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Well, I presented eight short primers on eight important economic statistics. I didn't provide a lot of context for the statistics, so that will come down the road when we delve into our next economics lesson. For now, know that I'm a committed liberal and the more I delve into economics, the most I feel that my liberalism has been reinforced. If you have anything to add, please comment!
Showing posts with label Important Economic Statistics. Show all posts
Showing posts with label Important Economic Statistics. Show all posts
Wednesday, April 29, 2009
Tuesday, April 28, 2009
Government Spending
8 Important Economic Statistics #8
Definition
There are three types of government spending:
Using the Statistic
Simply looking at government spending alone is not necessarily helpful. Generally, the most useful use of government spending data is as a percentage of GDP. (For 2009, 44.72% of GDP was government spending.) This allows us to compare our spending with those of other nations in the world, and provides us a handy benchmark to compare our own government spending historically.
Historical Changes
Until the Great Depression, government spending as a percentage of GDP in the United States was relatively low. There was a spike to account for the increased spending needed to fund the first World War, but levels came back down following the war. With the advent of the New Deal, and such government programs as social security, government spending as a percentage of GDP began to increase at a steady rate year after year. (There was a huge spike of government spending for World War II, and a smaller spike recently for the stimulus package passed earlier this year.)
Definition
There are three types of government spending:
- Consumption is the purchase of goods and services for use by the government. (The government will purchase items such as food and clothing for their various needs, including the military.) Consumption is a major component of GDP.
- Investment is the money the government spends on projects from which the country will hopefully reap future benefits. This would include research, infrastructure and education spending. Like consumption, government investment is a major component of GDP.
- Transfer Payments are payments made to the citizenry by the federal government. These are through social benefit programs. (A good example in the United States would be Social Security.) Since a transfer payment is simply a movement of money, it is not included in GDP.
Each year, the government publishes the Statistical Abstract of the United States. The data in this abstract is compiled from the US Census Bureau and The Bureau of Economic Analysis among other federal agencies. Each year, the abstract contains an overview of government spending.
Using the Statistic
Simply looking at government spending alone is not necessarily helpful. Generally, the most useful use of government spending data is as a percentage of GDP. (For 2009, 44.72% of GDP was government spending.) This allows us to compare our spending with those of other nations in the world, and provides us a handy benchmark to compare our own government spending historically.
Historical Changes
Until the Great Depression, government spending as a percentage of GDP in the United States was relatively low. There was a spike to account for the increased spending needed to fund the first World War, but levels came back down following the war. With the advent of the New Deal, and such government programs as social security, government spending as a percentage of GDP began to increase at a steady rate year after year. (There was a huge spike of government spending for World War II, and a smaller spike recently for the stimulus package passed earlier this year.)
Further Reading
Previous Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate, Gini Index, The Dow Jones Industrial Average, The S&P 500
The S&P 500
8 Important Economic Statistics #7
Definition
The S&P 500 is a stock market index consisting of 500 different large-cap companies from the United States. All of the companies trade on the New York Stock Exchange or NASDAQ. The index is market-value weighted, which means the companies with larger market capitalizations have more influence on the index. The companies must meet the following criteria to be included in the index, among others:
Definition
The S&P 500 is a stock market index consisting of 500 different large-cap companies from the United States. All of the companies trade on the New York Stock Exchange or NASDAQ. The index is market-value weighted, which means the companies with larger market capitalizations have more influence on the index. The companies must meet the following criteria to be included in the index, among others:
- Must be a U.S company
- Must have at least a $5 billion market cap
- Must have at least half of the companies shares publicly available
- Must be financially viable
- The stock must be reasonably priced to ensure adequate liquidity
The S&P 500 is the most popular stock market index among the investor crowd. There are many mutual funds that attempt to mimic the composition of the S&P 500. The performance of most mutual funds, and other investment equities as well, are compared against the S&P 500 to determine their performance. It is the bellwether measurement of the American market.
