Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo
Principles of Finance

3.6 Sources and Characteristics of Economic Data

Principles of Finance3.6 Sources and Characteristics of Economic Data

Menu
Table of contents
  1. Preface
  2. 1 Introduction to Finance
    1. Why It Matters
    2. 1.1 What Is Finance?
    3. 1.2 The Role of Finance in an Organization
    4. 1.3 Importance of Data and Technology
    5. 1.4 Careers in Finance
    6. 1.5 Markets and Participants
    7. 1.6 Microeconomic and Macroeconomic Matters
    8. 1.7 Financial Instruments
    9. 1.8 Concepts of Time and Value
    10. Summary
    11. Key Terms
    12. Multiple Choice
    13. Review Questions
    14. Video Activity
  3. 2 Corporate Structure and Governance
    1. Why It Matters
    2. 2.1 Business Structures
    3. 2.2 Relationship between Shareholders and Company Management
    4. 2.3 Role of the Board of Directors
    5. 2.4 Agency Issues: Shareholders and Corporate Boards
    6. 2.5 Interacting with Investors, Intermediaries, and Other Market Participants
    7. 2.6 Companies in Domestic and Global Markets
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Video Activity
  4. 3 Economic Foundations: Money and Rates
    1. Why It Matters
    2. 3.1 Microeconomics
    3. 3.2 Macroeconomics
    4. 3.3 Business Cycles and Economic Activity
    5. 3.4 Interest Rates
    6. 3.5 Foreign Exchange Rates
    7. 3.6 Sources and Characteristics of Economic Data
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  5. 4 Accrual Accounting Process
    1. Why It Matters
    2. 4.1 Cash versus Accrual Accounting
    3. 4.2 Economic Basis for Accrual Accounting
    4. 4.3 How Does a Company Recognize a Sale and an Expense?
    5. 4.4 When Should a Company Capitalize or Expense an Item?
    6. 4.5 What Is “Profit” versus “Loss” for the Company?
    7. Summary
    8. Key Terms
    9. Multiple Choice
    10. Review Questions
    11. Problems
    12. Video Activity
  6. 5 Financial Statements
    1. Why It Matters
    2. 5.1 The Income Statement
    3. 5.2 The Balance Sheet
    4. 5.3 The Relationship between the Balance Sheet and the Income Statement
    5. 5.4 The Statement of Owner’s Equity
    6. 5.5 The Statement of Cash Flows
    7. 5.6 Operating Cash Flow and Free Cash Flow to the Firm (FCFF)
    8. 5.7 Common-Size Statements
    9. 5.8 Reporting Financial Activity
    10. Summary
    11. Key Terms
    12. CFA Institute
    13. Multiple Choice
    14. Review Questions
    15. Problems
    16. Video Activity
  7. 6 Measures of Financial Health
    1. Why It Matters
    2. 6.1 Ratios: Condensing Information into Smaller Pieces
    3. 6.2 Operating Efficiency Ratios
    4. 6.3 Liquidity Ratios
    5. 6.4 Solvency Ratios
    6. 6.5 Market Value Ratios
    7. 6.6 Profitability Ratios and the DuPont Method
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  8. 7 Time Value of Money I: Single Payment Value
    1. Why It Matters
    2. 7.1 Now versus Later Concepts
    3. 7.2 Time Value of Money (TVM) Basics
    4. 7.3 Methods for Solving Time Value of Money Problems
    5. 7.4 Applications of TVM in Finance
    6. Summary
    7. Key Terms
    8. CFA Institute
    9. Multiple Choice
    10. Review Questions
    11. Problems
    12. Video Activity
  9. 8 Time Value of Money II: Equal Multiple Payments
    1. Why It Matters
    2. 8.1 Perpetuities
    3. 8.2 Annuities
    4. 8.3 Loan Amortization
    5. 8.4 Stated versus Effective Rates
    6. 8.5 Equal Payments with a Financial Calculator and Excel
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Problems
    12. Video Activity
  10. 9 Time Value of Money III: Unequal Multiple Payment Values
    1. Why It Matters
    2. 9.1 Timing of Cash Flows
    3. 9.2 Unequal Payments Using a Financial Calculator or Microsoft Excel
    4. Summary
    5. Key Terms
    6. CFA Institute
    7. Multiple Choice
    8. Review Questions
    9. Problems
    10. Video Activity
  11. 10 Bonds and Bond Valuation
    1. Why It Matters
    2. 10.1 Characteristics of Bonds
    3. 10.2 Bond Valuation
    4. 10.3 Using the Yield Curve
    5. 10.4 Risks of Interest Rates and Default
