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Guide to Economic Indicators: Making Sense of Economics, Fifth Edition
The definitive guide to understanding and interpreting economic indicators The Book It is essential in business and many professions today to have a thorough understanding of economic information. Written for the non-specialist, this highly accessible guide provides the keys to understanding all the major and many lesser economic what they are, the areas they cover, their reliability, and how and why to interpret them. It contains chapters
• GDP (Gross Domestic Product),GNP (Gross National Product) and GNI (Gross National Income)
• Growth, trends and cycles
• Population, employment, unemployment
• Government and Consumers
• Investment and savings
• Industry and commerce
• Exchange rates
• Money and financial markets Now in its fifth edition this fully updated, revised guide is invaluable for anyone who needs or simply wants to have the underlying economic realities of the world we live in clearly explained.
• GDP (Gross Domestic Product),GNP (Gross National Product) and GNI (Gross National Income)
• Growth, trends and cycles
• Population, employment, unemployment
• Government and Consumers
• Investment and savings
• Industry and commerce
• Exchange rates
• Money and financial markets Now in its fifth edition this fully updated, revised guide is invaluable for anyone who needs or simply wants to have the underlying economic realities of the world we live in clearly explained.
240 pages, Hardcover
First published March 12, 1998
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August 9, 2023
En bra genomgång av olika typer av indikatorer och vad de används för. I princip en handbok. Enkel och utmärkt läsning.
December 3, 2021
Note: This is less of a review than a summary of my notes on this book. My notes may be helpful to some readers in determining whether to buy the book, but I am not qualified to review the book other than to say it was useful to me. My experience with economics has been purely tied to an undergraduate course in macroeconomics and personal exposure to the business and investing world where I am not a professional.
Readers of The Economist would have learned much of what is to be learned in their Guide to Economic Indicators: Making Sense of Economics. I recently read the seventh edition of the resource and found it to be a very enjoyable discussion of technical matters often reduced to a technical term, acronym (more technically, initialism), or phrase that may seem opaque to the novice or casual investor. I particularly liked some of the use of formulae in explaining where certain index numbers or calculations originate.
For example, the book explains different means of “weighting” inflation. For example, if you paid $9.00 per bottle on wine and $5.00 per pound of cheese in 2005 (Isn’t this already better than the “Guns vs. Butter” of macroeconomics?) and that had increased to $10.50 per bottle on wine and $8.00 per pound on cheese, how would you index it? The book adds hypothetical quantities (5 bottles in 2005 and 6 in 2010—yeah, I know, not very good wine, but bear with me—and 2 pounds of cheese in 2005 and 3 in 2010—maybe if it was only Velveeta) and then, explains: take 2005’s $9 * five bottles and $5 * 2 pounds and add those two sums together ($45 + $10 = $55) and then take 2010’s $10.50 * six bottles and $8 * 3 pounds of cheese for ($52.50+$16.00 =) $68.50. To index this, you would treat the 2005 total as 100% and $68.50/55.00 (* 100 to get %) as 124.5. So, it appears that 2010 was 24.5% costlier than 2005 or approximately 5% inflation. Of course, that is a crude back of the envelope way of looking at a cost basis (p. 15), but the authors teach you how to do current weighting on p. 16 (where you get 124.3 – slightly less, but still in the ballpark). Naturally, one can’t judge an entire economy with one person’s wine and cheese purchases, but this was a helpful way of starting to understand some of the calculations included in economic measurements.
I particularly liked the way the authors offered different methods for the same types of calculations. On p. 24, there are three methods of finding the growth rate over several periods (IF you know the growth rate over one period). Assume the growth rate is 7.5% per year for 10 years. Step 1 (divide r/100) has 7.5/100 for .075. Step 2 (Add 1) means 1.075. Step 3 means raise to the power of n (multiple the value in Step 2 times itself the number of periods—in this case, 10 years) so 1.075 to the power of 10 which gives you 2.061. Step 4 has you subtract 1, leaving you with 1.061. Step 5 requires you to multiply by 100 and that nets 106.1 with means you get a 106.1% increase over 10 years. Even though there are now Excel spreadsheets to do these kinds of calculations for you, it’s interesting to see the way this is derived on a simple level.
