All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

Basics of Macroeconomics II

Macroeconomics measurement

• Labor Market (Unemployment rate, employment, wages)
• Output Market (GDP, CPI, inflation)
• Capital Market (Money supply, credit, interest rates)
• Foreign Exchange Market (Current & capital accounts, exchange rates)

Labor Market

• A primer on demographics
•  
  • International comparisons
  • Growth
  • Composition

• What are the primary measures of activity?
  • Quantity
    • Labor Force
    • Employment
  • Price
    • Earning
    • Employment Cost Index
      • adjustment for inflation
  • Disequilibrium
    • Unemployment

Labor Force

Employment

• How many jobs?

• What industries?

• What occupations?

• How do we compare with other countries?

Unemployment

• How do we measure it?

• What are the types of unemployed?

  • structural
    cyclical
    seasonal

• What is full employment?

• What do we miss?  discouraged workers

• Who are the unemployed?

  • occupation
    industry
    education
    age
    race
    location (national / international)

Earnings

• What are the measures of earnings?

  • average weekly earnings
    employment cost index

• How do we adjust for inflation?

Inflation-adjusted Earnings

R = N/PI *100

where

• R = real value (constant dollar)   N = nominal value (current dollar)  PI = price index

Output Market

• What are the quantity measures of economic activity?
  • Real vs Nominal
• What are the measures of prices and inflation?
  • Construction of a Price Index: A Simple Example
  • How to adjust price data for inflation?
  • Inflation Calculators
    • CPI inflation adjustment

I. Output / GDP

• What is GDP? What is GNP?

• When and by whom are the data published?

• What's in and what's not in GDP?

• How do we make intertemporal and international comparisons?

• How do we account for price changes (inflation)?

• What's the track record?

How do we account for price changes (inflation)? Real vs. Nominal GDP

A Simple Example

NOMINAL GDP (1987) Px₈₇*X₈₇ + Py₈₇*Y₈₇ = 6*10 + 2*15 = 90

NOMINAL GDP (1997) Px₉₇*X₉₇ + Py₉₇*Y₉₇ = 6*15 + 4*20 =170

REAL GDP (1997) Px₈₇*X₉₇ + Py₈₇*Y₉₇ = 6*15 + 2*20 =130

R = N/P

It is useful if you think of this as one equation with three unknowns - with the value of two unknowns one could solve for the other unknown. The three forms of the equation are:

(1) N = R*P

(2) P = N/R

(3) R = N/P

Track record

II. Prices / CPI  / Inflation

• What is the price level?

• When and by whom are the data published?

• What is the Consumer Price Index?

• What is the inflation rate?

• What is the track record?

What is the Consumer Price Index?

A Simple Example

ENTERTAINMENT PRICE INDEX

ACTUAL 1987 EXPENSES = 10*4 +3.5*2 +4*5 +5*2 +8*8 +30*2 = 201

ACTUAL 1997 EXPENSES = 25*3 +10*1 +7*6 +10*3 +18*6 +75*2=415

HYPOTHETICAL 1997 EXPENSES ( 1987 PURCHASES/ 1997 PRICES )

= 25*4 +10*2 +7*5+ 10*2+ 18*8+ 75*2 = 469

EPI = 100*(469/201) = 233

(1) WHAT COST $100 IN 1987 COST $233 IN 1993

(2) PRICES MORE THAN DOUBLED

(3) PRICES WENT UP 133% (233-100)

(4) A 1987 DOLLAR IS WORTH $.43 (100/233)

And what about inflation?

inflation rate = % change in price index = (233-201)/201 = 32/201 = .1592 = 15.92%

Track record

Money and Capital Market

• An overview of the capital market(s)
  • What's up in the financial world? CNN financial.
  • Some important financial MATH - made easy
  • Business terms
  • Financial terms
• A Primer on interest rates
  • Interest rates and inflation
• A Primer on Bonds
• A Primer on Stocks
  • Stock prices and inflation

A Primer on Interest Rates

There are many interest rates , but they tend to move together and with inflation

• Discount rate: rate that the FED charges banks for overnight borrowing
• Federal funds rate: rate banks charge other banks for overnight borrowing
• Prime rate: the rate banks charge their 'best' customers
• T-bill rate: the rate on short-term (<1 year) on government securities
• Mortgage rate: the rate on home loans, car loans

Foreign Exchange Market

• International balances

Transaction Classification Scheme

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