October 24, 2017 

AmosWEB means Economics with a Touch of Whimsy!

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COMPETITION ALONG A LINE: A basic analysis of location theory that demonstrates how and why competing firms tend to locate next to each other. This analysis indicates that as firms attempt to attract customers from each other, they edge increasingly closer. In particular, while an efficient situation (indicated by minimum transportation cost) is obtained by a more disperse location of firms, competition brings them together and creates inefficiency (by increasing transportation cost)

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A Random Walk Through Some ECONOMIC STATISTICS

A pedestrian must always be on guard during any economic excursion, especially when passing the Sylvester J. Peabody Federal Office Building here in Shady Valley. You never know when a window will burst open sending a barrage of glass slivers and economic statistics haphazardly into the street. This is usually followed by a pointy-headed economist who pokes his pointy head through the remaining shards of glass to adamantly declare that there's absolutely, positively NO RECESSION! But he'll recheck the numbers just in case there really is one. WATCH OUT! DUCK!

A Statistical Barrage

Whew! That was close! We were nearly sideswiped by a leading economic indicator. It's safe to say that our complex multi-gadzillion dollar economy has a great number of, well, numbers. A multitude of government agencies and a veritable plethora of assorted nongovernment number-crunchers have all seen fit to provide us with statistics on everything in the economy that can be measured, counted, quantified, or surveyed. How do you make sense of this stuff? I'll give you a start on sorting them out in the next few pages. More can be found among the definitions in section III.

Statistics Can Be Our Friends

The assorted statistics that you see on the business page and occasionally splashed on the front page of newspapers are nothing more than tidbits of information about the economy. When used properly, they can help us as consumers, workers, and taxpayers make better informed decisions. Let's highlight a few of the reasons that Dan Rather feels compelled to tell you about such things like the consumer price index.

  • First, and foremost, economic statistics keep track of the economy. They tells us whether the economy is in an expansion, a recession, or has simply closed up shop for a month or two of vacation.

  • Second, by monitoring the status of the economy, they give those government-leader-types information on what sorts of policies can be used to fix whatever problems the economy is having. (Whether they actually fix the problems is another story.)

  • Third, they can work wonders at election time to tell voters if the shifty-eyed politician currently in office is doing a good job, or whether we should give some other shifty-eyed politician a chance.

  • Fourth, but by no means least, they give consumers all sorts of information that can be used to make all sorts of informed consumer decisions. When used properly, economic statistics can help us decide the best time to sell a house, buy a car, or switch jobs.

But, these statistics must be "taken with a grain of salt," "viewed with a skeptical eye," and otherwise used very, very carefully. While they're relatively accurate (all things considered) they aren't perfect and are often misused. And like all information, you need to consider the source.

Our Top Ten List of Statistics

Let's run through some of the most commonly reported economic statistics, in no particular order of importance, to see what sort of information they convey.

  1. Dow Jones industrial average. This is usually referred to as the "Dow," as in the "Dow dropped 900 points on heavy trading." It's an index of the prices of 30 (yes, only 30), corporate stocks trading on the stock market. The 30 stocks include so-called "industrial" companies like IBM, General Electric, and General Motors. There are also Dow indexes for transportation companies and utility companies. On the surface, these indexes tell us whether stock prices are rising, falling, or staying the same. But underneath they suggest what is happening to business profitability and the overall health of the economy (see Dow Jones averages in section III for more).

  2. Standard & Poor's 500. This is also an index of stock prices, but includes 500 stocks rather than the Dow's 30. As such, it's a little broader measure of overall stock market prices. (Other stock price indexes commonly reported are AMEX and NASDAQ, based on a different groups of stocks, but they have the same general interpretation.)

  3. Unemployment rate. Every month the U. S. Department of Labor releases the unemployment rate. This is the percentage of the official workforce that is officially looking for work but officially can't find a job. In that you have to meet certain qualifications to fall into the "official" category, the official unemployment rate is prone toward erroneously not counting some who are unemployed and including others who are employed. The government-typpes get this number from people who seek to collect unemployment compesation and by wandering around the economy to query people, in a scientifically valid manner, if they are working, employed but looking for work, or doing other important things like raising a family, going to school, or enjoying retirement.

  4. Consumer price index. The U. S. Department of Labor also gives us this nice little statistic that measures prices in the economy. In particular the CPI (as the pointy-headed types call it) is an index of prices of stuff that's typically bought by consumers. It includes things like cars, VCRs, and prescription drugs, but doesn't count stuff like forklifts and aircraft carriers that consumers don't buy. Every month the government types check the prices on the same group of goods to see if the prices, on average, have gone up, down, or stayed the same. Percentage changes in the CPI are then used to measure the inflation rate. If the average prices have risen by 5 percent over a one year period, then we can say that the inflation rate is 5 percent.