Of course, I really read this book for the discussions of technical terms. I knew what GDP was (Gross Domestic Product) in general, but laughed out loud when the authors admitted that many economists say that it stands for “Grossly Distorted Picture” (p. 28). Why is it distorted? It is distorted because of all the things missing (partial list on p. 30 lists such things as gifts, barter, depletion of resources, environmental costs, and more). Some GDP calculations regarding cost are actually deflationary because they don’t reflect real costs (p. 39). The book discusses GNI (sometimes called GNP or Nominal GDP) as a way of looking at total economic output more realistically because it uses factor costs to measure outputs or incomes and market prices to measure expenditure patterns (p. 43). And, of course, almost everyone likes to read statistics on GDP per Head (p. 45). This is relatively simple in that it is the GDP number divided by population size. It may be wildly inaccurate in nations with large families but it is only supposed to provide a general sense of “overall economic welfare” (p. 45).
It certainly rings true that the U.S. target for Real GDP is around 3% (p. 47) while developing industrial nations need a higher percentage (p. 48). In case one didn’t know the sectors monitored in GDP output (aka production), the authors list them as: agriculture, mining, manufacturing, and service (p. 50)—even though I rarely hear/read anything about the mining sector other than those interests in which I am invested. On the GDP spending side, the main sectors are: consumption, investment, and services (p. 51) with changes in stock values creating a variable in that number (p. 52). Remember that the purpose of the book is to help the reader navigate the economic news to be investigated. So, the authors point out that output is sometimes measured in terms of “output per unit of labor” or “output per unit of capital” (p. 52). Naturally, to get those numbers, one divides total output by total employment or total output by total capital expended for that (pp. 52-53). In turn, “output per unit of labor” can be further delineated by dividing it by the total number of hours worked to get the “output per worker hour” (usually abbreviated to “man hour” but I perceive that as somewhat unfair—p. 53).
The second section on economic cycles is interesting. The authors define the economic cycle as consisting of four phases: expansion, peak (p. 54), recession (p. 55), and trough (pp. 56-57). In identifying expansion, the first sign is demand which lowers inventories. So, the output outgrows the demand to correct the imbalance, increasing employment to raise output, and usually, the new employees now have funds to spend and can consume products on consumer demand which has heretofore been thwarted. This period of growth moving upward begins to show that it is peaking when interest rates start getting higher and full employment numbers appear. Once the sign of peaking occurs, investments and demand fall, corporations cut back on employees because they need less products. Eventually, the economy recedes into a trough until a new cycle of expansion starts. The bottom line is that the leading indicator for the restart cycle is usually low interest rates that begin rising with new demand/production. The lagging indicator is that manufacturing capacity peaks a few months after the actual peak is reached and employment begins dropping about three months later (p. 58).
Shortly thereafter, there is a horrifying graphic which indicates Japan’s current difficulty. Japan’s old age dependency (shown on the table on p. 62) is the highest on earth and, from my recent reading, even worse than when this chart was published. Since REAL GDP must at least be equal to Population Growth for the economy not to fail, this bodes ill for Japan’s economic future (p. 63)
Guide to Economic Indicators: Making Sense of Economics also taught me some technical terms that explain why, even in “full employment,” unemployment never drops to zero. Frictional unemployment accounts for people “changing” jobs; structural unemployment means that there is a mismatch between the skill sets in the available labor force and the skills needed for open jobs (hence, the need for retraining and continual learning); seasonal unemployment means agricultural jobs and holiday/vacation temporary jobs; and residual unemployment represents the hardcore which will simply never be willing or able to work (pp. 69-70). I knew there was a theoretical ideal balance where the available laborers and number of jobs were in enough balance that they didn’t contribute to the wage-price spiral and not out of balance such that they did contribute to the spiral. This theoretical number is sometimes called the Natural Rate of Unemployment (NRU) and sometimes the Non-Accelerating Inflation Rate of Unemployment (NAIRU) (p. 70).
