Contents
List of tables
List of charts
Chapter 1: Interpreting economic indicators
Chapter 2: Essential mechanics
Chapter 3: Measuring economic activity
Omissions
Output, expenditure and income
Prices
Putting it in context
Reliability
Chapter 4: Growth: trends and cycles
Nominal GDP
GDP per head
Real GDP
GDP: output
GDP: expenditure
Productivity
Cyclical or leading indicators
Chapter 5: Population, employment and unemployment
Population
Labour or workforce
Employment
Unemployment and vacancies
Chapter 6: Fiscal indicators
Public expenditure
Government revenues
Budget balance, deficit, surplus
National debt; government or public debt
Chapter 7: Consumers
Personal income, disposable income
Consumer and personal expenditure, private consumption
Personal and household savings; savings ratio
Consumer confidence
Chapter 8: Investment and savings
Fixed investment and GDFCF
Investment intentions
Stocks (inventories)
National savings, savings ratio
Chapter 9: Industry and commerce
Business conditions; indices and surveys
Industrial and manufacturing production
Capacity use and utilisation
Manufacturing orders
Export orders
Motor vehicles
Construction orders and output
Housing starts, completions and sales
Wholesale sales or turnover, orders and stocks
Retail sales or turnover, orders and stocks
Chapter 10: The balance of payments
Accounting conventions
Exports of goods and services
Imports of goods and services
Trade balance, merchandise trade balance
Current-account balance
Capital- and financial-account flows
International investment position (IIP)
Official reserves
External debt, net foreign assets
Chapter 11: Exchange rates
Nominal exchange rates
Special drawing rights (SDRs)
EMU, ecu, ERM and euro
Effective exchange rates
Real exchange rates; competitiveness
Overview
Terms of trade
Chapter 12: Money and financial markets
Money supply, money stock, M0 ... M5, liquidity
Bank lending, advances, credit, consumer credit
Central bank policy rates
Interest rates; short-term and money-market rates
Bond yields
Yield curves, gaps and ratios
Real interest rates and yields
Share prices
Chapter 13: Prices and wages
Price indicators
Gold price
Oil prices
Commodity price indices
Export and import prices; unit values
Producer and wholesale prices
Surveys of price expectations
Wages, earnings and labour costs
Unit labour costs
Consumer or retail prices
House prices
Consumer or private expenditure deflators
GDP deflators
Appendix: Useful websites
Index
OTHER ECONOMIST BOOKS
Guide to Analysing Companies
Guide to Business Modelling
Guide to Business Planning
Guide to the European Union
Guide to Financial Management
Guide to Financial Markets
Guide to Hedge Funds
Guide to Investment Strategy
Guide to Management Ideas and Gurus
Guide to Organisation Design
Guide to Project Management
Guide to Supply Chain Management
Numbers Guide
Style Guide
Book of Obituaries
Brands and Branding
Business Consulting
Buying Professional Services
The City
Coaching and Mentoring
Corporate Culture
Dealing with Financial Risk
Doing Business in China
Economics
Emerging Markets
The Future of Technology
Headhunters and How to Use Them
Mapping the Markets
Marketing
Successful Strategy Execution
The World of Business
Board Directors: an A–Z Guide
Economics: an A–Z Guide
Investment: an A–Z Guide
Negotiation: an A–Z Guide
Pocket World in Figures
Copyright © 2011 by The Economist Newspaper Ltd. All rights reserved.
Text Copyright © 2011 by Richard Stutely. All rights reserved.
Diagrams and Extracts © 2011 by The Economist Newspaper Ltd. All rights reserved.
Additional research Lisa Davies, James Fransham, Carol Howard, David McKelvey, Jane Shaw, Christopher Wilson.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
Published in Great Britain and the rest of the world by Profile Books Ltd
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
If the book title or subtitle includes trademarks/registered trademarks (Microsoft, for example) that require a statement on the copyright page, please add here.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more inf
ormation about Wiley products, visit our web site at www.wiley.com.
