Brian Gaynor in the NZ Herald wrote a good piece on Lies, Damned Lies, and Statistics. Share prices and bond markets are moved by variables including market indicators and statistics on interest rates, inflation and unemployment. The variables are important in other ways, too. Interest rates affect mortgages, inflation harms those on fixed incomes and rising unemployment breeds job insecurity. Yet do many of us really understand how the figures are calculated? Do we really know how to interpret them? If we don’t, should we strive to know more?
We certainly should. Many commentators make a good living out of describing and interpreting statistics. Often their comments are commonplace and uninteresting.The pundit industry would collapse if we all knew more about these numbers and could judge them for ourselves. Interpreting market indicators is a minefield. Many indicators are official statistics that relate to economic performance. Although official statistics are usually honestly compiled, their accuracy varies.
While you can generally trust data published by, for example, Statistics New Zealand, you need to be aware of the limitations of the numbers. Unemployment and the ways that it is calculated varies considerably. It is a very influential indicator – the US Federal Reserve and its monetary policy is impacted by the levels of unemployment. They have said that if unemployment hits the 6.5% threshold it may consider raising interest rates.
In New Zealand the official measurement is the “Household Labour Force Survey (HLFS)” which is conducted every 3 months, covers about 15,000 private households and about 30,000 individuals.
Another measure is the unemployment benefit which counts those looking for work or in training who are eligible for payment of the benefit.
A third measure,the registered jobseeker statistic, is an administrative statistic affected by seasonal fluctuations and by changed administrative practices. Historically, it counted those who registered with the Department of Labour to find work (from late 1998, Work and Income New Zealand). As well as those out of work and available for work it includes people who work up to 29 hours a week who seek to increase their hours of work and does not include specific job availability or search criteria.
The difference between these three measures can fluctuate dramatically. See the graph below from the Parliamentary Library.
You will no doubt have covered economies and diseconomies of scale in a some form in economics courses. A recent example of the latter is the car manufacturing industry in Australia with Mitsubishi, Ford, Holden, and Toyota all closing, or in the process of closing, manufacturing operations.
At the turn of the century Australia produced over 400,000 cars a year but this was soon halved to 200,000 by the end of 2013. The global market has become ever smaller and Australian car manufacturers have struggled especially as consumers now want less of the gas guzzling V8’s to middle of the range, fuel efficient cars. Holden and Ford haven’t focused on these models. Some of the key points responsible for their demise:
1. In order to achieve economies of scale car plants need to be producing at least 200,000 cars a year – most plants in Australia produce 100,000.
2. Car plant employees in Australia earn very high wages and only German workers earn more.
3. Manufacturing costs in Australia are 4 times greater than Asian manufacturers and 2 times that of European plants.
4. The resource boom has meant the AUS$ has appreciated which has made Australian exports more expensive. With a lot of spare capacity in the global market for cars prices are very competitive.
5. For a long time generous state handouts have kept the industry solvent. That has now dried up.
Below are graphs explaining economies and diseconomies of scale.
Here is something I picked up from Scoop.it that explains Oligopoly markets in an amusing way. Useful for CIE A2-Unit 2.
Got this graph from the BNZ which shows the potential revenue of the Dairy industry this year. Like last year there have been concerns over the lack rainfall especially in the North Island and how it is impacting on milk volumes. However the sector is benefiting from the high export prices – in January there were annual increases of 56% in the value of milk powder, butter, and cheese exports and 37% for casein. Combined with an expected 9% increase in milk production this could lead to a $5.6bn increase in revenue from last year which equates to 2.6% of GDP.
Furthermore with a significant amount of milk products going to China this increase in prices has seen China become New Zealand’s number one trading partner with regard to revenue. This has traditionally been NZ’s neighbours Australia. Notice the increase in importance of China since the signing of the free trade deal.
This graph shows the importance of rugby events to visitor numbers in New Zealand. Both the British Lions Tour in 2004 and the Rugby World Cup in 2011 had the effect of increasing numbers significantly. Analysis completed for Auckland Tourism, Events and Economic Development (ATEED) by Market Economics reveals that RWC 2011 resulted in an estimated NZ$512 million net additional expenditure for Auckland between 2006 and 2012. When flow-on expenditure is added (the multiplier effect), Auckland’s economy grew by NZ$728 million over that period.
