,000
63,000
50,000
56,000
74,000
50,000
45
Female Income
49,000
67,000
69,000
64,000
30,000
68,000
73,000
61,000
61,000
48,000
72,000
57,000
Mean
Std Dev.
57,250
11,702
59,917
12,428
female
Factor
80
75
CaseMale Income
Female Income
1
40,000
72,000
2
42,000
34,000
3
83,000
65,000
4
100,000
34,000
5
100,000
86,000
6
86,000
86,000
7
104,000
67,000
8
70,000
64,000
9
37,000
79,000
10
62,000
78,000
11
88,000
85,000
12
72,000
83,000
Mean
Std Dev.
73,667
24,092
69,417
18,372
female
mean
mean
Male
mean
mean
Male
20,000
40,000
60,000
80,000
100,000
20,000
40,000
60,000
80,000
100,000
Male Income
Mean
57250
Variance
136931818.2
Observations
12
Pooled Variance
145689393.9
Hypothesized Mean Difference 0
df
22
t Stat
-0.541
P(T<=t) one-tail
0.297
t Critical one-tail
1.717
P(T<=t) two-tail
0.594
t Critical two-tail
2.074
Female Income
59916.66667
154446969.7
12
fail to
reject
Page 15
fail to
reject H
difference of means
Data Needed:
number of cases for each of the two groups
sample means for the two groups
standard deviation for each group
Hypothesis (no difference between the two population means):
1 2
i.e., 1 2 0
How to calculate t (note; EXCEL will do this all for you -- so do don't need to really use this formula)
(X1 X2 ) ( 1 2 )
t
_ _
X 1 X 2
SINCE WE HYPOTHESIZE U1=U2, OR U1 -U2 = 0, then the (u1-u2) drops out of the numerator of the equation for t
(X 1 X 2 )
t
_ _
X1 X 2
the formula for the standard error (the denominator of the equation for t)
X1X2
12 22
N1 N2
Page 16
difference of means
if we can assume the same standard deviation of the populations ("equal variance")
N1 N 2
X1X 2
N1 N 2
Page 17
difference of means
Bigger DOM
Factor
80
70
CaseMale Income
Female Income
1
37,000
55,000
2
105,000
40,000
3
52,000
82,000
4
58,000
97,000
5
107,000
56,000
6
105,000
44,000
7
96,000
39,000
8
86,000
70,000
9
82,000
77,000
10
104,000
79,000
11
71,000
44,000
12
100,000
47,000
Mean
Std Dev.
83,583
23,922
60,833
19,441
female
mean
Male
mean
100,000
120,000
20,000
40,000
60,000
80,000
100,000
g Equal Variances
emale Income
fail to
reject H0
reject H0
Page 18
120,000
difference of means
Page 19
Diff of Proportions
Case
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
City Residents
42
-22.7%
0.79545
0.40337
0.12162
t-score
-1.86871
Prob-t
0.068649
Page 20
Diff of Proportions
Suburban Residents
2 or t >
he .05 level.
at one could get
a population
and suburban
Page 21
Mean
10.0% 20.0%
n of cases 150
120
degrees of freedom (n1 +n2-2) 268
t-score
Numerator:-10.0%
pu
0.14444
sqrt(pu,qu)0.35154
denominator=
0.04305
t-score
-2.3226
Prob-t
0.0209
Page 22
ANOVA
50
100
ANOVA
Source of Variation SS
Between Groups21054.6364
Within Groups 242243.727
Total
263298.364
Sum
1397
2295
2146
df
2
63
Average
63.5
104.318182
97.5454545
Variance
2672.64286
5471.65584
3391.11688
MS
10527.3182
3845.13853
F
2.73782547
P-value
0.07241657
F crit
3.14280868
65
Page 23
ANOVA
While sample groups with high internal variation and low variation across groups have
a greater chance of representing populations with no real differences.
Anova: Single Factor
SUMMARY
Groups
Count
City Residents
22
Suburban Residents
22
Rural Residents
22
ANOVA
Source of Variation SS
Between Groups32248.5758
Within Groups 225825.545
Total
258074.121
Sum
1197
2295
2146
df
2
63
Average
54.4090909
104.318182
97.5454545
Variance
1890.82468
5471.65584
3391.11688
MS
16124.2879
3584.53247
F
4.49829595
65
Page 24
P-value
0.01492455
F crit
3.14280868
ANOVA
Rural Residents
20
30
40
40
50
50
60
60
70
75
80
mean
90
100
100
111
120
130
150
170
170
180
250
97.5
150
200
level
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
250
300
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
350
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.2
400
SS
be twe en d . f .