    6. 10.5 Using Spreadsheets to Solve Bond Problems
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  12. 11 Stocks and Stock Valuation
    1. Why It Matters
    2. 11.1 Multiple Approaches to Stock Valuation
    3. 11.2 Dividend Discount Models (DDMs)
    4. 11.3 Discounted Cash Flow (DCF) Model
    5. 11.4 Preferred Stock
    6. 11.5 Efficient Markets
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  13. 12 Historical Performance of US Markets
    1. Why It Matters
    2. 12.1 Overview of US Financial Markets
    3. 12.2 Historical Picture of Inflation
    4. 12.3 Historical Picture of Returns to Bonds
    5. 12.4 Historical Picture of Returns to Stocks
    6. Summary
    7. Key Terms
    8. Multiple Choice
    9. Review Questions
    10. Video Activity
  14. 13 Statistical Analysis in Finance
    1. Why It Matters
    2. 13.1 Measures of Center
    3. 13.2 Measures of Spread
    4. 13.3 Measures of Position
    5. 13.4 Statistical Distributions
    6. 13.5 Probability Distributions
    7. 13.6 Data Visualization and Graphical Displays
    8. 13.7 The R Statistical Analysis Tool
    9. Summary
    10. Key Terms
    11. CFA Institute
    12. Multiple Choice
    13. Review Questions
    14. Problems
    15. Video Activity
  15. 14 Regression Analysis in Finance
    1. Why It Matters
    2. 14.1 Correlation Analysis
    3. 14.2 Linear Regression Analysis
    4. 14.3 Best-Fit Linear Model
    5. 14.4 Regression Applications in Finance
    6. 14.5 Predictions and Prediction Intervals
    7. 14.6 Use of R Statistical Analysis Tool for Regression Analysis
    8. Summary
    9. Key Terms
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  16. 15 How to Think about Investing
    1. Why It Matters
    2. 15.1 Risk and Return to an Individual Asset
    3. 15.2 Risk and Return to Multiple Assets
    4. 15.3 The Capital Asset Pricing Model (CAPM)
    5. 15.4 Applications in Performance Measurement
    6. 15.5 Using Excel to Make Investment Decisions
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  17. 16 How Companies Think about Investing
    1. Why It Matters
    2. 16.1 Payback Period Method
    3. 16.2 Net Present Value (NPV) Method
    4. 16.3 Internal Rate of Return (IRR) Method
    5. 16.4 Alternative Methods
    6. 16.5 Choosing between Projects
    7. 16.6 Using Excel to Make Company Investment Decisions
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  18. 17 How Firms Raise Capital
    1. Why It Matters
    2. 17.1 The Concept of Capital Structure
    3. 17.2 The Costs of Debt and Equity Capital
    4. 17.3 Calculating the Weighted Average Cost of Capital
    5. 17.4 Capital Structure Choices
    6. 17.5 Optimal Capital Structure
    7. 17.6 Alternative Sources of Funds
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  19. 18 Financial Forecasting
    1. Why It Matters
    2. 18.1 The Importance of Forecasting
    3. 18.2 Forecasting Sales
    4. 18.3 Pro Forma Financials
    5. 18.4 Generating the Complete Forecast
    6. 18.5 Forecasting Cash Flow and Assessing the Value of Growth
    7. 18.6 Using Excel to Create the Long-Term Forecast
    8. Summary
    9. Key Terms
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  20. 19 The Importance of Trade Credit and Working Capital in Planning
    1. Why It Matters
    2. 19.1 What Is Working Capital?
    3. 19.2 What Is Trade Credit?
    4. 19.3 Cash Management
    5. 19.4 Receivables Management
    6. 19.5 Inventory Management
    7. 19.6 Using Excel to Create the Short-Term Plan
    8. Summary
    9. Key Terms
    10. Multiple Choice
    11. Review Questions
    12. Video Activity
  21. 20 Risk Management and the Financial Manager
    1. Why It Matters
    2. 20.1 The Importance of Risk Management
    3. 20.2 Commodity Price Risk
    4. 20.3 Exchange Rates and Risk
    5. 20.4 Interest Rate Risk
    6. Summary
    7. Key Terms
    8. CFA Institute
    9. Multiple Choice
    10. Review Questions
    11. Problems
    12. Video Activity
  22. Index

Learning Outcomes

By the end of this section, you will be able to:

  • Interpret economic data.
  • Compute the percent change for economic variables.

