Statistical error: Type I and Type II

Statisticians note two sorts of statistical error. There is a "null hypothesis" that
corresponds to a presumed default "state of nature", e.g., an individual is free of
disease, an accused is innocent. The "alternative hypothesis" corresponds to the
opposite situation, that is, the individual has the disease, the accused is guilty. The
goal is to determine accurately if the null hypothesis can be discarded in favor of
the alternative. A test of some sort is conducted and data are obtained. The result
of the test may be negative (that is, it does not indicate disease, guilt). On the other
hand, it may be positive (that is, it may indicate disease, guilt). If the result of the
test does not correspond with the actual state of nature, then an error has occurred,
but if the result of the test corresponds with the actual state of nature, then a
correct decision has been made. There are two kinds of error, classified as "type I
error" and "type II error," depending upon which hypothesis has incorrectly been
identified as the true state of nature[citation needed].

Type I error

Type I error, also known as an "error of the first kind", an α error, or a "false
positive": the error of rejecting a null hypothesis when it is actually true. Plainly
speaking, it occurs when we are observing a difference when in truth there is none,
thus indicating a test of poor specificity. An example of this would be if a test shows
that a woman is pregnant when in reality she is not, or telling a patient he is sick
when in fact he is not. Type I error can be viewed as the error of
excessive credulity[1] or even hallucination. In terms of folk tales, an investigator
may be "crying wolf" (setting a false alarm) without knowing it.

In other words, a Type I error means that a positive inference is actually false.

Type II error

Type II error, also known as an "error of the second kind", a β error, or a

"false negative": the error of failing to reject a null hypothesis when in fact we
should have rejected it. In other words, this is the error of failing to observe a
difference when in truth there is one, thus indicating a test of poor sensitivity. An
example of this would be if a test shows that a woman is not pregnant, when in
reality, she is. Type II error can be viewed as the error of excessive skepticism [2] or
myopia. The investigator does not see the wolf at the door.

In other words, a Type II error means that a negative inference is actually false.

See Various proposals for further extension, below, for additional terminology.

A table as follows can be useful in understanding the concepts.

Null Hypothesis (H0) Alternative Hypothesis

is true (H1) is true
 Wrong decision
Fail to Reject Null
Right decision Type II Error
Hypothesis
False Negative

Wrong decision
Reject Null Hypothesis Type I Error Right decision
False Positive

Type I and II errors (1 of 2)

There are two kinds of errors that can be made in significance testing: (1) a true null
hypothesis can be incorrectly rejected and (2) a false null hypothesis can fail to be
rejected. The former error is called a Type I error and the latter error is called a
Type II error. These two types of errors are defined in the table.

True State of the Null

Statistical Hypothesis
Decision
H0 True H0 False

Reject H0 Type I error Correct

Do not Reject
Correct Type II error
H0

The probability of a Type I error is designated by the Greek letter alpha (a) and is
called the Type I error rate; the probability of a Type II error (the Type II error rate)
is designated by the Greek letter beta (ß) . A Type II error is only an error in the
sense that an opportunity to reject the null hypothesis correctly was lost. It is not an
error in the sense that an incorrect conclusion was drawn since no conclusion is
drawn when the null hypothesis is not rejected.

A Type I error, on the other hand, is an error in every sense of the word. A
conclusion is drawn that the null hypothesis is false when, in fact, it is true.
Therefore, Type I errors are generally considered more serious than Type II errors.
The probability of a Type I error (α) is called the significance level and is set by the
experimenter. There is a tradeoff between Type I and Type II errors. The more an
experimenter protects himself or herself against Type I errors by choosing a low
level, the greater the chance of a Type II error. Requiring very strong evidence to
reject the null hypothesis makes it very unlikely that a true null hypothesis will be
rejected. However, it increases the chance that a false null hypothesis will not be
rejected, thus lowering power. The Type I error rate is almost always set at .05 or at
.01, the latter being more conservative since it requires stronger evidence to reject
the null hypothesis at the .01 level then at the .05 level.

