Jeffrey Timmermans
Global Economic JournalismWeek 2: Economies & Indicators - I
Economic goals of governments
✤ Full employment
✤ or at least as full as possible...
✤ Steady annual growth in output
✤ without overheating
✤ Stable prices (low but steady rise in inflation)
Measuring economic performance✤ Output of goods & services
✤ Changes in prices for goods & services over time
✤ Mood of consumers
✤ Employment
✤ Total supply of money
✤ Trade with other countries
✤ Productivity of workers
Major economic indicators
✤ Gross Domestic Product (GDP)
✤ measures output, not wealth nor well-being
✤ Consumer Price Index
✤ measures how prices change (e.g. inflation)
✤ Unemployment
✤ Money Supply
What is a recession?
1.Two consecutive quarters of declines in GDP (contraction)
2.Whatever the U.S. National Bureau of Economic Research (NBER) says it is!
U.S. Economic Growth (1940-2010)
Source: St. Louis Federal Reserve Bank
The Business Cycle
Real output
Time
Trend line
Recession
Recession
Recession
Rec
over
y
Rec
over
yTrough
Peak
The Regulatory Cycle
Crisis in un- or under-regulated
area
Politicians respond to people’s anger
Lobbyists/companies seek
deregulation
Politicians respond to companies
Regulation, followed by quiet period
Deregulation
Recession
Growth
Making sense of indicators
✤ A comparison figure (previous year, quarter or month) gives necessary context
✤ Watch market reaction to indicators
✤ Compare the actual result to expectations
✤ Market prices are news!
✤ Talk to “real people” to give life to the data
Questions to ask about data
✤ Who is publishing the data, and who compiled it?
✤ What do the data cover, and what is left out?
✤ How reliable are the data?
✤ What is the time period for the data?
✤ Will the data be revised later?
✤ Are the data seasonally adjusted? Adjusted for inflation? Annualized?
More questions
✤ Is the data published as an index, or an absolute amount?
✤ If an absolute amount, what units?
✤ What will you use for comparison? Year-earlier period?
✤ Is the indicator lagging, coincident, or leading?
✤ How should you describe the significance of the measure to your reader?
Adjustments
✤ Inflation adjusted
✤ Real: effects of inflation are removed
✤ Nominal: no adjustment for inflation
✤ Annualized: “what if” same trend continued for a whole year
✤ Seasonally adjusted
✤ Data “smoothed” using long-term seasonal trends
GDP vs. GNP
✤ Gross Domestic Product
✤ Total value of the output of final goods & services produced within a country’s borders
✤ Gross National Product
✤ Total value of output produced by a country’s citizens, no matter where in the world they are
Methods of calculating GDP
✤ Value added
✤ Adding the value added at each stage of production
✤ Income
✤ Adding the total income paid (wages, royalties)
✤ Expenditure
✤ Adding up the country’s spending on final goods & services, i.e. goods that aren’t inputs for another good
Circular Flow Model
Components of GDP
Gross Domestic Product = Consumption + Investment +
Government spending + (exports - imports)
GDP = C + I + G + (E - I)
or
Factors that impact GDP
✤ Exchange rates
✤ Purchasing-power parity
✤ Interest rates
✤ Inflation (real GDP vs. nominal GDP)
✤ Capital depreciation
✤ Gross domestic product, not net
Ways of using GDP
✤ Cross-border comparisons
✤ Either by value or by % change
✤ Productivity
✤ GDP per hours worked
✤ Prosperity
✤ GDP per person
Problems with GDP
✤ Doesn’t measure externalities (positive or negative)
✤ Pollution, education
✤ Doesn’t include a measure of overall quality of life, happiness nor well-being
✤ Doesn’t measure income disparity/distribution