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  • 1. Economics for Journalists Week 6: Economies & Indicators Jeffrey TimmermansMonday, 4 March, 13
  • 2. 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)Monday, 4 March, 13
  • 3. What to produce? ✤ Businesses in each country have choices of what to produce ✤ They will strive to produce the goods and services that earn them the most profit – the difference between price and costsMonday, 4 March, 13
  • 4. Absolute advantage “ The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.” – N. Gregory Mankiw, Principles of EconomicsMonday, 4 March, 13
  • 5. Comparative advantage “ The producer who gives up less of other goods to produce [a particular good] has the smaller opportunity cost of producing [that particular good] and is said to have a comparative advantage in producing it.” – N. Gregory Mankiw, Principles of EconomicsMonday, 4 March, 13
  • 6. Measuring economic performance ✤ Output of goods & services ✤ Total supply of money ✤ Changes in prices for goods & ✤ Trade with other countries services over time ✤ Productivity of workers ✤ Mood of consumers ✤ EmploymentMonday, 4 March, 13
  • 7. 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 SupplyMonday, 4 March, 13
  • 8. Questions to ask about data ✤ Who is publishing the data, and ✤ Are the data seasonally who compiled it? adjusted? Adjusted for inflation? Annualized? ✤ 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?Monday, 4 March, 13
  • 9. More questions ✤ Is the data published as an ✤ How should you describe the index, or an absolute amount? significance of the measure to your reader? ✤ If an absolute amount, what units? ✤ What will you use for comparison? Year-earlier period? ✤ Is the indicator lagging, coincident, or leading?Monday, 4 March, 13
  • 10. Adjustments ✤ Inflation adjusted ✤ Seasonally adjusted ✤ Real: effects of inflation are ✤ Data “smoothed” using long- removed term seasonal trends ✤ Nominal: no adjustment for inflation ✤ Annualized: “what if” same trend continued for a whole yearMonday, 4 March, 13
  • 11. Gross Domestic Product ✤ Total value of the output of final goods & services produced within a country’s borders ✤ Usually measured every three months (once a quarter) ✤ Only one of many ways to measure economic performanceMonday, 4 March, 13
  • 12. 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 goodMonday, 4 March, 13
  • 13. Circular Flow ModelMonday, 4 March, 13
  • 14. Components of GDP Gross Domestic Product = Consumption + Investment + Government spending + (exports - imports) or GDP = C + I + G + (E - I)Monday, 4 March, 13
  • 15. Ways of using GDP ✤ Cross-border comparisons ✤ Either by value or by % change ✤ Productivity ✤ GDP per hours worked ✤ Prosperity ✤ GDP per personMonday, 4 March, 13
  • 16. 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/distributionMonday, 4 March, 13
  • 17. Income and inequality ✤ Gini index is a commonly used measure of income inequality within an economy ✤ A Gini index of 0 means everyone in the economy has exactly the same income (perfect equality) ✤ A Gini index of 100 means one person in the economy has all the income (perfect inequality)Monday, 4 March, 13
  • 18. Freedom & Fairness Command Free-market Economy Economy U.S. Hong Kong N. Korea SwedenMonday, 4 March, 13
  • 19. Gini index (before taxes) N. Korea U.S. Hong Kong Sweden ? 43 49 54 (2011) (2008) (2008) Sources: OECD, HK Census & Statistics DeptMonday, 4 March, 13
  • 20. Writing about GDP ✤ Usually, it’s best to use seasonally adjusted quarter-on-quarter growth in GDP in percentage terms ✤ This shows the current momentum of an economy, without seasonal peaks & troughs ✤ Compare with the same figure in the previous quarter ✤ Be wary of revisions of earlier figures! ✤ Will the government be issuing a forward-looking forecast?Monday, 4 March, 13