Despite how nice the idea of a balanced budget sounds, one should know that it isn’t always a good thing. Balanced budgets don’t encourage growth and that means that entropy can actually start the GDP into decline. Budget deficits increase both demand and output (IF they are controlled, and that’s what a lot of people don’t understand about Keynesian economics) because they provide a “net injection into the circular flow of incomes.” (p. 83) Of course, out-of-control deficits can be the kind of accelerants that start fires. Budget surpluses can be good if an economy is anticipating some large demand or expenditure in the future (an aging population with need of a security net for example?), but if the surplus takes too much money out of the flow, it is bad for the economy (p. 83). Yet, as the late comedian, Red Skelton, used to say when his jokes fell flat, “We just do ‘em folks, we don’t explain ‘em,” the authors of this book just explains the terminology; they don’t necessarily provide answers. An example would be the admission on p. 88 that there is no ideal Debt/GDP ratio agreed upon by economists.
Of course, I couldn’t read the next chapter without remembering the T.A. in my macroeconomics class for my undergraduate degree. He had been a foreign student and never got over substituting an “sh” for the “s” in consumer spending (good thing he never had to tell us to sit). Generally, economists pay attention to a contributing number for “conshumer” spending by observing the Real PDI (personal disposable income after direct taxes and fees, but as opposed to PDI, is adjusted for inflation—p 90). In discussing consumer spending, the authors point out something that seems almost counterintuitive to me: when consumers expect prices to rise because of inflation, they draw back from spending mode and move into savings mode—meaning savings as a component goes UP during inflationary periods rather than down (pp. 93, 97-98). Why does this seem counterintuitive to me? It’s because actual interest rates on savings don’t usually keep pace with inflation (at least, in my experience), so one is apparently losing spending power by saving in such periods. Just a thought that, apparently, doesn’t coincide with reality.
Remember that old axiom about “lies, damn lies, and statistics?” Guide to Economic Indicators: Making Sense of Economics doesn’t exactly use it, but they help the would-be investor read between the lines on some of these indicators. For example, a table comparing net savings on an international basis is presented on p. 97. It looks very bad for the U.S. which seems as low compared to other nations as the Chicago Bears to other offenses in the National Football League. Yet, the book points out that these rates are not comparing apples to apples (or even Adobe to Adobe) because they don’t uniformly consider private pensions and life insurance, household interest payments, capital transfers and depreciation and their impact on the net savings calculation. On the flip side of the consideration of consumer spending, the authors briefly consider what is often called the Misery Index. Alas, when you hear the term, you need to consider if it is being calculated by adding the rate of price inflation on a consumer basis plus the unemployment rate or the rate of price inflation plus annual interest rates (p. 99). Both are used so one should know what one is considering.
A new initialism to me was GDFCF (Gross Domestic Fixed Capital Formulation) as defined as spending on goods with a lifetime beyond one year before depreciation, manufactured in the home country, non-fluctuating as in equities, and representing physical rather than financial investment (p. 103). One change I hadn’t caught until reading this book was that it is no longer the National Association of Purchasing Managers who collate the PMI to provide an index of production and manufacturing. It is now provide by the United States Institute for Supply Management (p. 115). It’s the same indicator but a different source organization. To get this number, the providers examine both manufacturing production to determine the value-added output of physical products built and industrial production which includes manufacturing production as well as supplies for energy/water utilities along with mining and drilling output. Sometimes, certain types of construction are added to this number (p. 117).
The United States has the most detailed survey of the indicator known as capacity utilization. It is conducted by the Federal Reserve (Fed), but it is not a hard and fast survey; it estimates a maximum sustainable capacity for production (like a theoretical hull speed on a sailing vessel, it can be exceeded for short times, but not recommended). The U.S. has been below 90% since 1967 (p. 119). That shouldn’t be surprising to anyone who has noticed the offshore outsourcing strategy over recent decades. One also hears a lot about construction indicators when one reads or researches economic trends. In general, infrastructure (whether government or corporate) builds are positive toward future output (p. 125) while housing starts are a mixed bag (implying future purchases of materials which would be a positive factor (p. 127) but not as much when replacing older homes (p. 128).
