index of leading economic indicators (lei) (predicts direction of the economy 6-9 months down the...
TRANSCRIPT
Index of Leading Economic Indicators
20
30
40
50
60
70
80
90
100
110
120
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Growth rate < -2% => Recession3 months Index increase => Recovery
LE
I In
dex
-15%
-10%
-5%
0%
5%
10%
Per
cent
Recession
6-Month Growth RateLeading Index
Purchasing Power ParityIn the long Run@ = P.L.Canada
$ P.L.U.S.
E will adjust so that it is possible to buy the same marketbasket of G/S with the equivalent amount of anycountry’s currency.
Purchasing power of each country’s currency is the same
If PPP holds, then no arbitrage profit opportunities.If not PPP, then arbitrage profit opportunities exist.
U.S. Dollar Exchange Rate Vs Gold Prices
Major Currency Index vs London AM Fix ($ per troy oz.)
65
70
75
80
85
90
95
100
105
110
115
120
125
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Nominal Exchange Rate (LHS)
Gold Price (RHS)
Dollars and gold are currency substitutes.Both serve as a store of value.A fall or expected fall in the value of the dollarcreate incentives to shift towards gold.
THE GREAT DEBATE:Stimulus Vs Austerity
J.M. Keynes1883-1946
Father of Modern Macroeconomics“The General Theory of Employment, Interest
and Money”
Advocated the use of fiscal and monetary measures to offset recessions.
AD determines the overall level of economic activity.
The modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by government intervention.
F.A. Hayek1899-1992
1974 Nobel Prize“The Road to Serfdom”
Changing prices communicate signals to enable individuals to coordinate their plans. This leads to an efficient exchange and use
of resources.
Leading critic of collectivism/socialism because it required a central planner that would eventually become totalitarianism.
The free price system is a spontaneous order – the result of human action, but not of
human design.
Central banks do not possess the relevant info to govern the money supply, nor the
ability to use it correctly.
U.S. Dollar Versus Yuan Exchange Rate
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12$0.10
$0.11
$0.12
$0.13
$0.14
$0.15
$0.16
$0.17
$0.18
$0.19
$0.20
$/YuanYuan/$
Yuan 6.35 / $1
$0.157 / Yuan
Imports and Exports Price Indexes(Measures Goods/Services Prices Changes of Exports/Imports)
Web address: www.bls.gov/mxpMonthly revisions going back 3 months. Every January, the weights of products in the basket are changed, and reflect shifts in trade patterns 2 years earlier.
The price indexes convert the monthly U.S. trade figures from current dollars (PtYt) to real dollars (trade flows in real terms). Allows an analysis on why trade flows changed; a change in prices or a change in quantity (price or volume effect). Monthly data on the transaction prices of trades on 20,000 products from 600 companies is collected.
Import prices are “free on board” (FOB) which does not include the cost of insurance and duty taxes. This reflects the value of product at the foreign port of exportation. Seller is responsible for placing the goods on a boat or plane. Export prices are “free along ship” (FAS) which represents value before loading.
The behavior of export and import prices affect the costs of trade. A rise in the price of imports can have a palpable impact on inflation in the U.S. and is considered a forward looking sign of inflation pressure. (examples: increase in the price of Columbian coffee or Saudi oil). The dominant factor behind changes in import and export prices is the rise and fall of the U.S. dollars value in the currency market. A decrease in the U.S. dollar exchange rate will increase the price of imports.
ePEU x ($/e) = $PMUS
Import and export prices have a direct impact on the competitive position of U.S. in foreign markets. Rising export prices => falling quantity demand of U.S. exports => rising unemployment rate => falling GDP. U.S. importers prefer to deal with nations whose currencies are weak because they can purchase goods more cheaply from them, than from stronger currency nations. But U.S. exporters face serious headwinds selling into a market whose local currency is falling
If U.S. inflation increases or the U.S. dollar appreciates, then the quantity demand for U.S. exports by foreigners will fall as they switch their purchases to other countries. This will reduce U.S economic growth.
Recall Purchasing Power Parity (PPP); $/e = P.L.U.S. / P.L.EU
Recall Real Exchange Rate; r = e/$ x (P.L.U.S. / P.L.EU)
Wine example: Assume the price of wine in Europe = 25 euros and the exchange rate E = $/e = $1/e1. So the price of imported wine in the U.S. is $25. If the Euro appreciates 25%, then the cost of imported wine in the U.S. rises to $31.25, a 25% increase. This will contribute to rising inflation in the U.S and an increase in U.S. producers’ wine prices. The dollar depreciates to e0.8/$1 (a 20% decline) so the price of U.S. exported wine to Europe falls 20%. This leads to rising quantity demand for U.S. exports and rising sales and profits.
--------------------------------------------------------------------------------------------------------------------------------------Market Analysis:
Bonds: PM => (P/P)Et+1=> DBonds => iBonds
Stocks: PM => production costs => profits => PStocks
PM => domestic producers sales => profits => PStocks
PX => foreign sales => profits => PStocks
(firms have different exposure to the global market place, some import commodities and inputs and others compete with final goods)
Dollar: PM => (P/P)Et+1 => possible policymaker intervention into the FX market
Import Prices (12-month Growth) Vs Exchange Rates Major Currency Index
Nominal & Real (1973 = 100)
-8
-6
-4
-2
0
2
4
6
8
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13Percen
t
60
65
70
75
80
85
90
95
100
105
110
115
120
Ind
ex
Import Prices (Excluding Petroleum)NominalReal
ePEU x ($/e) = $PMUS