Jeffrey Timmermans Global Economic Journalism Week 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!National Bureau of Economic Research

U.S. Economic Growth ( ) Source: St. Louis Federal Reserve Bank

The Business Cycle Real output Time Trend line Recession Recovery Trough 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 Recessio n 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