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Special Topics in Economics Econ. 491

Special Topics in Economics Econ. 491. Chapter 4: Understanding Economic Indicators (Unemployment, Prices, Financial &Monetary Data). I. Employment Unemployment Rate: - Measures the percentage of total labor force that is unemployed.

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Special Topics in Economics Econ. 491

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  1. Special Topics in Economics Econ. 491 Chapter 4: Understanding Economic Indicators (Unemployment, Prices, Financial &Monetary Data)

  2. I. Employment • Unemployment Rate: - Measures the percentage of total labor force that is unemployed. - The unemployment rate lags changes in other labor-market data, since most businesses alter work schedules before hiring or laying off employees. - It measures the balance between demand and supply in the labor market and is widely regarded as the most important and timely measure of resource utilization.

  3. - Can be defined as the failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force. -Unemployment can be measured as; Unemployment Rate = (unemployed / Labor Force) x 100 - How unemployment rate data affect the economy? - Think of the relationship between this indicator and the currency.

  4. Unemployment Insurance Claims: - Measuring the number of individuals filing claims for jobless insurance benefits and the number receiving payments. - Any change in these claims can be a useful signal of shifting trends in the labor market ( Think of the links between increase in claims and economic recession). - Unemployment insurance claims have large effect , as families on unemployment insurance maintain necessary spending more than saving. How!!

  5. II. Prices & Construction • Consumer Price Index (CPI): - The index is also called a cost of living index. - This index tracks the average price level of a basket of goods and services that consumers regularly buy in the country. - The CPI represents major groups such as food & beverages, housing, transportation, medical care, recreation, education, other goods and services) - The index is collected from consumer expenditure surveys. Prices are indexed to 100 in a given year .

  6. - Does the CPI include investment items (stocks, bonds, real estate), and why? - The CPI is the best measure of inflation. Explain!! - Think of the link between the CPI and Economy.

  7. Producer Price Index (PPI): - This index is a family of indexes that measure the average selling prices received by the country producers of goods and some services . - It consists of a survey that covers individual products ( around 8000 in USA) and product groups. - PPI limits its value to be an inflation indicator. Why!!

  8. Wholesale Price Index (WPI): - This index measures the price of goods at a wholesale stage ( goods traded between organizations rather than goods bought by consumers). - WPI is used as a measure of inflation in some economies ( i.e India, Philippines), whereas PPI is used to measure inflation in other countries ( i.e USA). - The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction.

  9. Export and Import Price Index : - These indexes ( Export price index and import price index) are used to deflate the merchandise trade figures, analyzing terms of trade, and exchange rate and price elasticity of trade volumes. - Markets tend to focus on movements in the price index for imports. Why!! -However, the export price index, in conjunction with change rate changes, are useful in judging the relative competitiveness of the country’s produced goods in foreign markets. Why!!

  10. III. Monetary and Financial Data • Monetary Aggregates: - The central bank tracks various measures of the stock of money in circulation and related aggregates of liquid assets. - Currently most central banks focus on two such measures : 1-M1; Currency in circulation + Demand Deposits+ Travel Checks 2-M2; M1 + Saving Deposits+ Time Deposits

  11. - These aggregates especially M2 have high market impact. - Monetarist economic theory holds that changes in the money supply should, over time, yield fairly predictable changes in nominal economic activities or output. - According to this theory, accelerations or decelerations in money stock growth influence real economic activity in the short term but only inflation in the long term.

  12. Monetary Base: - The monetary base is meant to measure the supply of “high powered money” in the economy that can be leveraged by the banking system for future lending activity. - The monetary base consists of (1) total bank reserves, (2) the currency portion of the money stock. - Many monetarists believe that changes in growth of the monetary base presage similar changes in the monetary aggregate growth rates.

  13. - A major problem with the monetary base as a measure of the stance of monetary policy is that it is comprised mostly of currency, - Thus, fluctuations in currency can be sometimes be related to changing domestic or international liquidity preferences rather than developments regarding final demand or lending. ( Explain !! )

  14. Tools of the Monetary Policy: - Tools of the monetary policy are used to influence the money supply at the economy. - First tool is the Open market operations whichconsists of buying and selling of government securities (or bonds). • When the Central Bank sells securities (OMS), commercial bank reserves are reduced (Money supply decreases…Why? ) • When the Central Bank buys securities (OMP) , commercial bank reserves are increased (Money supply increases .. Why?)

  15. - Second tool is the Reserve requirement Ratio (RRR) whichrepresents part of the deposits at each commercial bank should be kept at the central bank. • When the Central Bank increases RRR, commercial bank reserves are reduced (Money supply decreases…Why?) • When the Central Bank decreases RRR, commercial bank reserves are increased (Money supply increases…Why?)

  16. - Third tool is the Discount Rate(Rd) whichrepresents is the interest rate that the central bank charges to commercial banks that borrow from the central bank.. • When the Central Bank increases Rd, commercial bank reserves are reduced (Money supply decreases…Why?) • When the Central Bank decreases Rd, commercial bank reserves are increased (Money supply increases… Why?)

  17. The monetary policy is the use of monetary policy tools to affect the Aggregate Demand (AD). • Expansionary monetary policy To increase AD, central bank aims to increase Money Supply using: OMP, or lower RRR, or lower Rd • Restrictive(Contractionary)monetary policy To increase AD, central bank aims to decrease Money Supply using: OMS, or rise RRR, or rise Rd Monetary Policy • 30-17 • LO1

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