Basic methods of interpretation

Based on the definitions given in Section 4.2, indicators can be inferred as measures that are obtained by means o f further processing statistics so as to fit a framework o f economic or social

concerns. In essence, indicators are manipulated or processed statistics designed to express

structure or change o f phenomena related to economic or social interests. Therefore, in order to

reveal and fully understand their acquired meaning or latent information, several basic methods

o f interpretation have been developed. The following are some o f the methods commonly used

for interpreting economic indicators.

a) Nominal and real terms

When interpreting economic figures, it is important to distinguish between the effects o f inflation

and changes in the real level o f economic activity. For instance, a volume output indicator

provides information about the changes in volume, and not price. It is also known as output in constant prices, real prices or real terms. On the other hand, a value output indicator reflects

changes in both volume and price. An output measured in actual selling price is known as output

in current price, nominal price or nominal terms. In short, values or outputs in current prices, nominal prices or nominal terms include the effects o f inflation; while volumes or outputs in

constant prices, real prices or real terms exclude any inflationary influences. Generally, price

indicators are produced and used to convert output in current prices to constant prices. They are

also known as price deflators.

b) Index numbers

Often, indicators are developed using index numbers. Frumkin (1994) considers index numbers

as a convenient way o f quickly assessing the direction and level o f changes in economic activity.

Essentially, an index number is a relative measure which expresses the relationship between two

figures, that is, the current and the base. The base figure is set at 100 and subsequent figures are

obtained with reference to it. Thus, an index number shows percentage change over time or

difference at a point in time. It may be either simple or composite. A composite index combines

two or more indices to form a new single index. The most common method o f constructing a

composite index is to calculate a weighted average of the indices used.

price index, which deals with changes in price only and is generally used for deflating

purposes;

volume index, which measures changes in volume, such as the Index o f Industrial

Production; and

value index, which reflects changes in both volume and price, such as the Index of GDP.

c) Net and percentage changes

Net and percentage changes are two commonly used methods for interpreting economic

indicators. A net change is an absolute measure which reflects the amount difference between

two periods. On the other hand, a percentage change uses percentages as a consistent yardstick

for interpreting changes, and thus is a relative measure. In identifying critical periods over a

period o f time, change measures are more effective than those which show only total amounts.

These periods will be more apparent since the figures would indicate the magnitudes o f the

change. Although both net and percentage change reflect change over time, there is a main

difference in their usage. For example, an interest rate increases from 10 per cent to 13 per cent,

the net change is 3 percentage points, but the percentage change is 30 per cent.

d) Growth rates

Growth rates are most commonly used for interpreting time series o f economic indicators. Some

of the measures o f growth rates are:

12-month or 4-quarter change:

This measure compares the figure of a particular month or quarter with that o f the same month or

quarter in the previous year. For example, orders rose by 2.6 per cent between the third quarters

o f 1989 and 1990.

Annual change:

This measure compares the total or average figure for one calendar or fiscal year with that in the

previous year. For example, orders in 1990 were 2.7 per cent higher than in 1989.

Change to year-end:

four quarters to end 1990.

Long-term change:

This is also the long-term growth rate which is obtained by averaging annual rates. However, it

is only appropriate if the changes are fairly uniform.

e) Moving averages

When the time series of an indicator shows erratic fluctuations, it is common to apply moving

averages to smooth out the irregularities so as to reveal the underlying trend. In essence, the

application o f this method is most appropriate when interpreting indicators with volatile figures.

The moving average can average any number o f periods, although the more periods it covers, the

slower it will be to show any changes in trend.

f) Seasonality

Most economic figures show a seasonal pattern that repeats itself every year. By eliminating

seasonal effects, the figures can be more easily compared and examined for trends, cycles and

irregular components. When interpreting indicators containing seasonality, seasonal adjustment

has to be carried out to adjust raw data for the observed seasonal pattern. For instance, if output

in a particular month is typically higher by 50 per cent than the monthly average, the seasonal

adjustment would involve dividing all figures for that month by 50 per cent. Many published

figures are seasonally adjusted to aid interpretation o f economic indicators.