  5. Misery index. There's been growing use of this statistic to indicate the overall problems caused by inflation and unemployment. As a matter of fact, the misery index is simply the sum total of the inflation rate and the unemployment rate. If the inflation rate is 3 percent and the unemployment rate is 6 percent, then the misery index is 9 percent.

  6. Gross domestic product. The U. S. Department of Commerce is in charge of a whole bunch of economic statistics that it measures, calculates, computes, and releases every three months. At the top of their list is gross domestic product, which aspires to measure all production taking place in the economy during the three month period. In particular, GDP measures how much production takes place within the boundaries of the U. S. economy regardless of who does the producing. (Some of you might be more familiar with gross national product, GNP, which is very similar, but measures production by U. S. citizens regardless of where they happen to be doing the producing -- as in another country. For various reasons, GNP has been placed in statistical storage in favor of GDP.) Other useful measures that come out with GDP every three months are national income and personal income, which indicate how much income we get from producing all of that GDP.

  7. Real gross domestic product. One of the measures that come with the entire GDP package, and deserves its own mention, is real GDP. This is GDP after it's adjusted for inflation. While the regular GDP (nominal or current GDP) is the total amount of production measured in terms of actual prices each year, real GDP uses prices from a previous year. This lets us know how much the physical production changes from one year to the next without muddling things up with higher or lower prices. Whenever the pointy-headed economists, newsguys, and politicians are talking about recessions and economic growth, they're invariably using real GDP. A by-product of calculating real GDP is another, less common, measure of our economy's price level and inflation -- the GDP price deflator.

  8. Index of leading economic indicators. This is another one put out by the U. S. Department of Commerce. It's a composite of several other measures that all tend to move up or down before the rest of the economy. Some of the more noted measures included in this index of leading indicators are stock prices, permits for new construction, the balance on unpaid consumer loans, and the supply of money. Each of the individual measures and the composite leading indicator tend to fall 3-6 months before the onset of a recession and begin to rise with the same lead time before a recession is over.

  9. Lagging and coincident economic indicators. The index of leading indicators is actually only one of three similar measures. The other two are: coincident indicators that tend to move with the overall economy and lagging indicators that follow behind everything else by a few months. Overall, these three sets of indicators give us a good idea of when a recession has started and when it has ended.

  10. Consumer confidence index. This is another statistic that's achieving some notoriety among the media types and a noted leading indicator. It's an index, as the name suggests, of the degree of confidence consumers have in the economy. It's compiled by asking a sampling of consumers, in a scientifically valid manner, a series of questions about the economy. The answers are then tabulated and indexed to indicate the fraction that are relatively confident in the economy. This statistic can be quite useful because consumer spending is a large part of our economy. If consumers are in a deep, blue funk over the economy, they won't spend and the economy stagnates.

There are scores of other statistics that measure an assortment of everything that can be measured in the economy. They include, but by no means are limited to, the money supply, the trade deficit, industrial capacity utilization, building occupancy, interest rates, commodity prices, and on and on.

Are They Any Good?

No bit of information, whether it's a weather forecast, hollywood gossip, campaign promises, or economic statistics is absolutely correct. Any economic statistic should be viewed as an indicator and not as stone tablets brought down from the mountain. A few of the more common sources of error to be wary of when using economic statistics are:

  • Sampling error. Statistics based on some sort of a sample includes a built-in margin of error. Although 67 percent of a sample say that they're confident in the economy, the actual number for the overall population might be 63 percent. A sample is a scientifically constructed guess that is close, but with a chance of being off the mark a bit.

  • Computing glitches. Even when a statistic is based on measuring everything, like gross domestic product, there's a chance that someone added the wrong numbers, or added instead of subtracting. These errors tend to be minor, but, hey, we all screw up occasionally.

  • Deceit and chicanery. Every now and then a pointy-headed number-cruncher crunches a number in a way that is intended to achieve some other end. While most government generated statistics are above politics, occasionally you'll see numbers that conveniently support one political view or candidate over another.

  • Educated guess. Some of the statistics that we trust our lives to are based on approximations invented by the pointy-headed number-crunchers. Sure, their guesses are based on sophisticated scientific theories and years of training, but they're only educated guesses.

    Statistics that measure every nook and cranny of the good old U. S. of A. are among the best economic statistics in the world. But keep in mind that they are not perfect.

    Tips on Those Imperfect Economic Statistics

    • Use any given economic statistic with a grain of salt. It should be considered as only one bit of information that can help you make a decision. If it looks, walks, quacks, swims, and flies like a duck, don't let a statistic convince you that it's a toaster.

    • Consider the source of any economic statistic. Congressional statistics are often at odds with Presidential statistics on things like the budget deficit. A lot of people are prone to bandy statistics about in pursuit of a political agenda. Don't be fooled.

    • Economic statistics are great if used properly, but can be deadly if misused. Like you should be reluctant to use a giant steam shovel to tend your flower bed or use a hand trowel to quarry granite, don't use the Dow to measure economic production, nor GDP to measure stock prices.

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