ISBN 978-1-576-60367-3
List of tables
1.1 World output and trade
1.2 Euro area countries
2.1 OPEC crude oil production and prices
2.2 US GDP
2.3 Chaining index numbers
2.4 When did inflation fall?
2.5 Choosing the period for comparison
2.6 Annualised and doubling rates
2.7 Analysing seasonal and erratic influences
4.1 Nominal GDP
4.2 GDP per head
4.3 Five world cycles
4.4 Dominant sectors
4.5 Productivity
4.6 Implied peaks and troughs in GDP
5.1 Population
5.2 Labour force
5.3 Total employment
5.4 Unemployment
6.1 General government spending
6.2 General government budget balances
7.1 Personal income, outlays and savings in the United States
7.2 Consumer spending
8.1 Investment and savings
8.2 Real fixed investment
8.3 Savings ratios
9.1 Output by sector
9.2 Motor vehicle markets
10.1 Exports of goods and services
10.2 Imports of goods and services
10.3 Trade and current-account balances
10.4 External debt
11.1 Exchange rates
11.2 Currencies in the SDR
11.3 SDR exchange rates
11.4 Permanent conversion rates against euro area currencies
11.5 Effective exchange rates
11.6 Real effective exchange rates
12.1 Money supply
12.2 Comparative interest rates
12.3 Benchmark yields
12.4 Yields
12.5 Real yields
12.6 Share prices
13.1 Comparative inflation rates
13.2 The world oil market
13.3 Producer prices (manufacturing)
13.4 Hourly earnings in manufacturing
13.5 Unit labour costs in the whole economy
13.6 Consumer prices
13.7 Consumer spending deflators
13.8 GDP deflators
List of charts
1.1 Industrial countries’ GDP
2.1 Index numbers: illusory convergence
3.1 GDP per sector
3.2 Domestic spending
3.3 Trade in goods and services
4.1 US trends and cycles
4.2 Total GDP
4.3 GDP per head
4.4 GDP growth
5.1 Growth in the labour force
5.2 Employment
5.3 Unemployment
6.1 General government spending
6.2 Budget balances
6.3 Net public debt
7.1 Consumer spending
7.2 Growth in current consumer spending
7.3 Net household savings
8.1 Real fixed investment
8.2 Growth in real fixed investment
8.3 Gross national savings
9.1 Structure of production and sources of growth
9.2 Industrial production
9.3 Manufacturing sector
10.1 Exports of goods and services
10.2 Growth in exports of goods and services
10.3 Imports of goods and services
10.4 Growth in imports of goods and services
10.5 Current-account balances
11.1 Exchange rates
11.2 Effective exchange rates
11.3 Real effective exchange rates
12.1 Short-term interest rates
12.2 Short-term interest rates, 2008
13.1 Inflation in industrial countries
13.2 The Economist commodity price indicator
13.3 Changes in producer prices
13.4 Compensation per employee in the business sector
13.5 Changes in consumer prices
Chapter 1
Interpreting economic indicators
An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.
Dr Laurence J. Peter
All politicians seem able to demonstrate that their party presided over the fastest economic growth, the biggest fall in unemployment or the lowest inflation. Common sense suggests that they cannot all be correct. How can you interpret such claims?
This book shows how economic figures can be manipulated to demonstrate almost anything. More important, it explains how to read them, cut through any media hype and make up your mind about what they show, requiring no prior knowledge of economics or statistics. It deals with all the most important economic indicators and answers questions such as the following.
What are they? What are GDP, the invisibles balance, the terms of trade, the labour force?
What do they cover? What is included in retail sales data, what is not in GDP, who is in the labour force?
What is their significance? What do GDP, capacity utilisation or the terms of trade tell us?
Where and when are they are published? Should you look for weekly figures from the central bank, monthly information from a private organisation, quarterly numbers from the Department of Commerce, and so on?
How reliable are they? Reasonably reliable in the case of spending by a particular government department, reasonably unreliable in the case of the size of the labour force. Who knows how many people not registered as unemployed would come forward if jobs were suddenly available?
Will they be revised or are the first-reported figures set in stone? For example, GDP data are revised endlessly, consumer-price data rarely.