F SSw ithin d. f .
SSbetween sum of squares between the groups
SSwithin sum of squares within the groups
d.f. = degrees of freedom
Page 25
Page 26
Case
x
y
1
0
0
2 0.1
0.1
3 0.2
0.2
4 0.3
0.3
5 0.4
0.3
6 0.5
0.4
7 0.6
0.5
8 0.7
0.6
9 0.8
0.7
10 0.8
0.8
11 0.9
0.9
12
1
0.9
correlation+0.99
Case
x
1 0.2
2 0.3
3 0.4
4 0.4
5 0.5
6 0.5
7 0.5
8 0.5
9 0.6
10 0.6
11 0.7
12 0.8
correlation
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
F
### 0 0 0.1 0.2 0.3
p value
0.00
correlation (range: -1 < r < +1)
0.4
0.5
0.6
0.7
0.8
0.9
F
p value
Case
x
y
1
0
1
2 0.1
0.9
3 0.2
0.8
4 0.3
0.7
5 0.4
0.6
6 0.5
0.5
7 0.6
0.3
8 0.7
0.4
9 0.8
0.2
10 0.8
0.2
11 0.9
0.1
12
1
0
correlation -0.99
F
p value
###
0.00
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Case
x
1
0
2 0.1
3 0.2
4 0.3
5 0.4
6 0.5
7 0.6
8 0.7
9 0.8
10 0.8
11 0.9
12
1
correlation
F
p value
y
0.5
0.4
0.6
0.4
0.8
0.3
0.5
0.6
0.3
0.8
0.2
0.5
-0.09
0.1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.79
1
y
0
0.2
0.4
0.6
0.8
1
1
0.8
0.6
0.4
0.2
0
+0.07
0.0
0.84
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Case
1
2
3
4
5
6
7
8
9
10
11
12
x
0.8634
0.5109
0.691
0.95
0.2146
0.7882
0.5534
0.5532
0.4124
0.3131
0.1139
0.1786
y
0.3088
0.2311
0.9983
0.1494
0.7479
0.6823
0.4609
0.9613
0.3507
0.9722
0.3687
0.3059
0.9
0.8
0.7
0.6
F
0.1
p-value 0.745
P-Value: this is the probability
that the x-y relationship found in
the sample cases -- expressed as
an r-value -- is simply due to
random variation, and that if one
looked at the population as a
whole, there would be no
relationship. If p<.05, we
generally conclude that the
relationship is statistically
Hit "recalculate now" to
see a new set of numbers
(note: on a MAC this is "COMMAND ="
0.5
0.4
0.3
0.2
0.1
0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.6
0.7
0.8
0.9
-0.95 # # # # # # # # # # # # # # # # # # 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1
92.5641 # # # # # 7 6 4 3 3 2 1 1 1 0 0 0 0 0 0 0 0 0 1 1 1 2 3 3 4 6 7 # # # #
2.3E-06 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0
12
1
0.95
ABOVE the .05 line: relationship
NOT statistically significant at the
0.9
0.05 level
0.85
r
F=
sign F
n
0.8
0.75
0.7
0.65
0.6
0.55
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
-1
0.1
Value of r
0.2
0.3
0.4
0.5
0.6
0.7
0.8
11
##
00
a range of -1
probabililty
as a whole
red line:
critical
value: .05
0.8
0.9
D
D
D
D
D
D
D
D
D
E
E
E
E
E
E
E
20%
52%
46%
38%
24%
27%
26%
50%
30%
11%
10%
14%
10%
11%
41%
22%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
60,928
49,790
51,994
54,799
59,676
58,654
58,771
50,643
57,515
59,173
59,437
58,202
59,436
59,076
48,778
55,147
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
68000
68000
68000
68000
68000
68000
68000
68000
68000
63000
63000
63000
63000
63000
63000
63000
correlation
-0.43
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
case
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
percent of
hhd trips
"The ecological fallacy consists in thinking that re
using public
invisible
invisible for groups necessarily hold for individu
observed
factor
constant1
0 range 0 Fallacy"
to 1
city
transit
hhd income factor
source:
"Ecological
Inference and the Ecological
0 to 1 of California,
A
64% $
57,748
0.5 A. Freedman
80000 constant2
0 range
David
(Department of Statistics,
University
A
61% $
58,767
0.5
80000
3 range
high
to 1 & Behaviora
Prepared
for theconstant3
International Encyclopedia
of the
Social
A
52% $
61,738
0.5
80000
Technical
Report No. 549, 15 October 1999.
