Category: Economics for Business: Ch 02

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Nominal and real retail sales figures: interpreting the data

The distinction between nominal and real values in one of the ‘threshold concepts’ in economics. These are concepts that are fundamental to a discipline and which occur again and again. The distinction between nominal and real values is particularly important when interpreting and analysing data. We show its importance here when analysing the latest retail sales data from the Office for National Statistics.

Retail sales relate to spending on items such as food, clothing, footwear, and household goods (see). They involve sales by retailers directly to end consumers whether in store or online. The retail sales index for Great Britain is based on a monthly survey of around 5000 retailers across England, Scotland and Wales and is thought to capture around 93 per cent of turnover in the sector.

Estimates of retail sales are published in index form. There are two indices published by the ONS: a value and volume measure. The value index reflects the total turnover of business, while the volume index adjusts the value index for price changes. Hence, the value estimates are nominal, while the volume estimates are real. The key point here is that the nominal estimates reflect both price and volume changes, whereas the real estimates adjust for price movements to capture only volume changes.

The headline ONS figures for September 2023 showed a 0.9 per cent volume fall in the volume of retail sales, following a 0.4 per cent rise in August. In value terms, September saw a 0.2 per cent fall in retail sales following a 0.9 per cent rise in August. Monthly changes can be quite volatile, even after seasonal adjustment, and sensitive to peculiar factors. For example, the unusually warm weather this September helped to depress expenditure on clothes. It is, therefore, sensible to take a longer-term view when looking for clearer patterns in spending behaviour.

Chart 1 plots the value and volume of retail sales in Great Britain since 1996. (Click here for a PowerPoint of this and the other two charts). In value terms, retail sales spending increased by 165 per cent, whereas in volume terms, spending increased by 73 per cent. This difference is expected in the presence of rising prices, since nominal growth, as we have just noted, reflects both price and volume changes. The chart is notable for capturing two periods where the volume of retail spending ceased to grow. The first of these is following the global financial crisis of the late 2000s. The period from 2008 to 2013 saw the volume of retail sales stagnate and flatline with a recovery in volumes only really starting to take hold in 2014. Yet in nominal terms retail sales grew by around 16 per cent.

The second of the two periods is the decline in the volume of retail sales from 2021. To help illustrate this more clearly, Chart 2 zooms in on retail sales over the past five years or so. We can see a significant divergence between the volume and value of retail sales. Between April 2021 and September 2023, the volume of retail sales fell by 11%. In contrast, the value of retail sales increased by 8.4%. The impact of the inflationary shock and the consequent cost-of-living crisis that emerged from 2021 is therefore demonstrated starkly by the chart, not least the severe drag that it has had on the volume of retail spending. This has meant that the aggregate volume of retail sales in September 2023 was only back to the levels of mid-2018.

Finally, Chart 3 shows the patterns in the volumes of retailing by four categories since 2018: specifically, food stores, predominantly non-food stores, non-store retail, and automotive fuel. The largest fall in the volume of retail sales has been experienced by non-store retailing – largely online retailing. From its peak in December 2021, non-store retail sales decreased by 18% up to September 2023. While this needs to be set in the context of the volume of non-store retail purchases being 15% higher than in February 2020 before the pandemic lockdowns were introduced, it is nonetheless indicative of the pressures facing online retailers.

Importantly, the final chart shows that the pressures in retailing are widespread. Spending volumes on automotive fuels, and in food and non-food stores are all below 2019 levels. The likelihood is that these pressures will persist for some time to come. This inevitably has potential implications for retailers and, of course, for those that work in the sector.

Articles

Statistical bulletin

Data

Questions

  1. Why does an increase in the value of retail sales not necessarily mean that their volume has increased?
  2. In the presence of deflation, which will be higher: nominal or real growth rates?
  3. Discuss the factors that could explain the patterns in the volume of spending observed in the different categories of retail sales in Chart 3.
  4. Discuss what types of retail products might be more or less sensitive to the macroeconomic environment.
  5. Conduct a survey of recent media reports to prepare a briefing discussing examples of retailers who have struggled or thrived in the recent economic environment.
  6. What do you understand by the concepts of ‘consumer confidence’ and ‘economic uncertainty’? How might these affect the volume of retail spending?
  7. Discuss the proposition that the retail sales data cast doubt on whether people are ‘forward-looking consumption smoothers’.
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Microeconomics in the news

For those of you embarking on a course in economics, one of the first things you’ll come across is the distinction between microeconomics and macroeconomics. The news is full of both microeconomic and macroeconomic issues and you’ll quickly see how relevant both branches of economics are to analysing real-world events, problems and policies.

