Do not confuse correlation, or connection, with causation. Correlation between two events or two sets of data indicates only that they are associated in some systematic and dependable way. For example, we may find that when variable X increases, Y also increases. But this correlation does not necessarily mean that there is causa-tion—that an increase in X is the cause of an increase in Y. The relationship could be purely coincidental or dependent on some other factor, Z, not included in the analysis.
Here is an example: Economists have found a positive correlation between education and income. In general, people with more education earn higher incomes than those with less education. Common sense suggests education is the cause and higher incomes are the effect; more education implies a more knowledgeable and productive worker, and such workers receive larger salaries.
But causation could also partly run the other way. People with higher incomes could buy more education, just as they buy more furniture and steaks. Or is part of the relationship explainable in still other ways? Are education and income correlated because the characteristics required to succeed in education—ability and motivation—are the same ones required to be a productive and highly paid worker? If so, then people with those traits will probably obtain more education and earn higher incomes. But greater education will not be the sole cause of the higher income. (Key Question 9)
The ideas in this chapter will come into much sharper focus as you advance through Part 1, where we develop specific economic principles and models. Specifically, in Chapter 2 we will build a model of the production choices facing an economy. In Chapter we develop laws of demand and supply that will help you understand how prices and quantities of goods and services are established in markets. In Chapter 4 we combine all markets in the economy to see how the market system works. And in Chapter 5 we examine a very important sector of the Canadian economy, the international sector.
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