• By analyzing the past, present, and possible future balance between Supply and Demand through economic indicators.  
• Must analyze a group of indicators together in order to draw the best conclusions about future consumption, production, and employment levels.

Help understand past, current, or future economic conditions.

1. Broad
• GDP and GNP
2. Consumption
• CPI (Consumer Price Index)
3. Production
• PPI (Producer Price Index)
• Inventories
4. Employment
• Employment Levels (Unemployment)

Broadest indicator which measures growth by looking at the total market value of final goods & services produced within a country during a period of time.  

It is measured Quarterly Year-on-Year (YoY) and Quarter on Quarter (QoQ)

We look at the change in GDP in % terms

Adjusted for inflation by using a price deflator

Real GDP = Nominal GDP * GDP deflator base

                                       GDP deflator current

Consumer Price Index, measures the % change in prices of a fixed basket of goods that a typical consumer would buy.  Measured monthly as Year-on-Year (YoY) and Month-on-Month (MoM).

Represents the number of unemployed persons as a percent of the labor force.  It is measured monthly by Bureau of Labor Statistics.

(economic indicator)

1. Frictional
2. Structural
3. Cyclical

1. Lagging
2. Coincident (or current as Aubi said in class)
3. Leading

something that changes before the economy changes

Ex.  Prices of things such as the S&P 500 which is an index of the top 500 companies, another indicator would be building permits because it’s indicating that something is going to be built which will ultimately wind up affecting the economy.

comes out after the fact, measurement of what really occurred historically

Ex.  GDP comes out quarterly 

Principal monetary authority in a country.  In charge of:

• Maximum Employment
• Stable Price
• Implementing Monetary policy
• Regulating member banks & providing stability
• Acts as "lender of last resort"

1. Mandate Price ability (stable price)
2. Maximize levels of employment

is the policy around controlling the supply of money which ultimately drives interest rates. The price of money is an interest rate.

Ex. Lower Interest rates

1. Expansive
2. Restrictive

is the policy around government spending and government revenue collection.

Ex. Stimulus packages

Takes place during contraction (recession) Central banks begin buying gov't securities from their primary dealers in an effort to decrease the yield on bonds

Can also lower the interest rates to increase the demand and encourage people to spend, because borrowing would become cheaper.

Reduce the reserve requirement of banks so banks will have more money to lend and they'll charge lower rates.

Followed during Expansion (growth) to control consumer spending and inflation.

Central Banks start selling gov't securities in order to increase yields resulting in expectation of higher int. rates

Raise interest rates to stop people from spending too much

Increase Reserve Requirements of banks, so banks have less money and charge higher interest rates.

Federal Reserve System (FED)

Bank of England (BoE)

European Central Bank (ECB)

1. Discount Rate (least effective)
2. Reserve requirements (used less often)
3. Open Market Operations (OMO)

The interest rate owed from the bank who borrowed the money from the FED.  This has the smallest impact on the economy and is rarely done in the financial markets, banks do not want to borrow money from the Fed.

“Lender of Last Resort”

The amount of money that banks have to deposit in the Central Bank (not interest bearing)

lower reserve requirement - means banks have more money to lend (done during contraction)

higher reserve requirement - means banks have less money to lend (done during expansion)

Personal consumption expenditure

...deflator