The initial portion of the chapter on the Balance of Payments (BOP, of course, pp. 131-135) was very enlightening to me, even though the illustrations largely came from the U.K. experience and are grossly out-of-synch with the current post-Brexit mess (at least from MY side of the Atlantic). The authors do a good job of explaining the need for the “net errors and omissions” provision for a residual balancing item (aka “statistical discrepancy”) to cover timing differences (p. 133). Although this may seem necessary to any person familiar with basic accounting, the book notes that when there is a large negative line item in these “net errors and omissions,” that may indicate a significant amount of capital “fleeing” the country and when it is a significantly positive line item here, it may be a signal of unreported illegal proceeds (p. 133). Since I usually barely glance at such numbers, this added a new level of interest for me. Later in the chapter, the authors remind readers that the trade balance may measure strictly manufactured goods or all imports (including highly volatile commodities) (p. 143)
One indicator that I’ve never encountered before (but might examine soon) is the International Investment Position (IIP) which measures the balance sheet levels of external assets and liabilities (p. 150). What are the net equity assets invested in foreign corporations after the foreign liabilities are subtracted? The book features the 2008 numbers for he US at $23.4 trillion in foreign liabilities and $19.9 trillion in US investments for a negative 3.5 trillion (p. 150). For comparison’s sake the official US site (Bureau of Economic Activity) tracked this to $46.267.6 trillion foreign dollars invested in the US at the end of the 2nd quarter of 2021 with $32.256.3 trillion US dollars invested in foreign securities in that period for a negative $14.011.3 trillion. I guess that indicates that we’re not the imperialistic capitalists which we have been accused of being. (grin) Of course, one must remember that these numbers can seem out of whack because book values on equities could be overstated or understated compared to actual market value at any given time (p. 153).
The chapter on Money is a must for all investors (if they don’t understand the rudimentary principles of monetary supply—many of which had become vague since my university days). The concepts in this chapter are particularly necessary in this era of “floating currency evaluation.” Page 158 notes that of 100 International Monetary Fund (IMF) members, less than 1/6 (including Australia, Canada, and the U.S.) are free-flowing regarding the exchange rate. In other words, the central banks “interfere.” There is a valuable discusson on SDRs (Special Drawing Rights), bundles of currency which are “sold” for an average of the four currencies involved. The first ones were offered in 1970 at 1/35 ounce of gold which was, in turn, the value of the dollar (p. 162). The IMF tried it with an average of 16 currencies from 1974-1981 but that was considered too unwieldy (p. 163). The Effective Exchange Rate (EER) dwindled, in the case of the dollar to 90.8% of a dollar by 2008 (p. 167). The authors do take time to clarify that EER does not factor inflation into their calculations but when you see Real EER, you can count the inflation as being calculated.
One eye-opener for me was the calculation of the TOT (Terms of Trade). This is simply a ratio between export prices and import prices (p. 172). Obviously, the healthier economy would want export prices to be higher. For me, the refresher course on M0, M1, and M2 was welcome. M0 means the amount of money in the economy multiplied times V (Velocity = the number of times a unit of currency changed hands in the period) to get the total amount of money spent. This, in turn, should be equal to the amount of P (Price) times Y (real output) (p. 175). M1 is sometimes called “narrow money” because it only counts currency in circulation plus on-demand deposits (at least, this is how it’s measured in the U.S. – p. 176). M2 is called “broad money” and it adds to M1 savings deposits, time, deposits, and money market mutual funds available to consumers (also p. 176). M3 takes M2 and adds in the institutional money funds, large time deposits, repurchase agreements, and Eurodollars (also p. 176). This section also had the advantage of offering a British axiom known as Goodheart’s law: “Any monetary variable loses its usefulness within six months of being adopted as a target of monetary policy.” (p. 179)
If you don’t remember the difference between the discount rate and interest rates, the discount rate is the difference between the price you pay for a bond and its face value due upon maturity while the interest rate is what is paid on the bond (p. 185). So, as per the book’s illustration, if the discount rate is 7.5% such that you paid $92.50 for a $100 face value bond, that means that the interest rate would be 8.1% (7.5 divided by 92.50 and expressed as a percentage (also p. 185). [This doesn’t include any actual interest payment in addition to the discount, though.] From there, the authors discuss the yield rate and yield curve across multiple issues of bonds (pp. 192-195).
The most disappointing section to me was the discussion on prices and wages (pp. 195-218).
Readers of The Economist would have learned much of what is to be learned in their Guide to Economic Indicators: Making Sense of Economics. I recently read the seventh edition of the resource and found it to be a very enjoyable discussion of technical matters often reduced to a technical term, acronym (more technically, initialism), or phrase that may seem opaque to the novice or casual investor. I particularly liked some of the use of formulae in explaining where certain index numbers or calculations originate.