pdf0.5
file accessed
A
58% $
59,687
80000 Jan. 13, 2002, http://www.stanford.edu/class/ed260/f
A
69% $
55,707
0.5
80000
A
67% $
56,473
0.5
80000
A
75% $
53,775
0.5
80000
A
57% $
60,074
0.5
80000
A
81% $
51,761
0.5
80000
A
67% $
56,494
0.5
80000
B
66% $
51,894
0.4
75000
B
57% $
55,087
0.4
75000
Scatterplot; unit of analysis: in
B
45% $
59,280
0.4
75000
one seesunit
patterns
in the indivi
Scatterplot;
of analysis:
indiv
B
50% $
57,581
0.4
75000
This
example:
B
53% $
56,602
0.4
75000
$65,000
B
53% $
56,337
Is there
a relationship
between0.4use75000
of
$65,000
B
68%
$
51,028
0.4
75000
public transit and hhd income?
B
60% $
0.4
75000
$60,000
$60,000
Aggregate
data
(unit53,913
of analysis:
B
63% $
52,819
0.4
75000
city):
positive
relationship
B
67% $
51,662
0.4
75000
$55,000
$55,000
Individual
data
(unit 53,907
of analysis:
C
46% $
0.3 hhd):
70000
C
43% $
54,781
0.3
70000
negative
relationship
$50,000
$50,000
C
57% $
49,885
0.3
70000
C
58% $
49,842
0.3
70000
$45,000
DANGER:
making
an
ecological
C
38% $
56,742
0.3
70000
$45,000
fallacy
-- using
data
C
51% $ aggregate
52,198
0.3to 70000
$40,000
C
39% $
56,205
0.3
70000
0%
10%
20%
30%
$40,000
C
40% $
56,016
0.3
70000
0%
10%
20%
30%
Percent of hhd trips
C
35% $
57,779
0.3
70000
Percent of hhd trips by p
C
42% $
55,416
0.3
70000
D
48% $
51,254
0.2
68000
$57,000
$56,500
$56,000
$55,500
$55,000
E
E
E
F
F
F
F
F
29%
20%
19%
3%
6%
17%
30%
1%
$
$
$
$
$
$
$
$
52,822
55,841
56,426
58,852
57,908
53,971
49,420
59,539
0.1
0.1
0.1
0
0
0
0
0
63000
63000
63000
60000
60000
60000
60000
60000
56
57
58
59
60
F
F
F
F
F
3%
13%
20%
10%
8%
$
$
$
$
$
59,072
55,532
53,016
56,452
57,257
0
0
0
0
0
60000
60000
60000
60000
60000
percent of
hhd trips
using public
transit
65%
58%
45%
36%
19%
11%
$
$
$
$
$
$
AGGREGATED DATA
CITY
A
B
C
D
E
F
hhd income
57,222
54,620
54,277
55,402
56,434
56,102
48
49
50
51
52
53
54
55
$55,000
$54,500
$54,000
0%
10%
20%
correlation
-0.12
ogical Fallacy"
s, University of California, Berkeley)
ange
high
to 1 & Behavioral Sciences,
of the
Social
stanford.edu/class/ed260/freedman549.pdf
30%
30%
40%
40%
50%
50%
60%
60%
70%
70%
80%
80%
90%
90%
20%
30%
40%
50%
60%
70%
Multiplier
Twin Peaks
Local
Services
Timber
2,000
1,000
3,000
Mutliplier
3.0
Page 37
Multiplier
Page 38
Multiplier
port employment
TOTAL JOBS
d timber economy:
Page 39
Location Quotients
EXAMPLE: You are given data for the town of Icarus in the far-away country of Daedalus
Icarus Daedalus
Population
20,000 2,500,000
Annual Gross Per Capita Income
$17,000
$25,000
Total Employment
10,000 1,000,000
Agricultural Emp.
1,000
50,000
Govt Employment
300
100,000
Private Service Emp.
4,000
500,000
Airplane Manufacturing Emp.
700
10,000
Non-airplane Manufacturing Emp.
1,000
200,000
All Other Employment
3,000
140,000
Based upon this data, which sectors of the Icarus economy likely are exporting goods or s
Estimate the share of each sector's employment that could be due to exports
(and explain how you did these estimates and the name of the technique(s) you used).
Finally, explain why these estimates may not be accurate.
