What do economists mean when they use the term "difference of differences?"

Difference in differences is a method of drawing conclusions from a test group based on comparison to a control group. The technique takes a measurement of the test group and the control group before and after a treatment or specific conditions are applied to the test group. The measurements taken at the beginning and end of the study may vary for both the test group and the control group. The difference in differences measures the variation of change between the test group and the control group. This method allows for different starting points for the test group and control group as well.

As an example, assume the test group begins with a starting value of 10 units and finishes with a value of 16 units after conditions are applied. During the same period of time, the control group starts with a value of 8 units and finishes with a value of 10 units. The test group increased by 6 units during this period while the control group increased by 2. The difference in differences would be equal to 4; the change of 6 in the test group minus the change of 2 in the control group.

This method of analysis helps to identify changes in economics due to time and natural circumstances so that these results can be subtracted from conclusions drawn from studies of specific tests. The control group is necessary to identify these natural changes allowing for the "difference in differences" to reflect the actual results on the test group due to the unique circumstances applied.