Seminar in Economics Econ. 470 Chapter 1: Introduction to Basic Indicators in Economics

I. Introduction to Data Collection   The collection and presentation of economic data differ in several respects.   Most economic data are revised, often many times, and most are also adjusted for seasonal variation.   Economic reports usually tend to focus on sequential changes.

 WHY Data Revisions Occur? - With rare exceptions, economic data are revised extensively. - Data are initially generated from samples, sometimes with incomplete information for the period in question. HOW!! - The need for revisions is to accommodate evolution in the structure of the economy. HOW!! - The need for revisions is to facilitate international comparisons. HOW!!

 WHY Data are Seasonal Adjustment? - Seasonal adjustment strives to eliminate changes in the data that occur regularly at certain times of the year. - Elimination of these seasonal variations makes it easier to spot trends and fluctuations. HOW!! - It also permits a more meaningful examination of sequential changes from week to week, month to month, or quarter to quarter. HOW!! - The actual process of seasonal adjustment is complicated. HOW!!

II. Impact on Financial Asset Prices There are three criteria that determine “ which economic data tend to have the greatest effects on financial markets: 1. Relevance to Economic Growth Reports that provide information about large segments of the economy, generally get the most market attention. 2. Timeliness of the Information 2. Timeliness of the Information Financial market participants seek the latest news, and therefore assign more importance to information taken from the recent past, rather than belated reports or updates covering earlier months.

3. Reliability of the Data 3. Reliability of the Data Even when economic data are released, the data reliability is concerned.

III. Understanding National Output and Income Indicators  Gross Domestic Product (GDP): - Measures the total value of goods and services produced by people, businesses, governments, and property located in the country. - GDP is the broadest available measure of US economic activity. - There are two ways to look at GDP: Spending approach and Income approach.

- GDP is computed both in nominal (current-dollar) and real (inflation-adjusted) terms. - Nominal GDP is the market value of all final goods and services produced in a year. - Nominal GDP is calculated using the current prices prevailing when the output was produced (P x Q), but real GDP is a figure that has been adjusted for price level changes.

- GDP includes the following main factors: (1) personal consumption expenditure, (1) personal consumption expenditure, durable goods, nondurable goods and services. Includes durable goods, nondurable goods and services. (2) business investment in structures, equipment and software,  All final purchases of machinery, equipment, and tools by businesses.  All construction (including residential). (3) government consumption and investment, Includes spending by all levels of government (4) net exports ( exports – imports) Net exports is the difference: and can be either a positive or negative number depending on which is the larger amount.

Converting Nominal to Real Problem: valid comparisons cannot be made with nominal GDP alone, since both prices and quantities are subject to change. Solution: making an adjustment process by converting the nominal to real. : first determine a price index, and then adjust the nominal GDP figures by dividing by the price index (in hundredths). One method: first determine a price index, and then adjust the nominal GDP figures by dividing by the price index (in hundredths).

GDP Price Index  Use price index to determine real GDP Real GDP = Nominal GDP Price Index (in hundredths) Price Index = x 100 Price of Market Basket in a specific Price of Same Basket n Base Year

GDP Price Index Calculating Real GDP (Base Year = 2000) Year (1) Units of Output (2) Price of a product Per Unit (3) Price Index (Year 2000= 100) (4) Unadjusted, or Nominal, GDP (1) X (2) (5) Adjusted, or Real, GDP 20005$10100$