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1. 1. A Guide to Rules & Readings in “ECONOMICESE” A Primer on Basic & GenericReading ECONOMICS Principles 1
2. 2. Mentally calculating the Rate of Change [as a %age] New(n) – Old(o) Old(o)as an example: 600 – 500 = 0.2 = 20% 500 2
3. 3. when considering What To Look For• What was originally expected?• What actually happened?• If those two (2) components are different the markets will react.• How will the news affect the Fed? 3
4. 4. Four Data Adjustments• consider the Real versus the Nominal• consider Moving Averages• consider Seasonal Adjustments• consider Core Rates of Price Changes ~ measurement series excluding the volatile food and energy sectors 4
5. 5. Gross Domestic ProductGDP = C + I + G + (X-M)where:C is defined as Consumption or Consumer SpendingI is defined as Investment or Business SpendingG is defined as Government or Government SpendingX is defined as Exports andM is defined as Imports 5
6. 6. Gross Domestic Product (2000) GDP 2000(X-M) = - 3% Investment = 17.9% Consumption = 68%Government = 17.6% 6
7. 7. evaluating: Economic Growthcalculating the: Rate of Change of REAL GDP 7
8. 8. on measuring: Employment • use the Household Survey to estimate the unemployment rate • use the Establishment Survey to estimate the number of new jobs created • use the Employment Cost Index to estimate the costs of labor for business • use the Initial Claims for Unemployment to estimate the changes in overall employment levels • use the Labor Productivity and Unit Labor Costs to estimate the efficiency of the work force 8
9. 9. Real versus Nominal GDP Year 1 Year 2 Difference % changeNominal 220 280 60 27.3% IPD 110 120 Real 200 233 33 16.5% 9
10. 10. Real Oil Prices Real Oil Prices 70 60 50\$ per bbl 40 30 20 10 0 49 53 57 61 65 69 73 77 81 85 89 93 97 01 19 19 19 19 19 19 19 19 19 19 19 19 19 20 so ~ read the graph Year 10
11. 11. Real Teacher Salaries Salaries of California High School Teachers, Nominal and Real: 1985 - 2003 Nominal Salaries Real Salaries \$60,000 \$55,000 \$50,000Salary (\$) \$45,000 \$40,000 \$35,000 \$30,000 \$25,000 85 87 89 91 93 95 97 99 01 03 19 19 19 19 19 19 19 19 20 20 so ~ read the graph Year 11
12. 12. Real Minimum Wage Real and Nominal Minimum Wage 1985 - 2003 Minimum Wage (\$ per hour) Real Minim um Wage \$5.50 \$5.00Wage (\$) \$4.50 \$4.00 \$3.50 \$3.00 \$2.50 85 87 89 91 93 95 97 99 01 03 19 19 19 19 19 19 19 19 20 20 So ~ read the graph Year 12
13. 13. Prices• *Core Producer Price Index ~ the Producer Price Index (the “PPI”) measures average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending• *Core Consumer Price Index ~ the consumer price index (the “CPI”) measures changes in the price level of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services”• Implicit Price Deflator ~ the implicit price deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy* excludes the volatile food and energy sectors 13
14. 14. The Consumer Component• includes all personal consumption expenditures• includes retail sales made within the economy• reflects on the Index of Consumer Confidence measure• demonstrates how personal income is spent ~ disposable & discretionary 14
15. 15. Other Market Movers• any “situation” developing within an oil producing nation• any developing conditions of war and peace throughout the world• statements by policy makers or officials• announcements made with respect to the earnings reports of businesses 15