Problems and Criticisms
The S&P 500 is considered one of the more "rock solid" investment indices. It is certainly more reliable than the Dow since it looks at 470 more companies. Still, it is not perfect. The two biggest weaknesses of the index is that it only features US companies and that it only included large companies that are traded frequently. The index does not take into account the market performance of smaller companies, or huge companies that are rarely traded such as Berkshire
The S&P 500 Today
Because of the tech bubble bust in the early part of the decade, the S&P 500 took big hits in 2000, 2001 and 2002. Growth in the market resumed in 2003. On October 9th, 2007, the index closed with its highest ever value, $1,565.15. The bad times would soon return. In 2008, the index lost 38.49% of its value. This has taken a major hit in the investment portfolios of many average Americans. Many, many people have their 401K money invested in S&P 500 mutual funds. The index is currently valued around $860.
Problems and Criticisms
The S&P 500 is considered one of the more "rock solid" investment indices. It is certainly more reliable than the Dow since it looks at 470 more companies. Still, it is not perfect. The two biggest weaknesses of the index is that it only features US companies and that it only included large companies that are traded frequently. The index does not take into account the market performance of smaller companies, or huge companies that are rarely traded such as Berkshire
Hathaway.
The S&P 500 Today
Because of the tech bubble bust in the early part of the decade, the S&P 500 took big hits in 2000, 2001 and 2002. Growth in the market resumed in 2003. On October 9th, 2007, the index closed with its highest ever value, $1,565.15. The bad times would soon return. In 2008, the index lost 38.49% of its value. This has taken a major hit in the investment portfolios of many average Americans. Many, many people have their 401K money invested in S&P 500 mutual funds. The index is currently valued around $860.
Further Reading
Previous Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate, Gini Index, The Dow Jones Industrial Average
Monday, April 27, 2009
The Dow Jones Industrial Average
8 Important Economic Statistics #6
Definition
The Dow Jones Industrial Average (The DJIA or The Dow) is the oldest of the American stock market index. The DJIA is calculated using the value of 30 large companies, that are widely held. The 30 companies used to compute the average change on occasion, and by definition do not include utlities and transportation companies. Originally, the average was computed by taking a sum of the price of each of the included stocks and then dividing the sum by the number of stocks, a pure average. Today, the DJIA is price-weighted rather than a pure average. This helps to preserve the DJIAs usefulness as a historical measurement. For most people, the DJIA is the primary statistic used to determine the health of the market.
Problems and Criticisms
The DJIA is not necessarily the best indicator of overall stock market performance. The stock for only 30 companies are included so there are thousands of companies whose performance is not used. Additionally, because all of the included companies have large market caps, companies will smaller market caps are not figured into the average. Additionally, stocks that are higher priced have more influence over the index because the index is price-weighted. There is no consideration for the size of the companies included. Finally, despite a global economy, the DJIA remains a US centric index.
DJIA Performance
On September 3rd, 1929, the Dow reached what was, at the time, an all-time high of 381.17. By July 8, 1932, the index closed at 41.22. This was in the midst of the Great Depression. Sadly, we are living through a similar period of wealth destruction in the stock market. The DJIA experienced a period of remarkable growth in the aftermath of the 1987 market crash. On October 19th, 1987, the Dow closed at 1,738.74. By the end of the Clinton Presidency the DJIA was over 10,000. The George W. Bush Presidency would experience two major slides in the DJIA. The first came in the first two years of the administration as the tech bubble burst. Their were many lessons to learn from the tech bubble, but the Bush administration wasn't interested in those lessons. So when the DJIA began to grow again and peaked at 14,164.53 in October of 2007, they made sure their heads were buried deep in the sand. Well, with the bust of the real estate bubble and the banking crisis, the Dow would take a severe hit and would be bear 8,000 as Bush left office.
Further ReadingPrevious Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate, Gini Index
Definition
The Dow Jones Industrial Average (The DJIA or The Dow) is the oldest of the American stock market index. The DJIA is calculated using the value of 30 large companies, that are widely held. The 30 companies used to compute the average change on occasion, and by definition do not include utlities and transportation companies. Originally, the average was computed by taking a sum of the price of each of the included stocks and then dividing the sum by the number of stocks, a pure average. Today, the DJIA is price-weighted rather than a pure average. This helps to preserve the DJIAs usefulness as a historical measurement. For most people, the DJIA is the primary statistic used to determine the health of the market.
