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Global Economic Journalism Week 2: Economies & Indicators - I Jeffrey Timmermans Economic goals of governments ✤ Full employment ✤ ✤ Steady annual growth in output ✤ ✤ or at least as full as possible... 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 (19402010) Source: St. Louis Federal Reserve Bank The Business Cycle Real output Trend line Peak Trough Time The Regulatory Cycle Crisis in un- or underregulated area Recessio n Politicians respond to people’s anger Regulation, followed by quiet period Deregulation Politicians respond to companies Lobbyists/companies seek deregulation 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 ✤ ✤ Income ✤ ✤ Adding the value added at each stage of production 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) or GDP = C + I + G + (E - I) 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 ✤ ✤ Productivity ✤ ✤ Either by value or by % change 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
