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The rise in interest rate can have a direct impact on employment; similarly, the consumption of oil and the growth of the economy are interrelated. In an economy, we can find independent and dependent variables.
There are some that are directly related to others, which means, growth in one can lead to an increase in others. An increase in consumption is related to more income and stable jobs.
This may lead to graph formation where two variables create a line that is upward sloping. Some have indirect relationships like when income rises, consumption will grow and savings will decline, and the opposite movement can lead to a downward sloping graph.
Indirect is different from inverse, that is measured through only about the two or three variables and not others, while, indirect relationships involve multiple variables.
For example- the change in the sale of a chocolate company can be triggered by a change in taste, health factors, diet, festive season, etc, on the other hand, the interest rates are inflation having an inverse relationship where if the country’s central bank increases interest rates, the inflation will decline.
In indirect relation, one factor can affect others through a third variable – even when the two are not directly related. Indirect relation is also called negative relation where two or more variables move in opposite directions. For example –
the price of coffee and demand is related to inversely. So, when the price of coffee is much higher, people may lower their consumption or take tea or other beverages.
There can be other factors responsible for the higher sale of coffee when the prices decline – like some may buy it for future consumption or accumulate or sell it to others to increase its consumption.
The graphs of such variables help the learners to understand the changing patterns of commodity production and consumption, the economics of financial markets at a glance, and conduct global market research where you see the impact of the movement of one variable on the other.
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