  • 21. Japan grows but stays fragile By Mure Dickie in Tokyo and Robin Kwong in Taipei 21 May 2010 Change Japans economy grew a relatively robust 1.2 per cent in the first quarter but full recovery from the worst postwar slump depends on demand from foreign export Future markets and a rebound in private consumption that may be faltering. Preliminary gross domestic product data released yesterday were equivalent to an annualised growth rate of 4.9 per cent - below economists forecasts but still an refutation of fears last year that the economy might stall in early 2010 or suffer a Expectations "double dip". Naoto Kan, the finance minister, said the data reflected a "solid economic recovery" but made clear it was too soon to relax. "We need to watch very closely to see if this is an autonomous recovery," he said. It can be dangerous to read too much into Japans preliminary estimate of GDP, a statistic often revised heavily. In the third quarter of last year, for example, the economy was initially thought to have expanded 1.2 per cent but was later judged to have contracted and is now Context recorded as having expanded 0.1 per cent. However, yesterdays first-quarter estimate left no doubt of Japans continuing reliance on external demand for growth, with net exports of goods and services accounting for 0.7 percentage points of the 1.2 per cent quarter-on-quarter Cause expansion. The Japanese data offered some signs that Japans recovery was broadening, with growth in all categories of public demand, including residential investment, which declined sharply throughout 2009. "Rising exports and production have spilled over to domestic demand," wrote Kiichi Murashima, economist at Citigroup Global Markets, in a research note. Comment But the pace of quarter-on-quarter growth in private consumption softened considerably, falling to 0.3 per cent - its weakest performance since the first three months of last year - suggesting a waning effect of government stimulus efforts. Much could now depend on the impact on consumption of a monthly Y13,000 ($145, €118, £102) child allowance introduced by the Democratic party-led government. Some analysts say many parents are likely to save rather than spend the windfall. FutureMonday, 4 March, 13
  • 22. Consumer Price Index ✤ Based on the prices of a “basket” of goods & services ✤ Typically, only focus on % change in index, rather than the absolute index ✤ Baseline for index (index=100) is set at an arbitrary point in timeMonday, 4 March, 13
  • 23. Problems with CPI ✤ Actual index base year is arbitrary (Oct. 2009-Sep. 2010 in HK) ✤ Different countries have different “baskets” ✤ “Baskets” change over time, even in the same country ✤ The quality of goods changes over time ✤ You get far more computer for the price now than 10 years ago ✤ Consumers will substitute pricey goods with cheaper onesMonday, 4 March, 13
  • 24. Writing about CPI ✤ Focus on the percentage change, rather than the nominal index level ✤ Use CPI as a proxy for the inflation rate ✤ Using core on non-core depends on your audience ✤ Core inflation is used to determine economic policy responses ✤ Non-core is better to show effects of inflation on consumersMonday, 4 March, 13
  • 25. Japan Consumer Prices Fall 1% By Tomoyuki Tachikawa 1 October 2010 TOKYO -- Japans consumer prices fell in August for the 18th consecutive month, Change government data showed Friday, suggesting no end in sight for a deflationary trend that has been undermining the broader economy, and providing further impetus for the Bank of Japan to take additional monetary easing measures soon. The countrys core consumer price index, which excludes volatile fresh food prices, Cause fell 1.0% from the same month a year earlier, the Ministry of Internal Affairs and Communications said. The result was in line with the median forecast in a poll of private economists. Expectations The latest data show that the pace of decline in the core CPI is easing up, with the figure having fallen 1.1% in July and 1.0% in June compared with a recent low of 1.5% in April. This suggests that a mild recovery in the economy is propping up Context domestic demand and preventing prices from falling further. But analysts warn that deflation may accelerate as the yen stays strong with the outlook for the U.S. and European economies uncertain, dragging on Japans export- Future reliant economy and reducing the prices of oil, food, metals and other commodities the country buys from overseas. Persistent price declines usually eat into corporate profits, which could prompt firms to scale down operations and cut payrolls, increasing the risk that worsening income and employment conditions will make consumers reluctant to spend. That in turn should raise the possibility of Japans economy entering a lull in the near future. "As long as deflation continues and the yen rises, falling corporate profits could keep putting downward pressure on the economy," said Takeshi Minami, chief economist at Comment Norinchukin Research Institute. "Its very likely for the Japanese economy to stall down the road." Tokyo policymakers have also become more concerned over the future course of Japans economy. FutureMonday, 4 March, 13