Icarus
Population
20,000
Annual Gross Per Capita Income
$17,000
Total Employment
10,000
Agricultural Emp.
1,000
Govt Employment
300
Private Service Emp.
4,000
Airplane Manufacturing Emp.
700
Non-airplane Manufacturing Emp.
1,000
All Other Employment
3,000
Take the locatio quotients to estimate amount of export jobs (if any):
TOTAL JOBS = LOCAL JOBS + EXPORT JOBS
Page 40
Location Quotients
Export Jobs
2,500
Local Jobs
2,000
1,500
1,000
500
-
Agricultural Emp.
Page 41
Non-airplane
Manufacturing Emp.
Location Quotients
ei
LQ e
Ei
E
ay country of Daedalus.
Page 42
Location Quotients
xport Jobs
ocal Jobs
on-airplane
ufacturing Emp.
Page 43
Gravity Model
Gravity Model
Using Newton's Universal Law of Gravitation for social processes
m1m2
F G( 2 )
r
m1
To convert to society:
F becomes the interaction between m1 and m2 (e.g., traffic, trade, etc.
m1 and m2 become population (or employment, or GDP, etc.)
r is distance
G is a constant
Example:
G
0.001
0.001
0.001
0.001
0.001
Population
m1
10,000
20,000
20,000
10,000
10,000
m2
20,000
20,000
40,000
20,000
20,000
Page 44
Gravity Model
cial processes
m1
m2
Page 45
3 Growth Rates
Pn P0 (1nr)
Pn P0 (1r)
Pn P0e
rn
where e = 2.7183....
remember than ln (e) = 1
Po
100
100
100
100
100
100
100
100
100
100
n
0
1
2
3
4
5
6
7
8
9
r
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Linear
Pn
100
105
110
115
120
125
130
135
140
145
Page 46
Discrete
Compounded
Pn
100.0
105.0
110.3
115.8
121.6
127.6
134.0
140.7
147.7
155.1
Continuously
Compounded
Pn
100.0
105.1
110.5
116.2
122.1
128.4
135.0
141.9
149.2
156.8
3 Growth Rates
100
100
100
100
100
100
100
100
100
10
15
20
25
30
40
50
75
100
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
150
175
200
225
250
300
350
475
600
162.9
207.9
265.3
338.6
432.2
704.0
1146.7
3883.3
13150.1
164.9
211.7
271.8
349.0
448.2
738.9
1218.2
4252.1
14841.3
16000.0
14000.0
12000.0
10000.0
8000.0
6000.0
4000.0
2000.0
0.0
0
20
40
Page 47
60
80
3 Growth Rates
Page 48
3 Growth Rates
Continuously Compounded
Discrete Compounded
Linear
100
120
Page 49
Cost-benefit
Cost-Benefit Thinking
TWO CHALLENGES:
1. how to sum up all the costs and benefits.
2. How to deal with time: discounting. --->>> time preferences.
Present value (PV) = B(t) / (1+r)t
where B(t) is the benefit in year t, r is the discount rate.
Net Present Value (NPV) = (B(t) - C(t)) / (1+r)t
where B is benefits and C is costs.
note: it is hard to shift capital costs to future generations, since lenders want payba
However: "There is, in fact, no unique relationship between high discount rates an
How to select a discount rate: simply the rate of economic growth for a nation?
Taking sustainability into account:
Page 50
Cost-benefit
note how the r can really change the outcome, especially if costs and benefits patte
EXAMPLE
t
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Benefit Cost
Net Benefit
B(t)
C(t)
B(t) - C(t)
0 1,000,000 -1,000,000
100,000
100,000
0
110,000
100,000
10,000
120,000
100,000
20,000
130,000
100,000
30,000
140,000
100,000
40,000
150,000
100,000
50,000
160,000
100,000
60,000
170,000
100,000
70,000
180,000
100,000
80,000
190,000
100,000
90,000
200,000
100,000
100,000
210,000
100,000
110,000
220,000
100,000
120,000
230,000
100,000
130,000
240,000
100,000
140,000
250,000
100,000
150,000
260,000
100,000
160,000
270,000
100,000
170,000
280,000
100,000
180,000
290,000
100,000
190,000
discoun discoun
t rate
t rate
r
(1+r)^t
0.02
1.00
0.02
1.02
0.02
1.04
0.02
1.06
0.02
1.08
0.02
1.10
0.02
1.13
0.02
1.15
0.02
1.17
0.02
1.20
0.02
1.22
0.02
1.24
0.02
1.27
0.02
1.29
0.02
1.32
0.02
1.35
0.02
1.37
0.02
1.40
0.02
1.43
0.02
1.46
0.02
1.49
1,500,000
Page 51
Cost-benefit
Benefit
1,000,000
Cost
Cumulative Net Present Value (NPV)
Net Benefit
500,000
0
1
10
11
12
13
-500,000
-1,000,000
-1,500,000
Year
Page 52
Cost-benefit
(Bt Ct )
NPV
t
t 0 (1 r)
n
preferences.
lsewhere.