FRED: Federal Reserve Economic Data

One of the largest sources of economic data is the Federal Reserve Economic Data (FRED) database.12 This database is maintained by the Federal Reserve Bank of St. Louis and contains more than 765,000 economic time series. These time series are compiled by the Federal Reserve and come from a number of sources, including the Bureau of Labor Statistics and the US Census.

You can find statistics on employment, inflation, exchange rates, gross domestic product, interest rates, and many other economic variables in the FRED database. Although much of the data is about the US markets, macroeconomic data from other countries is also available. In addition to being viewable in graphical and text form on the FRED site, the data is easily downloaded into an Excel spreadsheet for analysis.

Levels versus Percentage Changes

The same information can be presented in graphs several different ways. The particular format you choose will depend on how you are using the data.

Figure 3.19 shows the real GDP of Japan for 2010–2020. This chart is created showing the level of real GDP. The steep drop in 2020 highlights the economic decline associated with the COVID-19 pandemic. Looking at the chart, it is easy to see that after 10 years of a general upward trend, Japan’s GDP quickly fell to a level not seen in the previous decade as COVID-19 began spreading in early 2020.

Graphical representation of the Real Gross Domestic Product for Japan, 2010–2020. It shows that the real GDP for Japan kept on rising from 2011 to 2019, then dropped dramatically in 2020 before it dramatically rose again.
Figure 3.19 Real Gross Domestic Product for Japan, 2010–202013

The vertical axis in Figure 3.19 is measured in yen. Over the time period shown, the real GDP ranged from 500 trillion yen to 560 trillion yen. The general trend (until COVID-19) was upward, indicating growth in the Japanese economy. However, the growth was not consistent from year to year.

Figure 3.20 also contains information about Japanese real GDP from 2010 to 2020. This chart measures the percent change for each quarter on the vertical axis. It is created using the same underlying data as Figure 3.19. Figure 3.20 demonstrates a way of highlighting the growth (or contraction) of an economy at a particular point in time.

Graphical representation of percent change for Gross Domestic Product for Japan, 2010–2020. It shows that the real GDP for Japan was steady from 2011 to 2020, never falling below negative 2.5 percent change or rising above 2.5 percent change. In 2020, the percent change went to more than negative 7.5 percent before quickly rising to 5 percent change.
Figure 3.20 Percent Change for Gross Domestic Product for Japan, 2010–202014

The formula to calculate the percentage change from one quarter to the next is

Percentage Change=Quarter2-Quarter1Quarter1Percentage Change=Quarter2-Quarter1Quarter1

In the first quarter of 2013, the real GDP for Japan was 522,594.2 billion yen. In the second quarter of 2013, the real GDP had risen to 527,277.0 billion yen. Thus, the percentage change in real GDP from quarter one to quarter two was

Percentage Change=Quarter2-Quarter1Quarter1=527,277.0-522,594.2522,594.2=0.00896=0.896%Percentage Change=Quarter2-Quarter1Quarter1=527,277.0-522,594.2522,594.2=0.00896=0.896%

As long as the percentage change for a quarter is positive, the real GDP in Figure 3.20 will rise; this indicates that the economy is growing. If the percentage change shown in Figure 3.20 is negative, then real GDP will fall; this indicates that the economy is contracting. Looking at the percentage change in Figure 3.20 is helpful for detecting when the economy is growing but the growth is slowing. If the percentage change is positive but lower than it was for the previous quarter, then GDP is growing, but the growth rate is slowing.

Indexes

An index is created to track the performance of a particular aspect of the economy or the financial markets. An index helps compare the level of a variable at one point in time relative to another point in time. Indexes are often used when movement over time is more important than the absolute level of the variable at any one point in time.