  • 26. CPI in Hong Kong ✤ CPI (A): basket based on expenditure patterns of 50% of households, namely those with low income (HK$4,500-$18,499 currently) ✤ CPI (B): based on the habits of the next 30% of households by income (HK$18,500-$32,499) ✤ CPI (C): based on the next 10% (HK$32,500-$65,999) ✤ Composite CPI: includes all of the above, or 90% of HK households ✤ This is usually the headline numberMonday, 4 March, 13
  • 27. DJ UPDATE: HK March CPI Up 4.6%; Inflationary Pressures Likely To Rise 583 words 22 April 2011 By Chester Yung and Fiona Law HONG KONG (Dow Jones)--Hong Kongs consumer prices rose at their fastest pace in two and a half years in March, and further increases are likely as inflationary Change pressures grow both at home and abroad, the government said Thursday. Hong Kongs headline consumer price index rose 4.6% in March from a year earlier, the Census and Statistics Department said Thursday, accelerating from Februarys Future 3.7% rise to the fastest pace since the CPI rose 4.6% in August 2008. Marchs reading was also above the median 4.1% rise forecast by 11 economists surveyed earlier by Dow Jones Newswires. Expectations Underlying CPI, which excludes the effects of government relief measures, rose 4.4% in March from a year earlier, the government said, also up from Februarys 3.6% increase. Context A government spokesman said in a statement increases in private residential rents and rising food prices will likely continue to add to inflationary pressure in the coming months, while the hike in the tobacco duty and higher fuel costs also contributed somewhat to the increase in inflation (in March). Private housing rental rates rose 4.9% in March, higher than Februarys 4.1% rise. Property prices in the territory rose around 24% last year, following a 30% surge in 2009, but rents havent kept pace because they are normally locked in by contracts Cause that cover a year or more. Public and private rents account for about one-third of Hong Kongs CPI basket. Food prices rose 6.3% on year in March, significantly higher than the 5.0% increase in February. Hang Seng Bank Senior Economist Irina Fan said the major drivers of inflation in March--a surge in global food prices and strong domestic demand--are unlikely to ease in the near term. Comment Imported inflation is weighing in, especially when other Asian currencies are rising and the Hong Kong dollar is unchanged and pegged to the U.S. dollar, she said, adding she expects the citys CPI rise to reach 4.7% or even higher for the full year.Monday, 4 The government March, 13 has said it expects the CPI to rise 4.5% in 2011, above the 2.4%
  • 28. Some other measures of inflation ✤ Wholesale Price Index (WPI): measures prices on a wholesale level ✤ Sometimes considered a leading indicator for CPI, but only a fraction of wholesale goods are inputs in final consumer goods ✤ GDP Deflator: used to remove the effects of inflation from GDP to get “real” economic growth ✤ Basically, CPI with a much bigger basket: all final newly produced goods & servicesMonday, 4 March, 13
  • 29. Unemployment Rate ✤ Tracks the number of people in the labor force who don’t have jobs ✤ How do you define “labor force”? ✤ Usually expressed in percentage terms rather than an absolute number ✤ Full employment is a bad thing!Monday, 4 March, 13
  • 30. Problems with unemployment data ✤ Based on a household survey ✤ Doesn’t include people who have given up looking for work ✤ Definitions of “unemployment” vary among countries ✤ Japan’s definition is more restrictive than the U.S.’sMonday, 4 March, 13