For example, the book explains different means of “weighting” inflation. For example, if you paid $9.00 per bottle on wine and $5.00 per pound of cheese in 2005 (Isn’t this already better than the “Guns vs. Butter” of macroeconomics?) and that had increased to $10.50 per bottle on wine and $8.00 per pound on cheese, how would you index it? The book adds hypothetical quantities (5 bottles in 2005 and 6 in 2010—yeah, I know, not very good wine, but bear with me—and 2 pounds of cheese in 2005 and 3 in 2010—maybe if it was only Velveeta) and then, explains: take 2005’s $9 * five bottles and $5 * 2 pounds and add those two sums together ($45 + $10 = $55) and then take 2010’s $10.50 * six bottles and $8 * 3 pounds of cheese for ($52.50+$16.00 =) $68.50. To index this, you would treat the 2005 total as 100% and $68.50/55.00 (* 100 to get %) as 124.5. So, it appears that 2010 was 24.5% costlier than 2005 or approximately 5% inflation. Of course, that is a crude back of the envelope way of looking at a cost basis (p. 15), but the authors teach you how to do current weighting on p. 16 (where you get 124.3 – slightly less, but still in the ballpark). Naturally, one can’t judge an entire economy with one person’s wine and cheese purchases, but this was a helpful way of starting to understand some of the calculations included in economic measurements.
I particularly liked the way the authors offered different methods for the same types of calculations. On p. 24, there are three methods of finding the growth rate over several periods (IF you know the growth rate over one period). Assume the growth rate is 7.5% per year for 10 years. Step 1 (divide r/100) has 7.5/100 for .075. Step 2 (Add 1) means 1.075. Step 3 means raise to the power of n (multiple the value in Step 2 times itself the number of periods—in this case, 10 years) so 1.075 to the power of 10 which gives you 2.061. Step 4 has you subtract 1, leaving you with 1.061. Step 5 requires you to multiply by 100 and that nets 106.1 with means you get a 106.1% increase over 10 years. Even though there are now Excel spreadsheets to do these kinds of calculations for you, it’s interesting to see the way this is derived on a simple level.
Of course, I really read this book for the discussions of technical terms. I knew what GDP was (Gross Domestic Product) in general, but laughed out loud when the authors admitted that many economists say that it stands for “Grossly Distorted Picture” (p. 28). Why is it distorted? It is distorted because of all the things missing (partial list on p. 30 lists such things as gifts, barter, depletion of resources, environmental costs, and more). Some GDP calculations regarding cost are actually deflationary because they don’t reflect real costs (p. 39). The book discusses GNI (sometimes called GNP or Nominal GDP) as a way of looking at total economic output more realistically because it uses factor costs to measure outputs or incomes and market prices to measure expenditure patterns (p. 43). And, of course, almost everyone likes to read statistics on GDP per Head (p. 45). This is relatively simple in that it is the GDP number divided by population size. It may be wildly inaccurate in nations with large families but it is only supposed to provide a general sense of “overall economic welfare” (p. 45).
It certainly rings true that the U.S. target for Real GDP is around 3% (p. 47) while developing industrial nations need a higher percentage (p. 48). In case one didn’t know the sectors monitored in GDP output (aka production), the authors list them as: agriculture, mining, manufacturing, and service (p. 50)—even though I rarely hear/read anything about the mining sector other than those interests in which I am invested. On the GDP spending side, the main sectors are: consumption, investment, and services (p. 51) with changes in stock values creating a variable in that number (p. 52). Remember that the purpose of the book is to help the reader navigate the economic news to be investigated. So, the authors point out that output is sometimes measured in terms of “output per unit of labor” or “output per unit of capital” (p. 52). Naturally, to get those numbers, one divides total output by total employment or total output by total capital expended for that (pp. 52-53). In turn, “output per unit of labor” can be further delineated by dividing it by the total number of hours worked to get the “output per worker hour” (usually abbreviated to “man hour” but I perceive that as somewhat unfair—p. 53).
