Question #15 from Chapter 15)

"There is an 'unhealthy correlation' between the building of skyscrapers and subsequent financial crashes," according to Barclays Capital. Examples include the world's first skyscraper, the Equitable Life building in New York (completed in 1873 and coincided with a five-year recession), the Empire State building (the Great Depression was under way), Chicago's Willis Tower - formerly known as the Sears Tower - in 1974 (during an oil shock and when the U.S. dollar's reliance on gold was abandoned), and Malaysia's Petronas Towers in 1997 (corresponding to the Asian financial crisis). Currently, the world's tallest skyscraper is the Burj Khalifa (built just before Dubai's financial troubles). China is the biggest builder of skyscrapers, with 53% of all the tall buildings in the world. JPMorgan Chase said that the Chinese property market could drop by as much as 20% in value in the country's major cities within the next 12 to 18 months. "Often the world's tallest building are... [a reflection of] a widespread misallocation of capital and an impending economic correction," Barclay's Capital analysts said.

Examine the correlational finding and provide plausible alternatives for their findings.

The explanations are provided below

Step-by-step explanation

Correlation means association, more precisely it is a measure of the extent to which two variables are related. The correlation coefficient measures the degree of association between the variables. Pearson's correlation coeficient is commonly used to meausre the correlation between variables.

Folowing is an example which illustrates an unhealthy correaltion between the building of skycrappers and subsequent financial crashes. 

The findings of a study conducted by a company Barclays can be stated as follows:

A skyscrapper built in New York city coincided with a five year recession.

Another skyscrapper built in Empire state was followed by a depression in the economy.

Chicago Willis was followed by an oil shack.

Malaysia's Petronas tower corresponds to financial crisis in Asia continent.

Therefore on the basis of these findings, Barclays capital analyst has concluded that the property and infrastructure market of China country could drop. China country is the largest builder of skycrappers.

From the above study conducted by Barclays company, it can be concluded that there is a partial correlation between financial crisis and building of skycrappers. A partial correlation implies that more than two quantities are involved in the relation. In this kind of correlation, relationship between only two quantities are considered. The effects of the other variables are ignored. From the case given above it is clear that the the correlation is considered only on two variables which are financial crisis and building of skyscrappers. The researcher tries to relate building of skyscrappers as a cause of financial dropdown for China and ignores other possible causes of financial dropdown or drop in property market. Thus there is a partial correlation between building of skyscrappers and financial crisis.

From the study conducted by Barclays company, the plausible alternatives for the findings are stated below:

The researchers must not have monitored only the occurrence of a crisis after the construction of a skyscrapper. The researchers should have considered monitoring the economy of China for instance before or after along period of time so as to come up with the findings.

They must have concentrated on the prevailing economic conditions of the respective cities, states and countries. The researcher must have considered what is prevailing in such economies interms of economic conditions as a whole before making the decisions. The unfavourable terms of trade for instance would have caused the same dropdown in the property market and not necesarily the building of skyscrappers.

They must have examined the system and process of allocation of capital for the construction of buildings. The allocation of funds for building the skyscrappers should be considered since the researcher was not sure if the fund allocation comes from the national government and in what proportion.

They should also monitored all the reasons for the drop in property market for China. The researcher must have considered all the aspects of the economy for eaxample the real GDP and the potential GDP.