What Is an Input-Output Model?

An input-output model is a way of depicting economic relationships between suppliers and producers in
an economy. These models can be used for a number of purposes, including prediction of
the profitability of an industry and analysis of the effects of changes in the economy. Both national and
regional governments have used input-output models to determine where to allocate government funds
and to increase efficiency by determining which industries have the greatest economic effect.

The input-output model was evolved into usable form by Wassily Leontief, a Russian-born economist. He
developed a way of converting massive amounts of raw economic data collected by companies and
governments into matrixes for easier study. These matrixes could then be manipulated to examine the
potential results of price changes, material shortages, and other alterations in the economy. Leontief
received the Nobel Prize in economics for this achievement.

nput-output models are usually applied to large scale economic systems but can also be used to analyze
individual companies. A closed input-output model consists of a system which receives no external inputs,
and all the outputs of the system are consumed within the system itself. Such systems exist but are rare.
More common is the open input-output model, which consists of a system that consumes a portion of its
own output and sends the rest to some external entity. For example, an oil company may sell most of its
gross output to other companies and retain the rest for its own use.

number of academic concepts are related to input-output models. Economic base analysis studies local
economies in relation to their exports by analyzing employment figures. It is based on the premise that a
local economy consists of an export-based component and a component which supports the production of
those exports. Increasing the number of exports would cause the supporting local economy to grow. The
resulting information is used to determine which export industries would provide the greatest
local economic growth.

Another related concept is shift-share analysis. Shift-share analysis seeks to understand

fluctuations in the employment rates of local economies in relation to the overall national
economy and the national state of specific industries. Factoring out the effect of the national
economic influences gives a clearer picture of the local economy. This allows the local
government to determine how to invest resources in a way that will build up the local economy,
instead of trying to influence factors the research indicates they cannot control.

What Is an Input-Output Analysis?

An input-output analysis is a strategy within behavioral economics that seeks to understand and
qualify the impact of activity in one business sector on other sectors within the same general
economy. This approach can be used to evaluate the economic connections within a local
economy, a national economy or even the world economy. An analysis of this type can also be
used to identify the impact of the actions of one company on other companies that function in
the same industry.
The general concept for an input-output analysis was developed by Wassily Leontief, who later
received the Nobel Memorial Prize in Economic Sciences for his work in defining the concept
and developing the model that is still used today to illustrate the findings that result from the
analysis. Demonstrating how various industries depend on other industries to produce the raw
materials they need, it is possible to use a simple matrix to demonstrate how production levels
in one industry can have a positive or a negative effect on a connected industry. At the same
time, the input-output analysis can demonstrate how those changes within an industry or group
of industries can either support growth within an economy or undermine the stability of that
economy, triggering an economic crisis.

A classic example of an input-output analysis begins with the production of goods in one
industry that are necessary to support the production of goods in another industry. For
example, coal must be mined in order to provide materials for the production of steel. If adverse
conditions weaken the coal industryto the point that mining operations are reduced, the steel
industry must find some way to compensate for that reduced production in order to avoid a
reduction in the creation of steel. Since the actual tonnage of coal that goes into the steel
industry results in a lower amount of tonnage of steel material, the input-output analysis allows
for the difference and makes it easy to determine just how much of an effect the change in coal
production ultimately has on steel production.

Economists as well as national governments often utilize the input-output analysis model to
project the impact of some change in industries that have some type of interconnection. Doing
so makes it possible to determine if those changes will create any short-term economic effects
that are not desirable, and even if the changes could trigger a chain of events that would lead to
a recession or other type of economic crisis. By using the input-output analysis to accurately
project how the changes will affect the economy, it is possible to use government based
initiatives to either support those changes and the ensuing events, or find ways to minimize the
impact of those changes and avoid some sort of economic downturn.