The Top 10 sectors that experienced the greatest shares of economic growth over the period 2006-2012 due to RWC 2011 were:
1. Property and business services NZ$202 million
2. Construction NZ$109 million
3. Manufacturing NZ$87 million
4. Accommodation, Cafés, Restaurants NZ$71 million
5. Transport and storage NZ$69 million
6. Retail trade NZ$69 million
7. Wholesale trade NZ$66 million
8. Finance and insurance NZ$57 million
9. Cultural and recreational services NZ$53 million
10. Communications services NZ$28 million
Visitors to New Zealand
There has been a lot of research regarding how higher income = higher levels of happiness. Increasing your income increases your utility (satisfaction). But the more you have, your utility increases, but at a diminishing rate. At low levels of income increasing your income has a big effect on your utility. However when you have a high income more money does increase your utility, but not as much as when you started off with low levels of income.
Introducing this diminishing returns framework into an analysis of happiness also suggests that increasing the income to the poorer members of society increases society’s total happiness by more than if the income of the wealthy increases by the same amount – see graph. Research has shown that a lack of money brings both emotional misery and low life evaluation; similar results were found for anger. Beyond $75,000 in the contemporary United States, however, higher income is neither the road to experienced happiness nor the road to the relief of unhappiness or stress, although higher income continues to improve individuals’ life evaluations.” The research does not imply that a financial increase will not improve the quality of life, but suggests that above a certain income level, people’s emotional wellbeing is constrained by other factors, such as temperament and life circumstances. The take home message of the research is that high incomes don’t bring you happiness, but they do bring you a life that you think is better. The Easterlin Paradox concerns whether we are happier and more contented as our living standards improve. In the mid 1970s Richard Easterlin drew attention to studies that showed that, although successive generations are usually more affluent that their parents or grandparents, people seemed to be no happier with their lives? It is an interesting paradox to study when you are writing about measuring economic welfare and the standard of living.
What is it?
1) Within a society, rich people tend to be much happier than poor people.
2) But, rich societies tend not to be happier than poor societies (or not by much).
3) As countries get richer, they do not get happier.
Easterlin argued that life satisfaction does rise with average incomes but only up to a point. One of Easterlin’s conclusions was that relative income can weigh heavily on people’s minds.
What about the other way around – Happiness causes Income?
An article by Scott Sumner (Library of Economics and Liberty) looked at this area and suggested that culture has an impact on happiness. According to Sumner peole who care about the welfare of others tend to be happier – this leads to more efficient policies, less corruption, acquiring governments handouts when they are not entitled e.g. the informal economy.
1) They have one of the highest levels of public integrity in the world
2) If you exclude the the two “size of government’ categories from the 10 categories used by the Hertitage foundation. Denmark has the most free economy in the world. Therefore it is a free market with a strong welfare state. As Sumner points out “not much (selfish) rent seeking” behaviour. Happy people aren’t selfish?
3) Denmark ranks leads the world in many happiness rankings
Euphoria v Income
China currently ranks extremely high in level of satisfaction but doesn’t exhibit an extremely high level of “euphoria” for everyday life. Can researchers distinguish between peoples incomes and euphoria? Think of the euphoria in the east of the collapse of the Berlin Wall or Spain winning the Football World Cup when they had over 25% unemployment. Ultimately a lot is dependent on when the research is carried out and culture of the people. You might not have much but newly regained freedom or being the best football team in the world gives immense pleasure.
Morgan Stanley has recently coined the term the ‘Fragile Five’ which alludes to those troubled emerging market currencies of Brazil, South Africa, India, Turkey and Indonesia. Not only have their currencies been of concern but also rising inflation, weak growth and sizeable current account deficits.
Why the currency problem in emerging markets?
In the latter part of 2013 the then US Federal Reserve Chairman Ben Bernanke signaled that there would be a scaling back or ‘tapering off’ of its quantitative easing programme. Beginning in January 2014, the Fed would buy $75 billion in bonds each month, down from the $85 billion it had been buying since September 2012. Over the last couple of years QE has kept interest rates low forcing investors to look further afield to seek out the best return. Emerging markets attracted a lot of this capital and this had the effect of appreciating the local currency. With the tapering of bond purchases by the Fed and the improvement in the US economy, interest rates will begin to rise again which will attract capital back into the US and out of emerging markets. This is predictable but will the extent of this outflow of capital intensify into an emerging market currency crisis?
The central banks of Brazil, India, Indonesia, South Africa and Turkey have been busy hiking rates to counter plunging currencies. But currency depreciation has been a policy that many countries have pursued to boost growth in their economies – the weaker currency makes imports more expensive and exports cheaper. However the higher inflation that is generated by a weaker currency will diminish competitiveness sooner or later again.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.