Copyright 1998, R.H. Rasche EC 827 Section A: Module I Introduction: Economic Concepts, Measurements and Data Sources

Copyright 1998, R.H. Rasche

EC 827

Section A: Module I

Introduction: Economic Concepts, Measurements and Data Sources


Vital Statistics

Geoff Jenkins– Campus Address:

Department of Economics

108 Old Botany Hall

Michigan State University

East Lansing, MI 48824-1038

(517) 355-1861

– e-mail: [email protected]

– Office Hours: Business Complex ?


Organizational Information

EC 827- Economics Web Page– use Netscape or Internet Explorer to open:

» http://www.msu.edu/course/ec/827/

Email contact» [email protected]



Resources available on EC 827 homepage:

» Electronic Syllabus

» Assorted “how to” guides, etc.

» PowerPoint presentations



Working Assumptions» Skilled at Using e-mail

» Skilled at basic functions of Netscape/IE, Word, Excel (including formula) and PowerPoint

Course Structure– Split between Section A and Section B

» Section A: forecasting models

» Section B: macroeconomics


Macroeconomics and Forecasting: What, Me Worry?

Conditional Business Strategies

Macroeconomic Environment (National and International) as a Conditioning Factor


Macroeconomic Impacts- Examples I

Southeast Asia 1997-8-9, Russia 1998-9 US Auto Industry in 70s and 80s

» (import competition)

Japanese Auto Industry in Early 90s » (yen appreciation)

S&L Industry & Inflation in late 70s Texas vs. World Oil Prices: 1986


Part I

Economic Activity, Growth, Inflation, Unemployment, and

Policy Trade-offs


Measuring Economic Activity: GDP

Gross Domestic Product (GDP)– Measure of the amount of all currently produced

goods and services that are sold on markets but not resold during the period of measurement.

– Measure of Production» Transactions that involve existing assets are

excluded - production (and GDP ) of past.» Non-market activity (including productive

activity within household) generally not included



GDP as a flow

– measured over some period of time; without reference

to the time period, the concept has no meaning

– U.S. and most major countries measure over quarterly

and annual periods

– SAAR (seasonally adjusted at annual rates), i.e.

corrected for normal seasonal fluctuations, and then

extrapolated to a year ahead.



Seasonal Adjustment - Statistical Technique to smooth out regular intra-year fluctuations

– reduces value in fourth quarter and increases value

in other three quarters

– particular importance in certain sectors, e.g.

consumer goods, agriculture

Annual Rates - adjustment to indicate rate of production if continued at current pace for a full year.



If there’s inflation, nominal (current dollar)

GDP overstates rate at which economy is

growing.

– The Dollar value of the economy can grow, simply

because prices rise, not because of increased output

of real goods & services.

Real GDP is a quantity measure - most

comprehensive measure of volume of

production - independent of price changes



Real and Nominal GDP

– Measuring aggregate of non-homogeneous items

requires a common unit of measurement

– Nominal GDP (current dollar) measures value of

current production in the monetary unit of the

country

– Real GDP (constant dollar) measures amount of

production valued at the prices of some specific

point in time (base year)



Real and Nominal GDP, cont.

– By construction, real and nominal GDP are same in base year

– Base year in U.S. data updated approximately every five years.

» Feb, 1996 was last update to base year of 1992 from 1987.

» Purpose of updating base year is to minimize measurement errors in most recent real GDP data


Historical Perspective-Nominal and Real GDP

Nominal and Real GDP

Year1875 1889 1903 1917 1931 1945 1959 1973 1987

0

1000

2000

3000

4000

5000

6000

7000

8000

Nominal GDP

Real GDP


Historical Perspective -Real Growth

Real Growth Rate

Year1876 1889 1902 1915 1928 1941 1954 1967 1980 1993

-25

-20

-15

-10

-5

0

5

10

15

20


Measuring Economic Activity:Alternatives

Industrial Production– manufacturing sector

Personal Income– income received before personal taxes

If all that you’re measuring is economic activity, income should equal production or expenditure: what you make determines what you earn determines what you spend.


Business Cycle Phases

Recession (falling GDP) Recovery (rising GDP, out of the trough) Expansion (to above average levels of GDP)

Average U.S. Cycle Duration 48 Months– Recession - 18 months average

– Recovery and Expansion - 30 months average


U.S. Business Cycles: 1948-

Trough Months

– October, 1949

– May, 1954

– April, 1958

– February, 1961

– November, 1970

– March, 1975

– July, 1980

– November, 1982

– March, 1991

Peak Months– November, 1948

– July, 1953

– August, 1957

– April, 1960

– December, 1969

– November, 1973

– January, 1980

– July, 1981

– July, 1990


Average Real GDP Growth During Recessions

48-9: -1.1 % annual rate 53-4: -2.2 % annual rate 57-8: -3.4 % annual rate 60-1: -0.1 % annual rate 69-70: 0.2 % annual rate 73-5: -2.3 % annual rate 80-1: -4.9 % annual rate 81-2: -1.7 % annual rate 90-1: -3.4 % annual rate


Average Real GDP Growth During Expansions

49-53: 7.5 % annual rate 54-57: 3.4 % annual rate 58-60: 4.7 % annual rate 61-69: 4.2 % annual rate 70-73: 4.4 % annual rate 75-80: 3.8 % annual rate 80-81: 3.2 % annual rate 82-90: 3.3 % annual rate


Inflation: Consumer Price Index

Consumer Price Index - CPI– Measures average price of goods and services purchased

by urban, wage earning families.

