Data are the economist’s link with reality. Much of economic analysis is based on thinking about how people and firms are likely to respond to the incentives they face when taking decisions about consumption or production. These decisions are required because of scarcity, and the desire to make the best possible use of available resources.
Governments use economic analysis to assist in the design of economic policy. If policy is poorly designed, the results can damage society, and leave people worse off than they could have been. It is therefore very important to be sure that economic analysis provides a reliable guide to policy design, by explaining the way in which the economy operates. How do we tell whether that analysis is correct? It is all very well to draw diagrams and claim to be able to explain how the world works — but how do we know whether or not we are right?
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