As we state in Economics (updated 10th edition), ‘microeconomics is concerned with the individual parts of the economy. It is concerned with the demand and supply of particular goods, services and resources such as cars, butter, clothes, haircuts, plumbers, accountants, blast furnaces, computers and oil.’ In particular, it is concerned with the buying, selling, production and employment decisions of individuals and firms. When you go shopping and make choices of what to buy you are making microeconomic decisions. When firms choose how much of particular products to produce, what techniques of production to use and how many people to employ, these choices are microeconomic ones.

Microeconomics examines people’s behaviour when they make choices. In fact many of the recent developments in microeconomics involve analysing the behaviour of individuals and firms and the factors that influence this behaviour.

Open any newspaper, turn on the TV news or access any news site and you will see various microeconomic issues covered. Why are rents soaring? How is AI affecting various businesses’ productivity? How rapidly is the switch taking place to green energy? How do supermarkets influence spending patterns? Why are wages so low in the social care sector? Why are private PCR tests so expensive for holidaymakers retuning from abroad?

Many of the blogs on this news site will examine microeconomic issues. We hope that they provide useful case studies for your course.

Articles

Questions

  1. Look through news sites and identify five current microeconomic issues. What makes them ‘micro’ issues?
  2. If world oil and gas prices rise, why is this a microeconomic issue?
  3. What do you understand by ‘scarcity’? How is microeconomics related to scarcity?
  4. Are all goods scarce?
  5. What is meant by ‘opportunity cost’? Give some examples of how opportunity cost has affected recent decisions you have made.
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Is capitalism changing?

The coronavirus pandemic and the climate emergency have highlighted the weaknesses of free-market capitalism.

Governments around the world have intervened massively to provide economic support to people and businesses affected by the pandemic through grants and furlough schemes. They have also stressed the importance of collective responsibility in abiding by lockdowns, social distancing and receiving vaccinations.

The pandemic has also highlighted the huge inequalities around the world. The rich countries have been able to offer much more support to their people than poor countries and they have had much greater access to vaccines. Inequality has also been growing within many countries as rich people have gained from rising asset prices, while many people find themselves stuck in low-paid jobs, suffering from poor educational opportunities and low economic and social mobility.

The increased use of working from home and online shopping has accelerated the rise of big tech companies, such as Amazon and Google. Their command of the market makes it difficult for small companies to compete – and competition is vital if capitalism is to benefit societies. There have been growing calls for increased regulation of powerful companies and measures to stimulate competition. The problem has been recognised by governments, central banks and international agencies, such as the IMF and the OECD.

At the same time as the world has been grappling with the pandemic, global warming has contributed to extreme heat and wildfires in various parts of the world, such as western North America, the eastern Mediterranean and Siberia, and major flooding in areas such as western Europe and China. Governments again have intervened by providing support to people whose property and livelihoods have been affected. Also there is a growing urgency to tackle global warming, with some movement, albeit often limited, in implementing policies to achieve net zero carbon emissions by some specified point in the future. Expectations are rising for concerted action to be agreed at the international COP26 climate meeting in Glasgow in November this year.

An evolving capitalism

So are we seeing a new variant of capitalism, with a greater recognition of social responsibility and greater government intervention?

Western governments seem more committed to spending on socially desirable projects, such as transport, communications and green energy infrastructure, education, science and health. They are beginning to pursue more active industrial and regional policies. They are also taking measures to tax multinationals (see the blog The G7 agrees on measures to stop corporate tax avoidance). Many governments are publicly recognising the need to tackle inequality and to ‘level up’ society. Active fiscal policy, a central plank of Keynesian economics, has now come back into fashion, with a greater willingness to fund expenditure by borrowing and, over the longer term, to use higher taxes to fund increased government expenditure.

But there is also a growing movement among capitalists themselves to move away from profits being their sole objective. A more inclusive ‘stakeholder capitalism’ is being advocated by many companies, where they take into account the interests of a range of stakeholders, from customers, to workers, to local communities, to society in general and to the environment. For example, the Council for Inclusive Capitalism, which is a joint initiative of the Vatican and several world business and public-sector leaders, seeks to make ‘the world fairer, more inclusive, and sustainable’.

If there is to be a true transformation of capitalism from the low-tax free-market capitalism of neoclassical economists and libertarian policymakers to a more interventionist mixed market capitalism, where capitalists pursue a broader set of objectives, then words have to be matched by action. Talk is easy; long-term plans are easy; taking action now is what matters.

