L06 Macroeconomics & Economics Indicators_BB(1)

Lecture 06

Macroeconomics & Economic Indicators

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Macroeconomics

Macroeconomics is a branch of economics dealing

with the performance, structure, behavior, and

decision-making of the economy as a whole.

This includes study national, regional, or global

economy.

Microeconomics and macroeconomics are the two

main fields in economics.

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http://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/Microeconomicshttp://en.wikipedia.org/wiki/Microeconomicshttp://en.wikipedia.org/wiki/Economics

Macroeconomists

Macroeconomists study aggregated indicators

such as:

Gross Domestic Products GDP,

unemployment rates, and

price indices

to understand how the whole economy functions.

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http://en.wikipedia.org/wiki/GDPhttp://en.wikipedia.org/wiki/Unemployment#Measurementhttp://en.wikipedia.org/wiki/Price_index

Gross Domestic Product (GDP)

Definition:

the market value of all final goods & services

produced within a country in a given period of time.

GDP per capita (inflation adjusted) is the main

indicator of the average persons standard of living.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

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http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

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Top 10 Economics Indicators

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1) Real GDP (Gross Domestic Product)

What is it?

The real GDP is the market value of all goods and

services produced in a nation during a specific time

period.

Real GDP measures a societys wealth by indicating how fast profits may grow and the expected return on

capital.

It is labeled real because each years data is adjusted to account for changes in year-to-year prices.

The real GDP is a comprehensive way to gauge the

health and well-being of an economy. 7

1) Real GDP (Gross Domestic Product)

Why is it important?

The Federal Reserve uses data such as the real GDP

and other related economic indicators to adjust its

monetary policy.

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2) M2 (Money Supply)

What is it?

M2 money supply represents the aggregate total of all

money a country has in circulation.

It takes into account all physical currency such as bills

and coins; demand deposit savings and checking

accounts; travelers checks; assets in retail money market accounts and small money market mutual funds,

(i.e., less than $100,000); individual time deposits and

savings deposits, such as certificates of deposits; in

addition to some repurchase agreements and Eurodollar

holdings. 9

2) M2 (Money Supply)

Why is it important?

The Federal Reserve uses this data to assess

current economic and financial conditions, and

to help alter its monetary policy, which includes

raising and lowering interest rates.

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3) Consumer Price Index (CPI)

What is it?

The CPI measures changes in the prices paid

for goods and services by urban consumers for

the specified month.

The CPI is essentially a measure of

individuals cost of living changes and provides a gauge of the inflation rate related to

purchasing those goods and services.

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3) Consumer Price Index (CPI)

Why is it important?

This statistic is the best indicator of inflation

that we have to rely on.

It is particularly closely scrutinized by

financial economists.

Changes in inflation can spur the Fed to take

action to change its monetary policy.

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4) Producer Price Index (PPI)

What is it?

The PPI is a group of indexes that measures the

changes in the selling price of goods and services

received by U.S. producers over a period of time.

As the business-side equivalent to the CPI that

measures changes in prices paid by consumers:

The PPI captures price movements at the

wholesale level, before price changes have

bubbled up to the retail level.

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4) Producer Price Index (PPI)

Why is it important?

This index is timely because it is the first

inflation measure available in the month.

In addition, by watching crude prices, which

are first in the chain of production trends, one

can sometimes spot inflation in the pipeline,

before it shows up in the CPI.

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5) Consumer Confidence Survey

What is it?

A gauge of the publics confidence about the health of the U.S. economy that reflects the

publics optimism/pessimism and the nations mood.

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5) Consumer Confidence Survey

Why is it important?

This statistic is a leading indicator of

consumer spending

: consumers are more inclined to spend

money when they are feeling confident about

their financial and employment prospects.

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6) Current Employment Statistics (CES)

What is it?

CES provides comprehensive data on national

employment, unemployment and wages and

earnings data across all non-agriculture industries,

including all civilian government workers.

Information is disseminated in many different

ways, e.g. employment/unemployment rates among

men and women, varied ethnic groups and teens.

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6) Current Employment Statistics (CES)

Why is it important?

This is the earliest indicator of economic trends

released each month.

Employment rates indicate the well-being of the

economy and labor force.

Changes in wages point to earnings trends and related

labor costs.

Economists focus on the monthly change in total non-

farm payrolls and in which sectors jobs were gained or

lost.

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7) Retail Trade Sales and

Food Services Sales

What is it?

This data tracks monthly U.S. retail and food

service sales, details changes from previous

periods, and identifies in which sectors sales

increased and/or decreased.

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7) Retail Trade Sales and

Food Services Sales

Why is it important?

The numbers measure consumers personal consumption across retail industries and track

growth or deceleration of personal consumption

spending, which makes up approximately two-

thirds of the annual U.S. GDP.

