Analysing the Outlook for GDP Growth

Question 1

What are the main key economic indicators in the US?

Answer 1

• Average weekly hours of production workers
  
  • Initial claims for unemployment insurance
  • New orders in manufacturing and non-defence capital goods
  • New private housing permits
  • Yield curve slope shifts
  • Money supply
  • Consumer sentiment
  • Personal income

In addition the stock market price index is itself a leading indicator. Some of the ‘real’ variables (e.g. real GDP) are subject to revisions several years after first figures are produced.

Many of the indicators followed by analysts around the world refer to US data releases, such as non-farm employment (payroll) changes, and variables that have an impact on the US dollar, such as the current account balance. The economic data are often considered in relation to their impact on interest rates by central banks.

Unexpected changes in budget deficits can affect attitudes to interest rates through unexpected changes to the supply of bonds. Similarly, commodity market developments e.g. oil price shocks, may be considered for future inflation developments. Surveys of purchasing managers are also closely watched as indicators of trends in economic activity.

Question 2

What is a leading indicator?

Answer 2

Leading indicators usually signal movement in advance in the wider economy and can be useful for economic prediction. For example, stock market trends occur before movements in the real economy. Other leading indicators are consumer or business surveys, and money supply and credit growth. In the USA, the Conference Board publishes a composite leading indicator - based on ten indicators - to predict economic activity nine months ahead.

Question 3

What is a lagging indicator?

Answer 3

Lagging indicators usually change after the overall economy changes, e.g. employment may move three or four quarters after output changes.

Question 4

What is a coincident indicator?

Answer 4

Coincident indicators move in step with the wider economy, and include activity variables such as industrial production and national output. They can be useful in identifying peaks and troughs in the business cycle.

Question 5

How much of global GDP and exports of goods and services did the US contribute in 2021?

Answer 5

Roughly 22.2%, with only 4.5% of global population

Question 6

How much of global GDP and exports of goods and services did the EU ex-UK contribute in 2021?

Answer 6

15% global GDP, 27& of exports of goods and services, with 4.5% of global population

Question 7

How much of global GDP and exports of goods and services did the UK contribute in 2021?

Answer 7

3.7% of global GDP and 3.6% of global exports, with less than 1% of the population.

Question 8

How much of global GDP and exports of goods and services did Japan contribute in 2021?

Answer 8

5.4% of global GDP and 3.7% of exports, with just under 2% of the population.

Question 9

How much global output do the G7 account for?

Answer 9

Roughly 30%

Question 10

What are the four typical phases of a business cycle?

Answer 10

1. An expansionary phase in which production rises and inflation and interest rates are low.
2. A more euphoric phase leading to overconfidence, gives way to falling stock prices, and rising interest rates and bankruptcies
3. The euphoric phase leads to recession as output and investors are cut back
4. Recession gives way to recovery as consumers regain confidence, and demand and output rise

Question 11

What is aggregate demand?

Answer 11

Aggregate demand measures the total amount of demand for all finished goods and services produced in an economy.

Aggregate demand is expressed as the total amount of money spent on those goods and services at a specific price level and point in time.

Aggregate demand consists of all consumer goods, capital goods, exports, imports, and government spending.

Question 12

What is national income accounting?

Answer 12

National income accounting is a government bookkeeping system that measures a country’s economic activity—offering insight into how an economy is performing.

Such a system will include total revenues by domestic corporations, wages paid, and sales and income tax data for companies.

National income accounting systems allow countries to assess the current standard of living or the distribution of income within a population, as well as assess the effects of various economic policies.

However, the accuracy of analysis relating to national income accounting is only as accurate as the data collected.

Question 13

What is GDP?

Answer 13

The value of output produced by factors of production located within the domestic economy. Factors of production owned outside the UK, such as foreign ownership of a factory, do not contribute to the UK’s GDP.

Question 14

What is GNP?

Answer 14

To allow for domestic ownership of factors of production located outside the UK, and foreign ownership of UK factors, we can use GNP. This is GDP plus the net income from abroad (i.e. from all factors).

Question 15

What is the difference between final goods and intermediate goods?

Answer 15

Final goods are purchased by the ultimate user (whether a consumer or a firm using capital equipment).

Intermediate goods are inputs in another production process

Question 16

What is the difference between GDP at factor cost and GDP at market prices?

Answer 16

GDP at market prices values domestic output including the value of indirect taxes.

GDP at factor cost deducts indirect taxes on output but adds back in subsidies.

Question 17

Describe the circular flow model and how it relates to GDP?

Answer 17

The circular flow model demonstrates how money moves from producers to households and back again in an endless loop.

In an economy, money moves from producers to workers as wages and then back from workers to producers as workers spend money on products and services.

The models can be made more complex to include additions to the money supply, like exports, and leakages from the money supply, like imports.

When all of these factors are totaled, the result is a nation’s gross domestic product (GDP) or the national income.

Analyzing the circular flow model and its current impact on GDP can help governments and central banks adjust monetary and fiscal policy to improve an economy.

Question 18

What is the equation that links household saving with government expenditure?

Answer 18

(Savings minus investments) = (Government expenditure minus income (taxes)) + (Foreign sector surplus of imports over exports)

Question 19

What is the consumption function?

Answer 19

The consumption function is an economic formula that measures the relationship between income and total consumption of goods and services in the economy.

The consumption function is represented as:

C = A + MD

where:

C=consumer spending
A=autonomous consumption
M=marginal propensity to consume
D=real disposable income
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Question 20

How is the marginal propensity to consume linked to the marginal propensity to save?

Answer 20

MPS is (1 - MPC)

Question 21

What is the aggregate demand equation?

Answer 21

Aggregate Demand=C+I+G+Nx

where:

C=Consumer spending on goods and services

I=Private investment and corporate spending on
non-final capital goods (factories, equipment, etc.)

G=Government spending on public goods and social
services (infrastructure, Medicare, etc.)

Nx=Net exports (exports minus imports)
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