Economic analysis. An economics student is studying the American economy and finds that the correlation between the inflation adjusted Dow Jones Industrial Average and the Gross Domestic Product (GDP) (also inflation adjusted)

is 0.77 (www.measuringworth.com). From that he concludes that there is a strong linear relationship between the two series and predicts that a drop in the GDP will make the stock market go down. Here is a scatterplot of the adjusted DJIA against the GDP (in year 2000 $). Describe the relationship and comment on the student’s conclusions.

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60 60 50 50 40 40 Dow Jones Industrial Average (inflation adjusted) 30 30 20 20 10 + + 5000 10,000 15,000 20,000 25,000 30,000 35,000 U.S. GDP (adjusted for inflation)