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EDITIONS
Wednesday, 14 August, 2002, 14:46 GMT 15:46 UK
How the economy is measured
Baffled by statistics? Seasonal adjustments, index numbers and month on month changes? Don't despair - take on a few simple rules and economic statistics need not be a minefield of confusion.

Value and Volume

When making comparisions, we are sometimes more interested in the absolute volume of sales (eg number of items sold) rather than the total income. This is particularly true when measuring retail sales and imports and exports, where changes in prices might reflect other factors (such as fluctuating exchange rates).

For example, if the revenue from clothing sales increased 10% last month, this could be owing to a change in prices (value) and/or a change in the amount (volume) sold. If it was imported clothing, and the pound went up by 10%, then without any change in the number of items of clothing sold, the value of sales would go up by 10%.

Seasonality

Seasonal adjustments take account of monthly distortions that are known to occur on an predictable basis such as holidays, the weather and sales periods.

For example, retail sales tend to rise sharply in the run-up to Christmas. December sales can increase up to 20-30% compared to November.

The seasonal adjustment attempts to strip out the Christmas-related increase in sales which can then be subtracted from non-adjusted sales.

This allows us to see whether sales are actually rising or falling on an underlying basis (i.e. compared to what has happened in December in recent years).

Annual and Annualised

The annual change is not the same as the year on year change.

The annualised rate shows what the annual rate would be if the latest change (either annual or quarterly) continued for the rest of the year.

The increase in a country's total wealth, GDP, is usually expressed at an annual rate, where as index numbers like retail prices are usually measured as year-on-year changes.

Trends

The trend indicates the general tendency or direction over the long-term.

Quarter on quarter growth rates compared with month on month growth rates provide a trend indicator for monthly data.

Many economic figures are quite volatile from month to month, so the trend can be useful, especially for figures like trade and retail sales.

Falling or Rising?

"Inflation has fallen to the government's target figure. The cost of living rose 2.5% last month."

Confused? The year on year rate has fallen, but compared to a year ago, prices are still rising.

It should read: "The underlying rate of inflation has fallen to the government's target figure. The cost of living rose 2.5% in April compared to the same month last year."

In any month, prices may fall compared to last month (this would likely be true in July and January when the sales are on), but compared to a year ago, prices are still likely to be rising (the year on year rate is positive).

Better or Worse?

Financial markets are usually concerned whether economic indicators are below or above expectations.

For major economic indicators a 'market consensus' is published weekly.

For example, if inflation went up from 2.4% to 2.6%, and the market consensus was that inflation would rise to 2.7%, then inflation was better than expectations,and the markets would be happy with this, at least in the short term.

Index Numbers

Many economic indicators are in the form of index numbers, with a specified base year normally being 100.

The figures act as a summary of the direction and changes in the underlying economic variable, such as inflation.

There are two main ways of creating index numbers:

  • The weight of each component in the overall index is fixed over time.

  • Alternatively, the weights of the components are allowed to fluctuate over time to reflect changes in their relative importance.

Replacement occurs most dramatically in the computer/technology sector where a product can be replaced after just a few months.

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