Articles and videos

Questions

  1. How similar is the economic response of Western governments to the pandemic to their response to the financial crisis of 2007–8?
  2. What do you understand by ‘inclusive capitalism’? How can stakeholders hold companies to account?
  3. What indicators are there of market power? Why have these been on the rise?
  4. How can entrepreneurs contribute to ‘closing the inequality gap for a more sustainable and inclusive form of society’?
  5. What can be done to hold governments to account for meeting various social and environmental objectives? How successful is this likely to be?
  6. Can inequality be tackled without redistributing income and wealth from the rich to the poor?
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Bounce back for the UK economy but with cloudy horizons

The OECD has recently published its six-monthly Economic Outlook. This assesses the global economic situation and the prospects for the 38 members of the OECD.

It forecasts that the UK economy will bounce back strongly from the deep recession of 2020, when the economy contracted by 9.8 per cent. This contraction was deeper than in most countries, with the USA contracting by 3.5 per cent, Germany by 5.1 per cent, France by 8.2 per cent, Japan by 4.7 per cent and the OECD as a whole by 4.8 per cent. But, with the success of the vaccine roll-out, UK growth in 2021 is forecast by the OECD to be 7.2 per cent, which is higher than in most other countries. The USA is forecast to grow by 6.8 per cent, Germany by 3.3 per cent, France by 5.8 per cent, Japan by 2.6 per cent and the OECD as a whole by 5.3 per cent. Table 1 in the Statistical Annex gives the figures.

This good news for the UK, however, is tempered by some worrying features.

The OECD forecasts that potential economic growth will be negative in 2021, with capacity declining by 0.4 per cent. Only two other OECD countries, Italy and Greece, are forecast to have negative potential economic growth (see Table 24 in the Statistical Annex). A rapid increase in aggregate demand, accompanied by a decline in aggregate supply, could result in inflationary pressures, even if initially there is considerable slack in some parts of the economy.

Part of the reason for the supply constraints are the additional barriers to trade with the EU resulting from Brexit. The extra paperwork for exporters has added to export costs, and rules-of-origin regulations add tariffs to many exports to the EU (see the blog A free-trade deal? Not really). Another supply constraint linked to Brexit is the shortage of labour in certain sectors, such as hospitality, construction and transport. With many EU citizens having left the UK and not being replaced by equivalent numbers of new immigrants, the problem is likely to persist.

The scarring effects of the pandemic present another problem. There has been a decline in investment. Even if this is only temporary, it will have a long-term impact on capacity, unless there is a compensating rise in investment in the future. Many businesses have closed and will not re-open, including many High Street stores. Moves to working from home, even if partially reversed as the economy unlocks, will have effects on the public transport industry. Also, people may have found new patterns of consumption, such as making more things for themselves rather than buying them, which could affect many industries. It is too early to predict the extent of these scarring effects and how permanent they will be, but they could have a dampening effect on certain sectors.

Inflation

So will inflation take off, or will it remain subdued? At first sight it would seem that inflation is set to rise significantly. Annual CPI inflation rose from 0.7 per cent in March 2021 to 1.5 per cent in April, with the CPI rising by 0.6 per cent in April alone. What is more, the housing market has seen a large rise in demand, with annual house price inflation reaching 10.2 per cent in March.

But these rises have been driven by some one-off events. As the economy began unlocking, so spending rose dramatically. While this may continue for a few months, it may not persist, as an initial rise in household spending may reflect pent-up demand and as the furlough scheme comes to an end in September.

As far as as the housing market is concerned, the rise in demand has been fuelled by the stamp duty ‘holiday’ which exempts residential property purchase from Stamp Duty Land Tax for properties under £500 000 in England and Northern Ireland and £250 000 in Scotland and Wales (rather than the original £125 000 in England and Northern Ireland, £145 000 in Scotland and £180 000 in Wales). In England and Northern Ireland, this limit is due to reduce to £250 000 on 30 June and back to £125 000 on 30 September. In Scotland the holiday ended on 31 March and in Wales is due to end on 30 June. As these deadlines are passed, this should see a significant cooling of demand.

Finally, although the gap between potential and actual output is narrowing, there is still a gap. According to the OECD (Table 12) the output gap in 2021 is forecast to be −4.6 per cent. Although it was −11.4 per cent in 2020, a gap of −4.6 per cent still represents a significant degree of slack in the economy.

At the current point in time, therefore, the Bank of England does not expect to have to raise interest rates in the immediate future. But it stands ready to do so if inflation does show signs of taking off.

Articles

Data, Forecasts and Analysis

Questions

  1. What determines the rate of (a) actual economic growth; (b) potential economic growth?
  2. What is meant by an output gap? What would be the implications of a positive output gap?
  3. Why are scarring effects of the pandemic likely to be greater in the UK than in most other countries?
  4. If people believed that inflation was likely to continue rising, how would this affect their behaviour and how would it affect the economy?
  5. What are the arguments for and against having a stamp duty holiday when the economy is in recession?
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How values affect outcomes

Each year the BBC hosts the Reith Lectures – a series of talks given by an eminent person in their field. This year’s lecturer is Mark Carney, former Governor of the Bank of England. His series of four weekly lectures began on 2 December 2020. Their topic is ‘How we get what we value’. As the BBC site states, the lectures:

chart how we have come to esteem financial value over human value and how we have gone from market economies to market societies. He argues that this has contributed to a trio of crises: of credit, Covid and climate. And the former Bank of England governor will outline how we can turn this around.

