When something “reflects relative, not absolute, changes,” it means that the changes are measured in terms of their proportion or percentage compared to a previous value, rather than in terms of the raw numerical difference.
Relative Changes
Definition: Relative change measures the change in percentage terms. It’s calculated as the change in value divided by the original value, often multiplied by 100 to express it as a percentage.
Example: If a stock price increases from $100 to $120, the relative change is (120 - 100) / 100 = 0.20, or 20%. This indicates a 20% increase relative to its original price.
Absolute Changes
Definition: Absolute change measures the raw numerical difference between two values. It’s the simple subtraction of the original value from the new value.
Example: Using the same stock price example, the absolute change is 120 - 100 = 20. This is the raw increase in the stock price.
Application
Relative changes are useful for understanding the significance of a change in context. For example, a $10 increase in a stock price is more significant if the stock started at $20 (a 50% increase) than if it started at $200 (a 5% increase). In contrast, absolute changes provide the raw magnitude of change, which can be useful for understanding the exact amount of increase or decrease, but may lack context about the significance of that change.
Importance
Example in Economics
Inflation rates are often discussed in terms of relative changes. If the price level of goods increases from 100 to 105, the absolute change is 5, but the relative change is 5%. This 5% is more informative because it tells you the rate at which prices are increasing.
In summary, understanding relative changes helps in comparing the proportional impact of changes across different scales or contexts, while absolute changes give the exact difference without contextual proportion.