– Prices measured relative to base year prices. Current base period = 1982-84

– Data collected monthly

– Used to index many contracts, both private and government (e.g. Social Security)


Inflation: Consumer Price Index

Measurement Biases in CPI– New Products

– Quality Improvements/Adjustments

– Discount Stores = sample selection problem.

Measurement Problems generally believed to add upward bias to CPI inflation of 0.5 to 1.0 percent per year– Political issues of re-calibration… how to fix the

deficit and enrage the AARP in one easy step...


Historical Perspective -CPI Inflation

CPI Inflation Rate

Year1876 1889 1902 1915 1928 1941 1954 1967 1980 1993

-12

-6

0

6

12

18


Inflation: Post WWII Experience

Stability: 1950s - 64 War: Vietnam Era: 1965-73 Sudden, unpleasant surprises: Oil: 1974-81 “Volcker Disinflation”: 1981-2 Stability: 1980s, “Greenspan period”: 1987-present


Employment and Unemployment

Consumer (Household) Survey Data– Employed if working

» ignores underemployed or overemployed

– In Labor Force if Employed or looking for work.» Homemaking? Only if you’re a French politician…

– Unemployed = Labor Force - Employed

– Unemployment Rate = Unemployed/Labor Force


Historical Perspective -Unemployment Rate

Unemployment Rate 1890-1995

Year1890 1902 1914 1926 1938 1950 1962 1974 1986

0

5

10

15

20

25

30

Pe

rce

nt


Unemployment Rate

Frictional Unemployment» The lucky: Moving from job to job

– Natural Rate of Unemployment

Cyclical Unemployment» The unlucky: Waiting for better days

Structural Unemployment» The clueless, helpless, hapless, hopeless

» These are the people that need & can use help


Historical Perspective - Inflation vs Unemployment

Phillips Curve 1890-1995

Unemployment Rate0 5 10 15 20 25 30

-15

-10

-5

0

5

10

15

20

25

Infl

ati

on

Ra

te


Part V

Interest Rates


Interest Rates

Nominal Interest rates – measure the fraction (or percentage) of value of a

loan earned by lender (or paid by borrower) per time period

– Short-term nominal rates

– Long-term nominal rates

Term Structure of Interest Rates


Historical Perspective - Nominal Interest Rates

Long- and Short-term Nominal Interest Rates

Year1875 1888 1901 1914 1927 1940 1953 1966 1979 1992

0

2

4

6

8

10

12

14

16COM_PAPERCORP_BOND

Pe

rce

nt


Interest Rates

Real Interest rates– measure the fraction (or percentage) of the purchasing

power of a loan that lenders expect to earn (or borrowers expect to pay) per period

– requires a measure of expectations (or forecasts) of inflation over the life of the loan

– real rate approximately equal to nominal rate - expected future rate of inflation

» Fisher-effect problems


Part II

How to get Economic Data


FRED

No Central Statistical Agency in U.S.

Federal Reserve Bank of St. Louis – maintains an electronic data base

– accessible via Internet

– Web address:

» http://www.stls.frb.org/fred

– data series can be downloaded using Netscape to local computer files

» see How To on EC 827 Web page


Using Data Retrieved from FRED

Data files can be opened and analyzed with Excel– eliminating blank rows: see How to on EC 827

home page

– Creating quarterly dates: see How to on EC 827 home page

– Creating quarterly average data from monthly series: see How to on EC 827 home page


US Economic DataGraphs

National Economic Trends– Federal Reserve Bank of St. Louis

– www.stls.frb.org/publ/net

Monetary Trends– Federal Reserve Bank of St. Louis

– www.stls.frb.org/publ/mt


www.stls.frb.org/publ/netExample


Weekly US Financial DataGraphs

Federal Reserve Bank of St. Louis– US Financial Data

– www.stls.frb.org/publ/usfd

Most US Economic data is either unavailable or unreliable over short (weekly, daily) periods, but the same techniques can be applied as for longer term data


www.stls.frb.org/publ/usfdExample

Documents

Copyright 1998, R.H. Rasche EC 827 Section A: Module I Introduction: Economic Concepts, Measurements and Data Sources