Economics 101: How to build a DIY economics dashboard
Ok, so last week I introduced you to economics, and told you that the economy doesn’t actually matter. It’s what ‘the economy’ gives us an insight into.
So let’s break that down a little bit, and start to get a feel for how all the pieces of data you see reported in the media fit together.
So I want you to imagine the dashboard – like you get in a car. But this is an economics dashboard. This has everything worth knowing.
Now, the dashboard has two halves.
The first half we can call ‘activity’. This is everything that happens and how it happens.
The second half we can call ‘prices’. This is about how we measure value in our economy.
And we’re probably about equally interested in both.
So let’s look at the actual data that you see in the media, and how it fits in this activity:prices framework.
So on the activity side, we have two headline stats.
The first is GDP – Gross Domestic Product. This is a measure of what we produce in any given year. It’s about what gets bought and sold.
The second is the unemployment rate. This is about how many people have jobs and how many don’t.
Now each of these headline measures are actually composed of a number of pieces. So GDP is made of consumer spending, investment spending, government spending, and the trade balance.
The unemployment rate is calculated by taking the number of people looking for work as a percent of the total number of people in the workforce.
At any rate, these are out headline activity stats, and these are the ones that gain the most air-time in the media.
So if they were our two big gauges on the activity side, around them are a number of smaller gauges. These are our ‘partial indicators’ – they give us a partial view into our headline number.
So on the GDP side it might be retail sales, or consumer confidence, or industrial production. There’s lots of them and there’s new ones being dreamed up all the time. But basically, they’re all trying to help us get a clearer picture of what’s going on in GDP.
On the unemployment side, you have things like the job ads survey, or hiring intentions in the business survey. Same story, we’re just trying to get a better sense of what’s happening in the jobs market.
And so that’s what we have on the activity side of the board. GDP and unemployment. Or, to borrow a phrase, “jobs and growth”.
Now, what about the other half of the dashboard – the prices side?
Well, in many ways, this is what we’re most interested in as investors. There are four key prices I’m interested in as a property investor.
There’s interest rates – which is the price of money.
There’s inflation – which is the price of goods and services.
There’s the exchange rate – which is the price of the Australian dollar.
And there’s property prices – which is what it says on the box.
And again, around those four gauges are a number of partial indicators.
At any rate, this is why my dashboard looks like.
What I’m trying to do here is give you a basic framework for understanding what’s going on in the economy, and making sense of all the data you’re going to see in the paper and what have you.
But you won’t go too far wrong if you can remember this. At the end of the day, we’re only interested in one of two things. There’s activity and there’s prices.
Each of those breaks down into further areas of interest. Activity breaks down in the GDP and employment. Prices breaks down into interest rates, inflation, exchange rates and property prices.
Everything else is just nuance.
If you can understand just this much, what you see in the papers will start to make a lot more sense.