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