The second section on economic cycles is interesting. The authors define the economic cycle as consisting of four phases: expansion, peak (p. 54), recession (p. 55), and trough (pp. 56-57). In identifying expansion, the first sign is demand which lowers inventories. So, the output outgrows the demand to correct the imbalance, increasing employment to raise output, and usually, the new employees now have funds to spend and can consume products on consumer demand which has heretofore been thwarted. This period of growth moving upward begins to show that it is peaking when interest rates start getting higher and full employment numbers appear. Once the sign of peaking occurs, investments and demand fall, corporations cut back on employees because they need less products. Eventually, the economy recedes into a trough until a new cycle of expansion starts. The bottom line is that the leading indicator for the restart cycle is usually low interest rates that begin rising with new demand/production. The lagging indicator is that manufacturing capacity peaks a few months after the actual peak is reached and employment begins dropping about three months later (p. 58).
Shortly thereafter, there is a horrifying graphic which indicates Japan’s current difficulty. Japan’s old age dependency (shown on the table on p. 62) is the highest on earth and, from my recent reading, even worse than when this chart was published. Since REAL GDP must at least be equal to Population Growth for the economy not to fail, this bodes ill for Japan’s economic future (p. 63)
Guide to Economic Indicators: Making Sense of Economics also taught me some technical terms that explain why, even in “full employment,” unemployment never drops to zero. Frictional unemployment accounts for people “changing” jobs; structural unemployment means that there is a mismatch between the skill sets in the available labor force and the skills needed for open jobs (hence, the need for retraining and continual learning); seasonal unemployment means agricultural jobs and holiday/vacation temporary jobs; and residual unemployment represents the hardcore which will simply never be willing or able to work (pp. 69-70). I knew there was a theoretical ideal balance where the available laborers and number of jobs were in enough balance that they didn’t contribute to the wage-price spiral and not out of balance such that they did contribute to the spiral. This theoretical number is sometimes called the Natural Rate of Unemployment (NRU) and sometimes the Non-Accelerating Inflation Rate of Unemployment (NAIRU) (p. 70).
Despite how nice the idea of a balanced budget sounds, one should know that it isn’t always a good thing. Balanced budgets don’t encourage growth and that means that entropy can actually start the GDP into decline. Budget deficits increase both demand and output (IF they are controlled, and that’s what a lot of people don’t understand about Keynesian economics) because they provide a “net injection into the circular flow of incomes.” (p. 83) Of course, out-of-control deficits can be the kind of accelerants that start fires. Budget surpluses can be good if an economy is anticipating some large demand or expenditure in the future (an aging population with need of a security net for example?), but if the surplus takes too much money out of the flow, it is bad for the economy (p. 83). Yet, as the late comedian, Red Skelton, used to say when his jokes fell flat, “We just do ‘em folks, we don’t explain ‘em,” the authors of this book just explains the terminology; they don’t necessarily provide answers. An example would be the admission on p. 88 that there is no ideal Debt/GDP ratio agreed upon by economists.
Of course, I couldn’t read the next chapter without remembering the T.A. in my macroeconomics class for my undergraduate degree. He had been a foreign student and never got over substituting an “sh” for the “s” in consumer spending (good thing he never had to tell us to sit). Generally, economists pay attention to a contributing number for “conshumer” spending by observing the Real PDI (personal disposable income after direct taxes and fees, but as opposed to PDI, is adjusted for inflation—p 90). In discussing consumer spending, the authors point out something that seems almost counterintuitive to me: when consumers expect prices to rise because of inflation, they draw back from spending mode and move into savings mode—meaning savings as a component goes UP during inflationary periods rather than down (pp. 93, 97-98). Why does this seem counterintuitive to me? It’s because actual interest rates on savings don’t usually keep pace with inflation (at least, in my experience), so one is apparently losing spending power by saving in such periods. Just a thought that, apparently, doesn’t coincide with reality.
Remember that old axiom about “lies, damn lies, and statistics?” Guide to Economic Indicators: Making Sense of Economics doesn’t exactly use it, but they help the would-be investor read between the lines on some of these indicators. For example, a table comparing net savings on an international basis is presented on p. 97. It looks very bad for the U.S. which seems as low compared to other nations as the Chicago Bears to other offenses in the National Football League. Yet, the book points out that these rates are not comparing apples to apples (or even Adobe to Adobe) because they don’t uniformly consider private pensions and life insurance, household interest payments, capital transfers and depreciation and their impact on the net savings calculation. On the flip side of the consideration of consumer spending, the authors briefly consider what is often called the Misery Index. Alas, when you hear the term, you need to consider if it is being calculated by adding the rate of price inflation on a consumer basis plus the unemployment rate or the rate of price inflation plus annual interest rates (p. 99). Both are used so one should know what one is considering.