Bt benefits in year t
Ct costs in year t
t year
NPV net present value (benefits adjusted for cost)
r discount rate (e.g.,6% per year or 0.06)
marginal productivity of capital' argument, the use of the word 'marginal' indicating that it is
rations, since lenders want paybacks. e.g., 30 year loans. but it is easier to shift non-mone
discounted value.
alued (even though today's actions are required for those 50 years from now to enjoy them).
ble resources, esp. with a high discount rate.
Page 53
[104]
Cost-benefit
(see graph).
Net Benefit
discounted for
present value
Cumulative Net Present Value (NPV)
(B(t) - C(t)) / (1+r)t (B(t) - C(t)) / (1+r)t
-1,000,000
-1,000,000
0
-1,000,000
9,612
-990,388
18,846
-971,542
27,715
-943,827
36,229
-907,597
44,399
-863,199
52,234
-810,965
59,744
-751,221
66,940
-684,280
73,831
-610,449
80,426
-530,023
86,734
-443,288
92,764
-350,525
98,524
-252,001
104,022
-147,979
109,267
-38,712
114,266
75,554
119,027
194,581
123,558
318,139
127,865
446,003
Page 54
Cost-benefit
13
14
15
16
17
18
19
20
21
Page 55
Cost-benefit
nal' indicating that it is the productivity of additional units of capital that is relevant. [99]
sier to shift non-monetary costs to the future, since the lenders are around to complain! the
m now to enjoy them). ie., they should not be discounted like capital.
Page 56
Cost-benefit
ent." [106]
Page 57
Cost-benefit
Page 58
Cost-benefit
is relevant. [99]
Page 59
gini
0.386
RANGE: 0 (PERFECT EQUALITY; 1 PERFECT INEQUALITY)
n
20
Person "i"
Income calculated
calculated
calculated
"i"
X(i)
CULULATIVE
x(i)
X(i)
x(i)*i
1
1,000
0.003
0.003
0.00
2
3,000
0.009
0.013
0.02
3
4,000
0.013
0.025
0.04
4
5,000
0.016
0.041
0.06
5
6,000
0.019
0.059
0.09
6
8,000
0.025
0.084
0.15
7
8,000
0.025
0.109
0.18
8
9,000
0.028
0.138
0.23
9
11,000
0.034
0.172
0.31
10
12,000
0.038
0.209
0.38
11
14,000
0.044
0.253
0.48
12
17,000
0.053
0.306
0.64
13
19,000
0.059
0.366
0.77
14
21,000
0.066
0.431
0.92
15
23,000
0.072
0.503
1.08
16
27,000
0.084
0.588
1.35
17
29,000
0.091
0.678
1.54
18
32,000
0.100
0.778
1.80
19
33,000
0.103
0.881
1.96
20
38,000
0.119
1.000
2.38
SUM
320000
1
14.36
mean
0.05
Insert income amounts for each of
the 20 people here -- be sure to
arrange from LOW to HIGH
Do NOT enter data in any of the
other columns -- those are
calculated.
Try entering both a fairly equal
income distribution -- and then try a
broadly unequal one.
GINI COEFFICENT
CUMULATIVE X
1.000
LINE OF EQUALITY
0.900
0.800
0.700
0.600
0.500
0.400
0.300
0.200
0.100
0.100
0.000
10
MEASURES OF
INEQUALITY/DISPARITY:
how to calculate a Gini
Coefficient
GINI COEFFICENT
CUMULATIVE X
COEFFICENT
MULATIVE X
1.000
OF EQUALITY
GINI COEFFICENT
CUMULATIVE X
1.000
LINE OF EQUALITY
LINE OF EQUALITY
0.900
0.900
0.800
0.800
0.700
0.700
0.600
0.600
0.500
0.500
0.400
0.400
0.300
0.300
0.200
0.200
0.100
0.100
13
11
19
17
15
13
11
20
0.000
1
0.000
15
I COEFFICENT
UMULATIVE X
NE OF EQUALITY
19
17
15
13