Problems and Criticisms
The DJIA is not necessarily the best indicator of overall stock market performance. The stock for only 30 companies are included so there are thousands of companies whose performance is not used. Additionally, because all of the included companies have large market caps, companies will smaller market caps are not figured into the average. Additionally, stocks that are higher priced have more influence over the index because the index is price-weighted. There is no consideration for the size of the companies included. Finally, despite a global economy, the DJIA remains a US centric index.
DJIA Performance
On September 3rd, 1929, the Dow reached what was, at the time, an all-time high of 381.17. By July 8, 1932, the index closed at 41.22. This was in the midst of the Great Depression. Sadly, we are living through a similar period of wealth destruction in the stock market. The DJIA experienced a period of remarkable growth in the aftermath of the 1987 market crash. On October 19th, 1987, the Dow closed at 1,738.74. By the end of the Clinton Presidency the DJIA was over 10,000. The George W. Bush Presidency would experience two major slides in the DJIA. The first came in the first two years of the administration as the tech bubble burst. Their were many lessons to learn from the tech bubble, but the Bush administration wasn't interested in those lessons. So when the DJIA began to grow again and peaked at 14,164.53 in October of 2007, they made sure their heads were buried deep in the sand. Well, with the bust of the real estate bubble and the banking crisis, the Dow would take a severe hit and would be bear 8,000 as Bush left office.
Further ReadingPrevious Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate, Gini Index
Gini Index
8 Important Economic Statistics #5
Definition
The Gini index is a measurement of a nation's income inequality. If a nation's Gini index is zero, then every citizen of the nation earns the same amount of income. A value of a hundred indicates that all income has been earned by a single individual. As a calculation, the Gini index is calculated through the use of a Lorenz Curve. (The index is the area of total equality as populated on the Lorenz Curve divided by the sum of the area of total equality and the area under the Lorenz Curve expressed as a percentage. Sound confusing? There's a great graph with a simple explanation provided by The World Bank.)
Problems and Criticisms
Like most economic statistics, the Gini index does not accomplish its goal perfectly. Some of the problems are mathematical. (For example, you cannot average the Gini indices of different groups of people to get the Gini index of the entire group.) The Gini index does not take into account the efficiency of income use. (The rich tend to the use their incomes more efficiently than the poor.) Additionally, the numbers for different nations do not account for the different levels of wealth.
The United States
The best use of the Gini index is for measuring the changes in income inequality in a given nation year after year. Looking at the Gini index throughout our history, it easy to see the effect of the two major competing political ideologies on income inequality. In 1929, at the beginning of the Great Depression, economists estimate the Gini index at 45.0. Of course, a period of highly conservative economic rule proceeded the Geat Depression. In the aftermath of the New Deal, and during World War II, the Gini index had dropped to 37.6. As recent as 1968, following the implementation of LBJ's Great Society, the index was paltry 38.6. The index would tick upwards slightly to 40.3 by the time Ronald Reagan was elected President in 1980. Since the implementation of Reaganomics throughout the 1980s, income inequality has grown steadily, peaking at 47.0 in 2006. This is the highest index recorded in the United States. It is safe to say that income inequality will continue to grow long term until the nation implements substantially more progressive economic policies.
Further ReadingPrevious Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate
Definition
The Gini index is a measurement of a nation's income inequality. If a nation's Gini index is zero, then every citizen of the nation earns the same amount of income. A value of a hundred indicates that all income has been earned by a single individual. As a calculation, the Gini index is calculated through the use of a Lorenz Curve. (The index is the area of total equality as populated on the Lorenz Curve divided by the sum of the area of total equality and the area under the Lorenz Curve expressed as a percentage. Sound confusing? There's a great graph with a simple explanation provided by The World Bank.)
Problems and Criticisms
Like most economic statistics, the Gini index does not accomplish its goal perfectly. Some of the problems are mathematical. (For example, you cannot average the Gini indices of different groups of people to get the Gini index of the entire group.) The Gini index does not take into account the efficiency of income use. (The rich tend to the use their incomes more efficiently than the poor.) Additionally, the numbers for different nations do not account for the different levels of wealth.
