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, 13 February, 12
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 costs
Monday, 13 February, 12
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 Economics
Monday, 13 February, 12
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 Economics
Monday, 13 February, 12
6. Measuring economic performance
✤ Output of goods & services ✤ Productivity of workers
✤ Changes in prices for goods &
services over time
✤ Mood of consumers
✤ Employment
✤ Total supply of money
✤ Trade with other countries
Monday, 13 February, 12
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 Supply
Monday, 13 February, 12
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, 13 February, 12
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, 13 February, 12
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
year
Monday, 13 February, 12
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 performance
Monday, 13 February, 12
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 good
Monday, 13 February, 12
14. Components of GDP
Gross Domestic Product =
Consumption + Investment + Government
spending + (exports - imports)
or
GDP = C + I + G + (E - I)
Monday, 13 February, 12
15. Factors that impact GDP
✤ Exchange rates
✤ Purchasing-power parity
✤ Interest rates
✤ Inflation (real GDP vs. nominal GDP)
✤ Capital depreciation
✤ Gross domestic product, not net
Monday, 13 February, 12
16. Ways of using GDP
✤ Cross-border comparisons
✤ Either by value or by % change
✤ Productivity
✤ GDP per hours worked
✤ Prosperity
✤ GDP per person
Monday, 13 February, 12
17. 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
Monday, 13 February, 12
18. Income and inequality
✤ Gini index is a commonly used measure of income inequality within
an economy
✤ A Gini coefficient 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, 13 February, 12
19. Freedom & Fairness
Command Free-market
Economy Economy
U.S.
Hong Kong
N. Korea
Sweden
Monday, 13 February, 12
20. Gini index
N. Korea
U.S.
Hong Kong
Sweden
Source: CIA World Factbook
Monday, 13 February, 12
21. Gini index
N. Korea
U.S.
Hong Kong
Sweden
?
Source: CIA World Factbook
Monday, 13 February, 12
22. Gini index
N. Korea
U.S.
Hong Kong
Sweden
?
23
(2005)
Source: CIA World Factbook
Monday, 13 February, 12
23. Gini index
N. Korea
U.S.
Hong Kong
Sweden
?
40
23 (1997)
(2005)
Source: CIA World Factbook
Monday, 13 February, 12
24. Gini index
N. Korea
U.S.
Hong Kong
Sweden
?
40
23 (1997)
(2005)
45
(2007)
Source: CIA World Factbook
Monday, 13 February, 12
25. Gini index
N. Korea
U.S.
Hong Kong
Sweden
? 53
40 (2007)
23 (1997)
(2005)
45
(2007)
Source: CIA World Factbook
Monday, 13 February, 12
26. 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, 13 February, 12
27. Japan grows but stays fragile
By Mure Dickie in Tokyo and Robin Kwong in Taipei
21 May 2010
Change
Japan's 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 Japan's 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, yesterday's first-quarter estimate left no doubt of Japan's 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 Japan's 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. Future
Monday, 13 February, 12
28. 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 time
Monday, 13 February, 12
29. Problems with CPI
✤ Actual index base year is arbitrary (Oct. 2004-Sep. 2005 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 ones
Monday, 13 February, 12
30. CPI: Core vs.
non-core
Change in U.S. CPI 1958-2011
✤ Core CPI: excludes “volatile”
components such as food and
energy
✤ But definition of “core” can
vary from country to
country
✤ Non-core CPI: includes all
index components
Source: Thumbcharts
Monday, 13 February, 12
31. 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 consumers
Monday, 13 February, 12
32. Japan Consumer Prices Fall 1%
By Tomoyuki Tachikawa
1 October 2010
TOKYO -- Japan's 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 country's 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 Japan's 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 Japan's 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. "It's very likely for the Japanese economy to stall
down the road."
Tokyo policymakers have also become more concerned over the future course of
Japan's economy. Future
Monday, 13 February, 12
33. CPI in Hong Kong
✤ CPI (A): basket based on expenditure patterns of 50% of households,
namely those with low income (HK$4,400-$17,300 currently)
✤ CPI (B): based on the habits of the next 30% of households by income
(HK$17,300-$31,100)
✤ CPI (C): based on the next 10% (HK$31,100-$67,900)
✤ Composite CPI: includes all of the above, or 90% of HK households
✤ This is usually the headline number
Monday, 13 February, 12
34. 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 Kong's 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 Kong's headline consumer price index rose 4.6% in March from a year earlier,
the Census and Statistics Department said Thursday, accelerating from February's Future
3.7% rise to the fastest pace since the CPI rose 4.6% in August 2008. March's
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 February's 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 February's 4.1% rise.
Property prices in the territory rose around 24% last year, following a 30% surge in
2009, but rents haven't 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 Kong's 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 city's CPI rise to reach 4.7% or even higher for the full year.
The government
Monday, 13 February, 12 has said it expects the CPI to rise 4.5% in 2011, above the 2.4%
35. 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 & services
Monday, 13 February, 12
36. 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, 13 February, 12
37. 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.’s
Monday, 13 February, 12
38. 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 week's 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%. It's probably the other 20% who say, 'I'm worried,
I'm uncertain, I'm 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 weren't 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. "We're 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 hasn't 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 can't
find full-time work, hit 17.5% in October -- up half a percentage point from September.
Tom O'Pray, 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. O'Pray 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. O'Pray 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.
"I'd prefer another office job," he said. "I'm working harder, for less money, than I ever have in my whole life."
The economy's 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, 13 February, 12
39. 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 sentiment
Monday, 13 February, 12
40. 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 businesses
Monday, 13 February, 12
41. Some other indicators
✤ Consumer Confidence
✤ Balance of Payments, including Trade Balance
✤ Industrial Production
✤ Retail Sales
✤ Tourist Arrivals
✤ Home Sales/Land Sales
Monday, 13 February, 12