Unit one key economic indicators

LEAD-IN

Read the text and answer the questions that follow.

Every week there are dozens of economic surveys and indicators released. Economic indicators measure macro-economic variables that enable economists to judge whether economic performance has improved or deteriorated. Tracking these indicators is especially valuable fоr policy makers to determine not only where the economy is going, but how fast it's getting there and whether it is time for them to intervene. Economic indicators can have a huge impact on the stock market; therefore, knowing how to interpret and analyze them is important for all investors. As a student learning about business, and later as a business manager, you need to understand the nature of the economy and the terminology that is used to describe it.

Economic indicators (also referred to as numbers) show what is going on in the real economy, how well the economy is doing and how well the economy is going to do in the future.

Economists typically group macroeconomic statistics under one of the three headings: leading, lagging or coincident. Leading indicators are those which are believed to change in advance of changes in the economy, giving you a preview of what is going to happen before the change actually occurs. These types of indicators signal future events. “Changes in business inventories” is an important leading economic indicator as they reflect changes in consumer demand. New construction including new home construction is another leading indicator which is watched closely by economists and investors. A slowdown in the housing market during a boom often indicates that a recession is coming, whereas a rise in the new housing market during a recession usually means that there are better times ahead.

A lagging indicator is one that follows an event. Unemployment is one of the most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy has been doing poorly.

A coincident indicator is an economic indicator which varies directly with, and at the same time as, the related economic trend, thereby providing information about the current state of the economy. Coincident indicators are comprehensive measures of economic performance: real GNP, industrial production, income, and trade.

Most economic figures show a seasonal pattern that repeats itself every year. For example, prices of seasonal foods rise in the winter, sales of beachwear increase with the onset of summer, and industrial production falls in the months when factories close for annual holidays. There is a simple numerical process called seasonal adjustment which adjusts raw data for the observed seasonal pattern.

One way to smooth out erratic fluctuations is to look at an average.

The most important indicator is the GDP report. Gross domestic product (GDP) is defined as the market value of all goods and services produced by the economy in a given year. GDP includes only the goods and services produced domestically; goods produced outside the country are excluded. GDP also includes only those goods and services that are produced for the final user; intermediate products are excluded.

The nominal GDP measures the value of all the goods and services produced expressed in current prices. On the other hand, real GDP measures the value of all the goods and services produced expressed in the prices of some base year. Real GDP takes out the effects of price increases.

Don't confuse Gross Domestic Product with Gross National Product (GNP). GDP includes only goods and services produced within the geographic boundaries of the country, regardless of the producer's nationality. GNP doesn't include goods and services produced by foreign manufacturers, but does include goods and services produced by national firms operating in foreign countries.

By itself, GDP doesn’t necessarily tell us much about the state of the economy. But change in GDP does. The key number to look for is the growth rate of GDP. If GDP (after adjusting for inflation) goes up, the economy is growing. If it goes down, the economy is contracting.

Economic developments should be judged in the context of trends and cycles. The trend is the overall direction in which a nation's economy is moving in the long term. The repeated rise and fall of economic activity is called a business cycle. The cycle reflects short-term fluctuations around the trend.

A typical cycle runs from three to five years but could last much longer. A cycle can be divided into four general phases of prosperity, recession, depression, and recovery. Recession is normally defined as two consecutive quarters of falling GDP.

Industrial production/output is another widely used economic indicator. Many countries do not have quarterly estimates of gross national product but do have monthly figures on industrial production, covering manufacturing and mining and often including utilities and construction activity.

There are several indicators that focus on inflationary pressure. The most notable in this group are the Producer Price Index (PPI), which measures the average change over time in the selling prices received by domestic producers for their output, and the Consumer Price Index (CPI) which measures any change in the cost of a fixed group of products and services such as housing, food, transportation, medical care, apparel, and entertainment. The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling is called inflation rate. Central banks attempt to stop severe inflation, along with severe deflation. Most countries' central banks will try to sustain an inflation rate of 2-3%.

Economic conditions are the state of the economy in a country or region. Economic conditions change over time in line with the economic and business cycle, as an economy goes through expansion and contraction. Economic conditions are considered to be sound or positive when an economy is expanding, and are considered to be adverse or negative when an economy is contracting. A country's economic conditions are influenced by numerous macroeconomic and microeconomic factors, including monetary and fiscal policy, the state of the global economy, unemployment levels, productivity, exchange rates, inflation and so on.

The indicators discussed above only scratch the surface of the type of economic data that is published regularly. In the past, only investment professionals and economists could receive these reports on a timely basis. But thanks to the Internet, this information is now available to everyone.

Richard Stutely: “The Economist Guide to Economic Indicators. Making Sense of Economics”, 2010

http://www.investopedia.com

NOTES

1. Units and changes. Do not confuse percentage points with percentage changes. If an interest rate or inflation rate increases from 10% to 13%, it has risen by three units, or 3 percentage points, but the percentage increase is 30% (3÷10×100).

2. Annualised change. This is the change which would occur if the movement observed in any period were to continue for exactly 12 months. For example, orders rose 6.4% annualised during the first three quarters of 2006.

3. Annual change. This compares the total or average for one calendar or fiscal year with the previous one. For example, orders in 2006 were 2.7% higher than in 2005.

4. Change to end-year. This compares end-year with end-year: for example, orders fell by 2.1% over the four quarters to end-2001.

Answer the questions.

1. What is macroeconomics?

2. Why is it important to track economic indicators?

3. What do economic indicators measure?

4. What are the three broad categories of economic indicators?

5. What are the leading economic indicators supposed to predict? Give examples.

6. Which economic indicator measures the overall value of goods and services produced in the country?

7. What is the difference between real GDP and nominal GDP?

8. What is the difference between GDP and GNP?

9. What must be taken out of gross domestic product to compare economic output from one year to the next?

10. What does the unemployment rate measure?

11. What is the business cycle?

12. What are the four phases of a business cycle?

13. What do we call the economic indicator that measures inflation in the factors of production?

14. Is severe deflation good or bad for the economy? Why?