In lectures 2, 3 and 4, he looks at three crises and how they have shaped and are shaping what we value. The crises are the financial crisis of 2007–9, the coronavirus pandemic and the climate crisis. They have challenged how we value money, health and the environment respectively and, more broadly, have prompted people to question what is valuable for individuals and society, both today and into the future.

The questions posed by Carney are how can we establish what is valuable to individuals and society, how well are such values met by economies and how can mechanisms be improved to ensure that we make the best use of resources in meeting those values.

Value and the market

In the first lecture he probes the concept of value. He explores how economists and philosophers have tried to value the goods, services and human interactions that we desire.

First there is ‘objective value’ propounded by classical economists, such as Adam smith, David Ricardo and Karl Marx. Here the value of goods and services depends on the amount of resources used to make them and fundamentally on the amount of labour. In other words, value is a supply-side concept.

This he contrasts with ‘subjective value’. Here the value of goods and services depends on how well they satisfy wants – how much utility they give the consumer. For these neoclassical economists, value is in the eye of the beholder; it is a demand-side concept.

The two are reconciled in the market, with market prices reflecting the balance of demand and supply. Market prices provided a solution to the famous diamonds/water paradox (see Box 4.2 in Economics (10th edition) or Case Study 4.3 in Essentials of Economics (8th edition) – the paradox of ‘why water, which is essential for life, is virtually free, but diamonds, which have limited utility beyond their beauty, are so expensive.’ The answer is to do with scarcity and marginal utility. Because diamonds are rare, the marginal utility is high, even though the total utility is low. And because water is abundant, even though its total utility is high, for most people its marginal utility is low. In other words, the value at the margin depends on the balance of demand and supply. Diamonds are much scarcer than water.

But is the market balance the right balance? Are the values implied by the market the same as those of society? ‘Why do financial markets rate Amazon as one of the world’s most valuable companies, but the value of the vast region of the Amazon appears on no ledger until it’s stripped of its foliage and converted into farmland?’ – another paradox highlighted by Carney.

It has long been recognised that markets fail in a number of ways. They are not perfect, with large firms able to make supernormal profits by charging more and producing less, and consumers often being ill-informed and behaving impulsively or being swayed by clever marketing. And many valuable things that we experience, such as human interaction and the beauty of nature, are not bought and sold and thus do not appear in measures of GDP – one of the main ways of valuing a country.

What is more, many of things that are produced in the market have side-effects which are not reflected in prices. These externalities, whether good or bad, can be substantial: for example, the global warming caused by CO2 emissions from industry, transport and electricity production from fossil fuels.

And markets reflect people’s biases towards the present and hence lead to too little investment for the future, whether in healthcare, the environment or physical and social infrastructure. Markets reflect the scant regard many give to the damage we might be doing to the lives of future generations.

What is particularly corrosive, according to Carney, is the

drift from moral to market sentiments. …Increasingly, the value of something, some act or someone is equated with its monetary value, a monetary value that is determined by the market. The logic of buying and selling no longer applies only to material goods, but increasingly it governs the whole of life from the allocation of healthcare, education, public safety and environmental protection. …Market value is taken to represent intrinsic value, and if a good or activity is not in the market, it is not valued.

The drift from moral to market sentiments accelerated in the Thatcher/Regan era, when governments were portrayed as inefficient allocators, which stifled competition, innovation and the movement of capital. Deregulation and privatisation were the order of the day. This, according to Carney, ‘unleashed a new dynamism’ and ‘with the fall of communism at the end of the 1980s, the spread of the market grew unchecked.’

But this drift failed to recognise market failures. It has taken three crises, the financial crisis, Covid and the climate crisis to bring these failures to the top of the public agenda. They are examined in the other three lectures.

The Reith Lectures

Questions

  1. Distinguish between objective and subjective value.
  2. If your income rises, will you necessarily be happier? Explain.
  3. How is the concept of diminishing marginal utility of income relevant to explaining why ‘A Christmas bonus of £1000 means less to Mark Zuckerberg then £500 does to someone on a minimum wage.’
  4. Does the use of social cost–benefit analysis enable us to use adjusted prices as a measure of value?
  5. Listen to lectures 2, 3 and 4 and provide a 500-word summary of each.
  6. Assess the arguments Mark Carney uses in one of these three lectures.