Understand Financial Terms Better
By Jeremy Yap
26th August 2009
When asked about Singapore’s economic growth over the past few years and how it is faring in the economic crisis, many are left clueless, especially when it comes to the economic growth indicators. Most people are unsure how the percentages and figures that appear in the business section of the newspaper are derived, resulting in them not being interested in how the economy is doing. So, what are economic growth indicators, and how are they derived?
An economic indicator, simply put, is any economic statistic, for example, the unemployment rate, the Gross Domestic Product (GDP), the inflation rate, the Producer Price Index or the Consumer Price Index, all of which inform us how well the economy is doing and how well it is going to do in the future.
The Ministry of Trade and Industry (MTI) recently announced that Singapore’s GDP growth is likely to be -5.0% to -2.0% in 2009, significantly lower than the -2.0% to +1.0% earlier in January 2009. Here, many will ask: What exactly is the GDP? The GDP is the market value of all the goods and services produced by labour and property located in the country, and this figure released every three months or so.
The GDP can be calculated by adding the private consumption of households, gross investment, government spending, and how much more the country exports as compared to how much it imports. Private consumption includes most personal expenditures such as food, rent, and medical expenses. Investment is defined as investments by business or households in capital, such as the purchase of software, or the purchase of machinery and equipment for a factory. The general public buying new houses is also considered as investments.
Government spending is the sum of government expenditures on final goods and services which the Government is responsible for. It includes salaries of public servants, or the purchase of weapons for the military. However, it does not include any transfer payments, such as social security or unemployment benefits. The amount of exports will also accurately capture the amount a country produces, including goods and services produced for other nations' consumption. Imports are subtracted since imported goods will be included in the Government spending, Investments and Consumption, and must be deducted to avoid counting foreign supply as domestic.
For 2009, inflation has been revised downwards from 2.5% to 3.5% to 1% to 2%, due to falls in global commodity prices and the lower than expected annual values of public housing properties. Inflation can be referred to as a rise in the general level of prices of goods and services in an economy. When the price level rises, each unit of currency buys fewer goods. At the same time, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
In layman terms, a number of goods that are representative of the economy are put together into what is referred to as a "market basket". The cost of this basket is then compared over time. This results in a price index or the current value of the market basket today as a percentage of the value of the same basket the previous year. Over some time, the various (Producer Price Indexes) PPIs and the (Consumer Price Indexes) CPIs show a similar rate of inflation.
The unemployment rate is another important term in finance. For example, the employment rate was 2.93 million in June 2009, and from this figure, the unemployment rate can be found. People with jobs are classified under “employed”. Those who are jobless, looking for jobs or available for work are classified under “unemployed”. People who are neither employed nor unemployed are assumed to not be in the labour force, such as students, are not included. When workers are unemployed, they, their families, and the country as a whole lose out. Workers and their families lose wages, and the country loses the goods or services that could have been produced. In addition, the purchasing power of these workers is lost, which can lead to unemployment for yet other workers. This is why the unemployment rate is a key indicator of the economy.
This article does have its limitations, and hence cannot cover all the terms used in finance, and the figures that are calculated. Now, however, there's a difference: you need not be left clueless in a swarm of financial talk.
26th August 2009
When asked about Singapore’s economic growth over the past few years and how it is faring in the economic crisis, many are left clueless, especially when it comes to the economic growth indicators. Most people are unsure how the percentages and figures that appear in the business section of the newspaper are derived, resulting in them not being interested in how the economy is doing. So, what are economic growth indicators, and how are they derived?
An economic indicator, simply put, is any economic statistic, for example, the unemployment rate, the Gross Domestic Product (GDP), the inflation rate, the Producer Price Index or the Consumer Price Index, all of which inform us how well the economy is doing and how well it is going to do in the future.
The Ministry of Trade and Industry (MTI) recently announced that Singapore’s GDP growth is likely to be -5.0% to -2.0% in 2009, significantly lower than the -2.0% to +1.0% earlier in January 2009. Here, many will ask: What exactly is the GDP? The GDP is the market value of all the goods and services produced by labour and property located in the country, and this figure released every three months or so.
The GDP can be calculated by adding the private consumption of households, gross investment, government spending, and how much more the country exports as compared to how much it imports. Private consumption includes most personal expenditures such as food, rent, and medical expenses. Investment is defined as investments by business or households in capital, such as the purchase of software, or the purchase of machinery and equipment for a factory. The general public buying new houses is also considered as investments.
Government spending is the sum of government expenditures on final goods and services which the Government is responsible for. It includes salaries of public servants, or the purchase of weapons for the military. However, it does not include any transfer payments, such as social security or unemployment benefits. The amount of exports will also accurately capture the amount a country produces, including goods and services produced for other nations' consumption. Imports are subtracted since imported goods will be included in the Government spending, Investments and Consumption, and must be deducted to avoid counting foreign supply as domestic.
For 2009, inflation has been revised downwards from 2.5% to 3.5% to 1% to 2%, due to falls in global commodity prices and the lower than expected annual values of public housing properties. Inflation can be referred to as a rise in the general level of prices of goods and services in an economy. When the price level rises, each unit of currency buys fewer goods. At the same time, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
In layman terms, a number of goods that are representative of the economy are put together into what is referred to as a "market basket". The cost of this basket is then compared over time. This results in a price index or the current value of the market basket today as a percentage of the value of the same basket the previous year. Over some time, the various (Producer Price Indexes) PPIs and the (Consumer Price Indexes) CPIs show a similar rate of inflation.
The unemployment rate is another important term in finance. For example, the employment rate was 2.93 million in June 2009, and from this figure, the unemployment rate can be found. People with jobs are classified under “employed”. Those who are jobless, looking for jobs or available for work are classified under “unemployed”. People who are neither employed nor unemployed are assumed to not be in the labour force, such as students, are not included. When workers are unemployed, they, their families, and the country as a whole lose out. Workers and their families lose wages, and the country loses the goods or services that could have been produced. In addition, the purchasing power of these workers is lost, which can lead to unemployment for yet other workers. This is why the unemployment rate is a key indicator of the economy.
This article does have its limitations, and hence cannot cover all the terms used in finance, and the figures that are calculated. Now, however, there's a difference: you need not be left clueless in a swarm of financial talk.
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