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8) Housing Starts (Formally Known

as New Residential Construction)

What is it?

An approximation of the number of housing units on

which some construction was performed during the

month.

Data is provided for single-family homes and multiple

unit buildings.

The data indicates how many homes were issued

building permits, how many housing construction

projects were initiated and how many home construction

projects were completed.

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8) Housing Starts (Formally Known

as New Residential Construction)

Why is it important?

Housing starts are highly sensitive to changes in

mortgage rates, which are affected by changes in

interest rates.

Although this indicator is highly volatile, it represents

about 4% of annual GDP, and can signal changes in

the economy and the effects of current financial

conditions.

Analysts and economists know to watch for longer-

term trends in housing starts.

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9) Manufacturing and

Trade Inventories and Sales

What is it?

This data represents the combined value of

trade sales and shipments by manufacturers in a

specific month, as well as the combined values

of inventories in the wholesale and retail

business sectors and manufacturing.

The current and most recent past months inventory/sales ratios are also provided.

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9) Manufacturing and Trade

Inventories and Sales

Why is it important?

This data set is the primary source of

information on the state of business inventories

and business sales.

Inventory rates often provide clues about the

growth or contraction of the economy.

A growth in business inventories may mean sales

are slow and the economys rate of growth is also slowing.

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10) S&P 500 Stock Index (the S&P 500)

What is it?

The Standard & Poors 500 is a market-value-weighted index of 500 publicly owned stocks

that are combined into one equity basket.

This basket of stocks has become the industry

standard and benchmark for the overall

performance of the U.S. equity markets.

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10) S&P 500 Stock Index (the S&P 500)

Why is it important?

The index is designed to measure changes in the stock

prices of component companies.

It is used as a measure of the nations stock of capital, as well as a gauge of future business and consumer confidence

levels.

Growth of the S&P 500 index can translate into growth of

business investment.

It can also be a clue to higher future consumer spending.

A declining S&P 500 index can signal a tightening of belts

for both businesses and consumers.

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Gross Domestic Product (GDP)

Gross Domestic Product (GDP)

measures total income of everyone in the economy.

GDP also measures total expenditure on the

economys output of goods & services.

For the economy as a whole,

income equals expenditure

because every dollar a buyer spends

is a dollar of income for the seller.

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GDP does NOT value

the quality of the environment;

leisure time;

non-market activity, such as the child care

a parent provides his or her child at home;

an equitable distribution of income

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Unemployment Rates in HK

29 http://www.tradingeconomics.com/hong-kong/unemployment-rate

http://www.tradingeconomics.com/hong-kong/unemployment-ratehttp://www.tradingeconomics.com/hong-kong/unemployment-ratehttp://www.tradingeconomics.com/hong-kong/unemployment-ratehttp://www.tradingeconomics.com/hong-kong/unemployment-ratehttp://www.tradingeconomics.com/hong-kong/unemployment-rate

Unemployment Rate

Based on adult population (16 yrs or older in US) (15 yrs or older in Hong Kong)

Unemployment rate is measured by (the number of

unemployed /the labor force) *100%

Unemployed: people not working but have looked

for work during previous 4 weeks

Employed: Paid employees, self-employed, and

unpaid workers in a family business

The labor force = Employed+ Unemployed

Who are not in the labor force?

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Consumer Price Index (CPI)

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Price Indices

GDP deflator:

measures the prices of the economy produced at present,

compared to the base year

Consumer Price Index (CPI):

measures the prices of the goods and services that a typical

household consume, compared to the base year

Inflation rate

is measured by the % change of the price index from the

previous year

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Correcting variables for inflation

One of the variables that should be adjusted for inflation is

interest rate

The nominal interest rate:

the interest rate not corrected for inflation

the rate of growth in the dollar value of a deposit or debt

The real interest rate:

corrected for inflation

the rate of growth in the purchasing power of a deposit or

debt

Real interest rate = (nominal interest rate) (inflation rate)

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Correcting variables for inflation

Example: Deposit $1,000 for one year.

Nominal interest rate is 9%.

During that year, inflation is 3.5%.

Real interest rate

= Nominal interest rate Inflation

= 9.0% 3.5% = 5.5%

The purchasing power of the $1000 deposit

has grown 5.5%.

To calculate the real return of and investment or a loan, the

real interest rate is more accurate

Macroeconomics and financial planning

After all, why we need to learn macroeconomics?

The stock price and dividend depends on the

profitability of that company, which is (in different

extent) affected by the business cycles

We need to understand the macroeconomics to forecast

our future incomes

Inflation decreases the value of money, so we need

forecast the inflation rate to estimate the retirement

planning

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End of Lecture

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