The United States
The best use of the Gini index is for measuring the changes in income inequality in a given nation year after year. Looking at the Gini index throughout our history, it easy to see the effect of the two major competing political ideologies on income inequality. In 1929, at the beginning of the Great Depression, economists estimate the Gini index at 45.0. Of course, a period of highly conservative economic rule proceeded the Geat Depression. In the aftermath of the New Deal, and during World War II, the Gini index had dropped to 37.6. As recent as 1968, following the implementation of LBJ's Great Society, the index was paltry 38.6. The index would tick upwards slightly to 40.3 by the time Ronald Reagan was elected President in 1980. Since the implementation of Reaganomics throughout the 1980s, income inequality has grown steadily, peaking at 47.0 in 2006. This is the highest index recorded in the United States. It is safe to say that income inequality will continue to grow long term until the nation implements substantially more progressive economic policies.
Further ReadingPrevious Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate
Thursday, April 23, 2009
Inflation Rate
8 Important Economic Statistics #4
Definition
The government, with the help of some really smart economists, has defined a "basket of goods" typically purchased by a run-of-the-mill urban consumer. The basket consists of, quite literally, thousands of different items. Government economists track the prices of these goods and compiles a statistic known as the Consumer Price Index (CPI). When the CPI increases, this is known as inflation. Conversely, a decrease in CPI is called deflation. The inflation rate is the change in CPI represented as a percentage.
Previous Entries in this Series: GDP, Unemployment Rate, Poverty Rate
Definition
The government, with the help of some really smart economists, has defined a "basket of goods" typically purchased by a run-of-the-mill urban consumer. The basket consists of, quite literally, thousands of different items. Government economists track the prices of these goods and compiles a statistic known as the Consumer Price Index (CPI). When the CPI increases, this is known as inflation. Conversely, a decrease in CPI is called deflation. The inflation rate is the change in CPI represented as a percentage.
The Problem with Inflation
Inflation is an increase in prices, but the best way to think of inflation is as a decrease in the purchasing power of the dollar. If inflation rises rapidly, people will rush to spend their money quickly before their purchasing power declines even further. Inflation will distort investment returns and taxes. Unchecked inflation can have a catastrophic effect on an economy. In order to maintain the purchasing power of a currency, central banks work hard to keep inflation under control by tightening or expanding the supply of money.
The United States
Unlike Germany in the 1920s and Central America towards the end of the 20th century, the US has never experienced a period of hyperinflation. (A rapid increase in the inflation rate where inflation appears to be out of control.) Our worst period for inflation was the period from 1973 to 1981 which saw four years of double digit increases in the inflation rate (including an inflation rate of a whopping 13.58 in 1980). The inflation rate in 2008 was 3.85% which is slightly higher than what economists would like to see (2%).
Further Reading
Wednesday, April 22, 2009
Poverty Rate
8 Important Economic Statistics #3
Definition
At its most basic, poverty is a lack of sufficient resources. The amount of resources needed to stay out of poverty is subject of debate, but it is generally defined by a society and the values embraced by that society. In the United States, we have set an income level that is known as the poverty line. A single person who earns less than 11, 201 a year was considered to be living in poverty in 2008. The percentage of people who live under the poverty line is the poverty rate.
Previous Entries in this Series: GDP, Unemployment Rate
Definition
At its most basic, poverty is a lack of sufficient resources. The amount of resources needed to stay out of poverty is subject of debate, but it is generally defined by a society and the values embraced by that society. In the United States, we have set an income level that is known as the poverty line. A single person who earns less than 11, 201 a year was considered to be living in poverty in 2008. The percentage of people who live under the poverty line is the poverty rate.
Problems with the Statistic
The united states poverty rate is understated for a number of reasons. The number does not take into account the different income levels needed to live in different parts of the country. (It costs more to live in California than Nebraska for instance.) The "basket of goods" used to determine the poverty line has not been updated in 50 years. (The prices are indexed for inflation, but the goods themselves have not been altered.)
