Lecture 06

Macroeconomics & Economic Indicators

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.

Macroeconomists
Macroeconomists study aggregated indicators
such as:
Gross Domestic Products GDP,
unemployment rates, and
price indices
to understand how the whole economy functions.

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

Top 10 Economics Indicators

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.

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.

10

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.
11

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.

12

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.
13

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.

14

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.

15

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.

16

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.

17

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 nonfarm payrolls and in which sectors jobs were gained or
lost.
18

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.

19

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 twothirds of the annual U.S. GDP.

20

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.
21

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 longerterm trends in housing starts.
22

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.
23

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.
24

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

What is it?
The Standard & Poors 500 is a market-valueweighted 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.

25

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.
26

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.
27

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

28

Unemployment Rates in HK

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

29

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?
30

Consumer Price Index (CPI)

31

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

32

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)

33

33

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
34

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

35

End of Lecture

36