  • 31. Grim Milestone as Jobless Rate Tops 10% By Sudeep Reddy 9 November 2009 The unemployment rate last month soared above 10% for the first time since the early 1980s, a milestone likely to weigh on consumer confidence and stir new efforts in Washington to spur job creation. Some 558,000 people joined the ranks of the jobless in October, sending the rate to 10.2% and the tally of officially unemployed Americans to 15.7 million, the Labor Department said. The 10% figure could overshadow last weeks news that the economy began growing again this summer after a long contraction. "Ten percent is a terribly important number," Democratic pollster Peter Hart said. "It is not only the 10.2% of the people who are unemployed, it is the number of people who are reliant on that 10%. Its probably the other 20% who say, Im worried, Im uncertain, Im afraid about this, I worry about my job." The report intensified pressure on the government to provide more unemployment relief and spur hiring. President Barack Obama on Friday signed an extension of jobless benefits for up to 20 weeks. He said his administration was considering new investment in infrastructure, as well as tax cuts for businesses, to stimulate employment. "History tells us that job growth always lags behind economic growth," Mr. Obama said, "which is why we have to continue to pursue measures that will create new jobs." The unemployment news initially sent stocks lower. But the market ended up modestly on hopes that job growth would return by early next year. The payroll figures werent entirely bleak. The survey of employers showed fewer jobs lost in October than in previous months; figures for August and September were revised up. The temporary employment sector, seen as an indicator of future employment, gained 34,000 jobs to mark the third straight month of increases. The rest of the business and professional- services sector grew, as did education and health jobs. Factory overtime hours increased. Still, October marked only the second time since recordkeeping began in 1948 that the jobless rate topped 10%. It stayed that high for 10 months in the early 1980s, peaking at 10.8% in November and December of 1982. Economists expect the unemployment rate to continue rising at least until spring, even as gross domestic product resumes growing. The 10.2% rate "reinforces a view on Main Street that recovery is spelled j-o-b-s and not G-D-P," said Stuart Hoffman, chief economist at PNC. "Were in a sort of economic purgatory where we see growth in productivity and growth in output, and even some growth in consumer spending. But it hasnt been sustained long enough for businesses to create jobs." Sectors slammed hardest in the recession continued to suffer. Manufacturing lost 61,000 jobs, more than in the prior three months. Construction employment fell by 61,000, near the pace of prior months. Retail declined by 40,000 jobs. A measure of unemployment that includes people who have stopped actively searching for work, or are working part-time because they cant find full-time work, hit 17.5% in October -- up half a percentage point from September. Tom OPray, 36 years old, of Rockville, Md., lost his job as a hotel waiter a year ago and spent six months looking for a full- time position. Mr. OPray applied to as many as four openings a week as an executive assistant -- a prior occupation of his -- but stopped looking in April. "There are so many overqualified applicants that I never made it to the top of the stack to ever get an interview," Mr. OPray said. He went to the movies with a friend and -- "on a lark," he said -- asked the theater manager if he had jobs. There was a part- time position, paying $7.85 an hour, that included concession sales and cleaning restrooms. "Id prefer another office job," he said. "Im working harder, for less money, than I ever have in my whole life." The economys course in coming months will depend on how well it can transition from growth backed by government support -- such as the $787 billion stimulus package -- to an expansion built on the private sector.Monday, 4 March, 13
  • 32. Consumer/Business Confidence Index ✤ A leading indicator of short-term consumer spending or investment by businesses ✤ Often presented as a diffusion index ✤ How many respondents are confident minus how many are pessimistic ✤ A reading of above 50 indicates optimism ✤ Compare to previous month/quarter for changes in sentimentMonday, 4 March, 13
  • 33. Problems with confidence indices ✤ Can have relatively large margin of error ✤ How big is the survey? ✤ Can mask dramatic changes in consumer or business sub-groups ✤ In the case of the tankan, check the sub-index for smaller businessesMonday, 4 March, 13
  • 34. Some other indicators ✤ Consumer Confidence ✤ Balance of Payments, including Trade Balance ✤ Industrial Production ✤ Retail Sales ✤ Tourist Arrivals ✤ Home Sales/Land SalesMonday, 4 March, 13