How should they be interpreted? The most important question.
Why interpret economic figures?
There are as many reasons for interpreting economic indicators as there are published statistics. You may want to:
get the best return on investing your money;
measure companies and their products;
judge if the time is right to give the go-ahead to a new capital investment project, to launch a takeover or to move into new markets;
get a better understanding of how an economy is performing;
judge the government’s economic policies;
obtain a feel for an unfamiliar economy;
compare several countries;
make a forecast; or
simply obtain a better understanding of the news.
The countries
This book takes a global view and is intended as a guide to interpreting economic indicators worldwide.
Since it would be cumbersome if not impossible to list figures for all countries, the tables generally show data for the largest industrial countries and the leading developing countries. Where appropriate, totals or averages are also shown for the OECD and the euro area (see definitions below).
The Economist includes over 40 countries each week, with more on its website, www.economist.com. This book therefore provides the background to these figures and the historical data behind the up-to-the-minute information.
America
If at times undue attention seems to be given to America, it is because the American economy occupies such a dominant position, accounting as it does for about one-fifth of world output and over one-third of the output of the industrialised countries.
Bankers, financiers and politicians worldwide depend on economic events in America. For example, apart from the direct effects on the major financial markets, a change in the dollar’s exchange rate affects the prices of many internationally traded commodities such as oil, and influences trade balances worldwide, especially those of the 40 or so countries with currencies directly pegged to the dollar.
Country groups
In 2008 total world economic output was around $60,000 billion a year at market exchange rates and $70,000 billion a year at purchasing power parity.
Table 1.1 shows how this was split among advanced and developing countries, and various other groups which are sometimes used as a basis for analysis. The terminology and definitions are internationally accepted and are used by the World Bank (IBRD) and the International Monetary Fund (IMF), among others.
Table 1.1 World output
Developing countries
Of the 183 countries in Table 1.1, the 122 developing countries account for over one-third of world output. Of these the 47 sub-Saharan African states account for less than one-fortieth of world output. Many of them are debt-laden, with slow economic growth and low income per head. They are used in this book as an example of one of the extremes of economic performance.
Asia
At the other extreme, the four Asian newly industrialised countries (NICs) – Hong Kong, Singapore, South Korea and Taiwan – account for 3.7% of world output. Their economic growth rates – and those of China (the world’s third largest economy), Indonesia, Malaysia and Thailand – were among the highest in the world in the 1980s and 1990s, up to the Asian crisis of 1997.
Key regional and economic groups
Group of Seven (G7)
Canada, France, Germany, Italy, Japan, the UK and the United States, which together accounted for over 50% of world GDP in 2008, measured at market exchange rates; over 40% using purchasing-power parity exchange rates. The G8 includes Russia.
European Union (EU – 27 countries)
Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.
Euro area (16 countries)
Eleven of the EU’s member states (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain) adopted a single currency, the euro, on January 1st 1999. Greece joined on January 1st 2001, Slovenia on January 1st 2007, Cyprus and Malta on January 1st 2008 and Slovakia on January 1st 2009. Economic statistics for the euroarea, as well as national economies, are published in The Economist each week. Table 1.2 gives some key data on the euro area countries.
Table 1.2 Selected countries compared, 2008
Advanced countries (IMF definition – 33)
Euro area members plus Australia, Canada, Czech Republic, Denmark, Iceland, Israel, Japan, New Zealand, Norway, Sweden, Switzerland, the UK and the United States, plus the four newly industrialised Asian economies.
Organisation for Economic Co-operation and Development (OECD – 31)
As at May 2010, the euro area (without Cyprus, Malta or Slovenia) and other G7 countries plus Australia, Chile, Czech Republic, Denmark, Hungary, Iceland, Mexico, New Zealand, Norway, Poland, South Korea, Sweden, Switzerland and Turkey. The term industrial countries is used in this book to refer to the OECD. Strictly speaking the two are not quite the same since the OECD includes some emerging countries but they account for only a small amount of OECD economic output.
Guide to Economic Indicators Page 1
