Economics in the real world

What do your possessions, favourite snacks or pastimes say about the economy? Hannah Langworth takes a look at six unconventional indicators

What is an economic indicator? It's a statistic to which economists refer when they want to make an assessment of an aspect of an economy. For example, those interested in the overall financial health of a particular country might examine unemployment rates, industrial production or retail sales, while those comparing purchasing power across a number of different nations might focus on house prices or inflation rates.

However, economists also pore over some more unexpected statistics, and might even be found loitering in a department store or fast food restaurant. Why? Because they believe that finding out what goes on here can shed more light on certain aspects of what the economy is doing than the conventional measurements they learnt about at university.

So here are just a few of The Gateway's favourite unconventional economic indicators, and explanations of why economists have taken an interest in them over the years.

Lipstick

In the autumn of 2001, Leonard Lauder of cosmetics giant Estée Lauder drew attention to an 11 per cent rise in US lipstick sales in the wake of the September 11 attacks, which he attributed to a desire for small luxuries during hard times. Ever since then, the number of lipsticks sold has been a much-cited statistic for gauging economic health - disciples of this index have also drawn attention to a 25 per cent rise in American cosmetic sales during the Great Depression of the 1930s.

However, the theory has now been discredited to a certain extent, as statisticians have noted that lipstick sales have also risen during periods of economic optimism, and haven't boomed during the last few years of economic crisis - though it has been suggested that this time round women are buying foundation or nail varnish instead.

Some commentators have argued that the "lipstick index", or the foundation or nail varnish ones, are simply revamped versions of the older "hemline index" that was brought to public attention by economist George Taylor in 1926, who claimed that stock market prices rise and fall in tandem with skirt lengths. Some see all of these as demeaning to women, as they make light of the economic contributions of this sizeable proportion of the workforce.

Googling - for gold

Over summer 2011, the Economist asked its readers for their favourite "quirky economic indicators". Their favourite came from an investment analyst in London, who highlighted the number of Google searches for gold prices as a figure to watch - he claimed that when economic confidence is plummeting, the number of these searches rockets as investors look to bullion as a safe haven for their assets, which the Economist showed to be pretty accurate.

The newspaper also pointed out that this indicator is particularly useful because it's available almost instantaneously, much earlier than conventional market confidence surveys, so tracking it could provide useful early warnings of economic turbulence to come.

The price of gold, halfway between a commodity and money, is notoriously volatile, and it's worth noting that there is no particular correlation between fluctuations in the number of Google searches for gold prices and those in gold prices themselves.

Male underwear

Believe it or not, examining sales of male underwear is economist and ex-US Federal Reserve chairman Alan Greenspan's favourite way of monitoring consumer confidence. He argues that when sales of these items dip, the economy's in trouble.

His reasoning? Men view underwear as an essential yet mundane purchase so sales figures hardly ever fluctuate because men don't spend more in this area when times are good, and don't quickly cut back on these purchases if they start to feel the pinch. So when purchases do drop, it means that men are making severe cuts to their outgoings, indicating that they feel times are getting very tough indeed. And a subsequent increase in purchases, Greenspan argues, can be a good sign that prospects for the economy are looking up.

Critics of the theory have suggested that sales of male underwear do not, in fact, say much about men's views about the economy. Many men, they argue, are reluctant to replace their stocks of undergarments regardless of their financial situation, and a significant amount of male underwear is purchased by women for their partners or family members.

Big Macs

The Economist's "Big Mac" index is one of the best-known tools used by economists to track variations in purchasing power across the world. The index was introduced in 1986, and has been published in the paper every year since then.

Looking at prices across the world for the famous hamburger - in economic terms, a indicative bundle of commodities, including wheat, sugar, meat and milk, and services, such as property costs and employee wages - reveals, argues the Economist, how closely exchange rates reflect actual differences in the cost of living in different countries. For example, if a Big Mac in Beijing is 50 per cent cheaper than one in New York according to current exchange rates, it suggests that the yuan is trading at a significant undervalue against the dollar.

The Big Mac index has also been used to draw comparisons between the purchasing power of workers in different countries. Economists at UBS looked at the number of hours it takes an average employee to earn enough to afford a Big Mac, which varied from less than 20 minutes in Chicago to around three hours in Nairobi.

Billy bookshelf

In 2009, Kristian Siedenburg, an analyst at global data firm Bloomberg, came up with a new index to rival the Economist's "burgernomics". He used Swedish furniture firm IKEA's popular Billy bookshelf to compare prices across the globe. Like the Big Mac, the Billy is readily available and popular worldwide. In 2011, the "Billy bookshelf index" suggested that prices were highest in the Dominican Republic and Israel, and lowest in the Netherlands.

Like the Big Mac, the Billy bookshelf is arguably a useful tool of comparison, being a good value and widely sold product that satisfies a universal need. However, some economists have argued that the popular piece of furniture is a less effective measure of consumer prices than the Big Mac because, as a much more expensive and durable item, Billy bookshelves are purchased considerably less often than Big Macs. In addition, IKEA only adjusts the prices of Billy bookshelves once a year, which is much less frequently than McDonalds tweaks the cost of their flagship burger, making the Billy index much slower to respond to economic trends than the Big Mac barometer.

Mars bars

In the early 1980s, Financial Times reporter Nico Colchester drew attention to the Mars bar as an effective way of monitoring fluctuations in UK prices over past decades. He praised it as a "currency for our time", being a "basket of staple commodities (cocoa, vegetable fats, milk solids, sugar)" and a "unit of account certainly more reliable than gold, which is prone to speculation"

Colchester saw the Mars bar as a better alternative to the pound sterling to indicate shifts in prices over time. For example, he noted that the cost of a Mini stayed steady in Mars bar terms between 1940 and 1980 at around 20,000 of the chocolate slabs. However, the vehicle's price in Mars bar terms has risen since then to stand at around 32,000 bars today. Jobhunters might be interested to hear that someone starting their career at leading graduate recruiter ICI could buy around 33,000 Mars bars with their annual salary in 1940, 38,000 in 1981, and a whopping 52,000 in 2012.

However, as when looking at any currency over time, debasement of the Mars Bar "coinage" has to be taken into account when analysing shifts in prices. In 2008, Mars UK shrunk the size of the bars available in Britain from 62.5g to 58.0g, which may have played a part in the price inflation in Mars bar terms seen in recent years.

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