A new initialism to me was GDFCF (Gross Domestic Fixed Capital Formulation) as defined as spending on goods with a lifetime beyond one year before depreciation, manufactured in the home country, non-fluctuating as in equities, and representing physical rather than financial investment (p. 103). One change I hadn’t caught until reading this book was that it is no longer the National Association of Purchasing Managers who collate the PMI to provide an index of production and manufacturing. It is now provide by the United States Institute for Supply Management (p. 115). It’s the same indicator but a different source organization. To get this number, the providers examine both manufacturing production to determine the value-added output of physical products built and industrial production which includes manufacturing production as well as supplies for energy/water utilities along with mining and drilling output. Sometimes, certain types of construction are added to this number (p. 117).
The United States has the most detailed survey of the indicator known as capacity utilization. It is conducted by the Federal Reserve (Fed), but it is not a hard and fast survey; it estimates a maximum sustainable capacity for production (like a theoretical hull speed on a sailing vessel, it can be exceeded for short times, but not recommended). The U.S. has been below 90% since 1967 (p. 119). That shouldn’t be surprising to anyone who has noticed the offshore outsourcing strategy over recent decades. One also hears a lot about construction indicators when one reads or researches economic trends. In general, infrastructure (whether government or corporate) builds are positive toward future output (p. 125) while housing starts are a mixed bag (implying future purchases of materials which would be a positive factor (p. 127) but not as much when replacing older homes (p. 128).
The initial portion of the chapter on the Balance of Payments (BOP, of course, pp. 131-135) was very enlightening to me, even though the illustrations largely came from the U.K. experience and are grossly out-of-synch with the current post-Brexit mess (at least from MY side of the Atlantic). The authors do a good job of explaining the need for the “net errors and omissions” provision for a residual balancing item (aka “statistical discrepancy”) to cover timing differences (p. 133). Although this may seem necessary to any person familiar with basic accounting, the book notes that when there is a large negative line item in these “net errors and omissions,” that may indicate a significant amount of capital “fleeing” the country and when it is a significantly positive line item here, it may be a signal of unreported illegal proceeds (p. 133). Since I usually barely glance at such numbers, this added a new level of interest for me. Later in the chapter, the authors remind readers that the trade balance may measure strictly manufactured goods or all imports (including highly volatile commodities) (p. 143)
One indicator that I’ve never encountered before (but might examine soon) is the International Investment Position (IIP) which measures the balance sheet levels of external assets and liabilities (p. 150). What are the net equity assets invested in foreign corporations after the foreign liabilities are subtracted? The book features the 2008 numbers for he US at $23.4 trillion in foreign liabilities and $19.9 trillion in US investments for a negative 3.5 trillion (p. 150). For comparison’s sake the official US site (Bureau of Economic Activity) tracked this to $46.267.6 trillion foreign dollars invested in the US at the end of the 2nd quarter of 2021 with $32.256.3 trillion US dollars invested in foreign securities in that period for a negative $14.011.3 trillion. I guess that indicates that we’re not the imperialistic capitalists which we have been accused of being. (grin) Of course, one must remember that these numbers can seem out of whack because book values on equities could be overstated or understated compared to actual market value at any given time (p. 153).
The chapter on Money is a must for all investors (if they don’t understand the rudimentary principles of monetary supply—many of which had become vague since my university days). The concepts in this chapter are particularly necessary in this era of “floating currency evaluation.” Page 158 notes that of 100 International Monetary Fund (IMF) members, less than 1/6 (including Australia, Canada, and the U.S.) are free-flowing regarding the exchange rate. In other words, the central banks “interfere.” There is a valuable discusson on SDRs (Special Drawing Rights), bundles of currency which are “sold” for an average of the four currencies involved. The first ones were offered in 1970 at 1/35 ounce of gold which was, in turn, the value of the dollar (p. 162). The IMF tried it with an average of 16 currencies from 1974-1981 but that was considered too unwieldy (p. 163). The Effective Exchange Rate (EER) dwindled, in the case of the dollar to 90.8% of a dollar by 2008 (p. 167). The authors do take time to clarify that EER does not factor inflation into their calculations but when you see Real EER, you can count the inflation as being calculated.