Earlier in this chapter, we looked at the rate of change in the CPI to measure the rate of inflation. In its raw form, the CPI is an index. Remember that the CPI is a measure of the cost of a market basket of goods. When the index is created, the total cost of the market basket, whether it is $300 or $950, is irrelevant. What economists are interested in is the magnitude of the difference in cost of the same market basket at a later date.

In order to focus on the change over time, a base year is identified. The cost of the market basket in the base year is given an index level of 100. Let’s assume that the market basket costs $300 in the base year. If the same basket of goods costs $330 the following year, then the index level the following year would be 110. The index level increases by 10% when the cost of the market basket increases by 10%. This makes it easy to compare different measures of inflation.

For example, suppose a market basket costs 40,000 yen in the first year and 42,000 yen in the second year. In the base year, the CPI in Japan would be set at 100; the following year, the index would rise to 105 (because of the 5% rise in the market basket cost). Comparing the levels of the index in Japan with the index in the United States allows you to compare inflation trends in the two countries.

Table 3.6 contains the CPI for the United States, Japan, and Switzerland for each decade since 1970. A base year of 1970 is used for all three countries, so the index level is 100 for all three countries in 1970. You can see that Japan has experienced virtually no inflation for the last several decades. If the index level remains the same from one year to the next, there is a zero rate of inflation. Negative rates of inflation, or deflation, would be associated with a falling index level.

Year United States Switzerland Japan
1970 100.0 100.0 100.0
1980 212.3 162.3 232.5
1990 336.5 226.4 291.2
2000 443.5 278.2 322.1
2010 561.6 304.3 313.6
2020 666.6 302.3 331.8
Table 3.6 CPI Levels for the United States, Switzerland, and Japan15

Using an index level helps us compare the impact that inflation has had on the cost of living in the three countries. Prices were rising rapidly in Japan in the 1970s, outpacing price increases in both the United States and Switzerland. By the mid-1980s, however, price increases in Japan tapered off. Although prices in Switzerland rose much more slowly in the 1970s, the price level continued to rise over the next couple of decades. Even though the price increases have followed different patterns in Switzerland and Japan, the overall price level today is about three times what it was in 1970 in both of those countries. However, the price level in the United States has continued to rise; today, the price level in the United States is about seven times higher than it was in in the 1970s.

Footnotes

  • 12Federal Reserve Bank of St. Louis. Economic Resources & Data. Accessed October 25, 2021. https://www.stlouisfed.org/
  • 13Data from JP, Cabinet Office. “Real Gross Domestic Product for Japan (JPNRGDPEXP).” FRED. Federal Reserve Bank of St. Louis, accessed July 7, 2021. https://fred.stlouisfed.org/series/JPNRGDPEXP
  • 14Data from JP, Cabinet Office. “Real Gross Domestic Product for Japan (JPNRGDPEXP).” FRED. Federal Reserve Bank of St. Louis, accessed July 7, 2021. https://fred.stlouisfed.org/series/JPNRGDPEXP
  • 15Data from US Bureau of Labor Statistics. “Consumer Price Index for All Urban Consumers: All Items in US City Average (CPIAUCNS).” FRED. Federal Reserve Bank of St. Louis, accessed July 31, 2021. https://fred.stlouisfed.org/series/CPIAUCNS; Organization for Economic Co-operation and Development. “Consumer Price Index: All Items for Switzerland (CHECPIALLMINMEI).” FRED. Federal Reserve Bank of St. Louis, accessed July 31, 2021. https://fred.stlouisfed.org/series/CHECPIALLMINMEI; Organization for Economic Co-operation and Development. “Consumer Price Index of All Items in Japan (JPNCPIALLMINMEI).” FRED. Federal Reserve Bank of St. Louis, accessed July 31, 2021. https://fred.stlouisfed.org/series/JPNCPIALLMINMEI
Do you know how you learn best?
Kinetic by OpenStax offers access to innovative study tools designed to help you maximize your learning potential.
Order a print copy

As an Amazon Associate we earn from qualifying purchases.

Citation/Attribution

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/principles-finance/pages/1-why-it-matters
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/principles-finance/pages/1-why-it-matters
Citation information

© May 20, 2022 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.