The United States
In 2007, 12.5% of all Americans lived in poverty. This is 37.3 million people. With the current economic crisis in full swing, it is expected that the 2008 and 2009 numbers will decline further. (When George W. Bush took office, the poverty rate was 11.3%, which is still too high. His administration clearly did not do enough to tackle this problem.)
Like other developed countries, poverty in the United States is cyclical. At some point over every ten year period, 40% of Americans will experience poverty.
Further Reading
Tuesday, April 21, 2009
Unemployment Rate
8 Important Economic Statistics #2
Definition
An unemployed individual is someone who wants to work, is capable of working, and is actively seeking work. The unemployment rate is the percentage of unemployed workers in the total labor force. Economist Arthur Okun studied unemployment data and GDP from 1930 through 1980 and observed that rises in GDP are directly related to a lowering of the unemployment rate. In other words, in a growing economy, the unemployment rate falls. In a stagnating or recession economy, the unemployment rate will rise.
Previous Entries in this Series: GDP
Definition
An unemployed individual is someone who wants to work, is capable of working, and is actively seeking work. The unemployment rate is the percentage of unemployed workers in the total labor force. Economist Arthur Okun studied unemployment data and GDP from 1930 through 1980 and observed that rises in GDP are directly related to a lowering of the unemployment rate. In other words, in a growing economy, the unemployment rate falls. In a stagnating or recession economy, the unemployment rate will rise.
Problems with the Statistic
The unemployment rate in an imperfect statistic and does not accurately reflect the state of the workforce. The rate does not include those individuals who have given up looking for work. It does not account for those that have had to accept lower paying jobs. There is no accounting for part time employees who would prefer full time work but can't find it. The rate doesn't account for those who have accepted contract positions but would prefer a permanent position. There's no denying that a lower unemployment rate indicates a stronger economy, but the rate itself is an imperfect measurement.
The United States
We are in the midst of a major economic recession. Naturally the unemployment rate has fallen. In an April 3rd article on the MSN Money site, it was reported that the unemployment rate is 8.5% which would be the worse since the recession of the early 1980s. Worse yet, when the people who are in the circumstances mentioned in the problems section above are counted, the rate balloon even further. In other words, the real unemployment rate might be as high as 15.6%. I don't know about you, but I find that number shocking.
Further Reading
Monday, April 20, 2009
Gross Domestic Product (GDP)
8 Important Economic Statistics #1
Definition
Gross Domestic Product (GDP) is the market value of all goods and services produced by a nation in a given year. It is calculated by adding all spending (government, consumer, and investment) and exports and subtracting the value of imports. For GDP to have any real value as a statistic, it has to be adjusted for inflation. (If GDP grows 5% one year, but inflation is also 5%, no real growth has taken place.)
Usage
GDP is the statistic used by economists to determine if the economy is growing from year to year. Two consecutive quarters of negative GDP growth is called a recession.
Definition
Gross Domestic Product (GDP) is the market value of all goods and services produced by a nation in a given year. It is calculated by adding all spending (government, consumer, and investment) and exports and subtracting the value of imports. For GDP to have any real value as a statistic, it has to be adjusted for inflation. (If GDP grows 5% one year, but inflation is also 5%, no real growth has taken place.)
Usage
GDP is the statistic used by economists to determine if the economy is growing from year to year. Two consecutive quarters of negative GDP growth is called a recession.
GDP per capita (a country's GDP divided by the population of the country) is often used to determine a nation's standard of living, but there are limitations. There are items that GDP does not take into account, such as income inequality, black market transactions and bartering. All of these provide value and could either increase or reduce an individuals standard of living, but they cannot be measured.
The United States
According to the CIA The World Factbook, the United States ranked 10th in the world by the measurement of per capita GDP in 2008. Most of the countries ahead of the United States are small, rich countries such as Liechtenstein and Qatar. The United States ranks well ahead of all their so-called western neighbors such as the European Union and Canada.
According to the CIA The World Factbook, the United States ranked 10th in the world by the measurement of per capita GDP in 2008. Most of the countries ahead of the United States are small, rich countries such as Liechtenstein and Qatar. The United States ranks well ahead of all their so-called western neighbors such as the European Union and Canada.
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