One eye-opener for me was the calculation of the TOT (Terms of Trade). This is simply a ratio between export prices and import prices (p. 172). Obviously, the healthier economy would want export prices to be higher. For me, the refresher course on M0, M1, and M2 was welcome. M0 means the amount of money in the economy multiplied times V (Velocity = the number of times a unit of currency changed hands in the period) to get the total amount of money spent. This, in turn, should be equal to the amount of P (Price) times Y (real output) (p. 175). M1 is sometimes called “narrow money” because it only counts currency in circulation plus on-demand deposits (at least, this is how it’s measured in the U.S. – p. 176). M2 is called “broad money” and it adds to M1 savings deposits, time, deposits, and money market mutual funds available to consumers (also p. 176). M3 takes M2 and adds in the institutional money funds, large time deposits, repurchase agreements, and Eurodollars (also p. 176). This section also had the advantage of offering a British axiom known as Goodheart’s law: “Any monetary variable loses its usefulness within six months of being adopted as a target of monetary policy.” (p. 179)
If you don’t remember the difference between the discount rate and interest rates, the discount rate is the difference between the price you pay for a bond and its face value due upon maturity while the interest rate is what is paid on the bond (p. 185). So, as per the book’s illustration, if the discount rate is 7.5% such that you paid $92.50 for a $100 face value bond, that means that the interest rate would be 8.1% (7.5 divided by 92.50 and expressed as a percentage (also p. 185). [This doesn’t include any actual interest payment in addition to the discount, though.] From there, the authors discuss the yield rate and yield curve across multiple issues of bonds (pp. 192-195).
The most disappointing section to me was the discussion on prices and wages (pp. 195-218).
December 30, 2020
If you are struggling with language of financial market and want to learn meaning of the word like trade balance, budget deficit in very short time read it.
August 16, 2018
I can not recommend you read this.
What even is this book? I really struggle to understand what kind of reader this book was made for. It’s a reference of economic statistics jargon that seems to be meant for people who have to write, think or communicate about economics but who don’t have any training in the subject. Who exactly fits that description? Journalists? Policy makers?
Dude, just Google it.
Also, I found several instances of incorrectly calculated numbers and numbers in referenced tables that didn’t match with the text. I assume it was just lazy updating.
Finally, while most of the explanations were quite good (as you’d expect from The Economist) some others seemed a bit heterodox.
What even is this book? I really struggle to understand what kind of reader this book was made for. It’s a reference of economic statistics jargon that seems to be meant for people who have to write, think or communicate about economics but who don’t have any training in the subject. Who exactly fits that description? Journalists? Policy makers?
Dude, just Google it.
Also, I found several instances of incorrectly calculated numbers and numbers in referenced tables that didn’t match with the text. I assume it was just lazy updating.
Finally, while most of the explanations were quite good (as you’d expect from The Economist) some others seemed a bit heterodox.
December 29, 2013
This books describes the economic indicators just in an encyclopedia style. So it might be more valuable if it's picked up after a more general book on macro-economy.
The book gives insight on the dynamics of various economic indicators and their inter-relations. A must have book for anybody interested in economics.
The book gives insight on the dynamics of various economic indicators and their inter-relations. A must have book for anybody interested in economics.
January 23, 2012
READ JAN 2012
Good basic primer for anyone wanting to understand economic trends.
Good basic primer for anyone wanting to understand economic trends.
February 14, 2013
tenio latev
a well reseached and solid knowlegde book! highly recomended for the educated reader!
a well reseached and solid knowlegde book! highly recomended for the educated reader!
July 11, 2013
Quite informative for those who are into financial field, defintely a must read for a rookie who is new to world of economic indicators
September 29, 2015
Dry, but comprehensive and gets the job done.
December 30, 2019
When your neighbor loses his job, it’s a slowdown; when you lose your job, it’s
a recession; when an economist loses his job, it’s a depression
a recession; when an economist loses his job, it’s a depression
Want to read
August 27, 2008d
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