8 Economic Indicators You Must Understand.
If you have been hearing about growth, GDP, inflation, national debt, recession, unemployment rate, and you’re still confused, this article will help.
It’s time for you to understand what all of that really means, why you should care about economic indicators, and how they impact the price of your food or the difficulty you may have to find a job.
Therefore, in this article, I will select 8 common economic indicators; explain what they are and how they impact your everyday life.
Before we start, note that an economic indicator is only useful when compared to its previous level in the same region or to its equivalent in different regions.
For example, if I were to tell you that your country’s consumer price index was 102.4, it would not give you as much information as saying that the price of goods and services in your country has increased by say, 5%, or that a similar basket of goods costs half the price in a neighboring country.
1. GDP growth
Gross domestic Product (GDP) is the market value of all goods and services produced in a country.
An increase in GDP means that the country is producing more of these valuable goods and services (we say the economy is “growing”), while a decrease in GDP means the exact opposite (the economy is “contracting” or is “in recession” if the negative growth lasts for at least six months).
This indicator is one of the most important measures of economic prosperity. As a general rule, a growing economy means that individuals and institutions are generating more money, either through consumption, investment, government spending or net exports.
As a result, companies may hire more employees, buy more production equipment, or increase salaries in order to fulfill people’s growing needs.
On the opposite side, a declining GDP over a sustained period of time can be dramatic and usually results in some people losing their jobs or staying unemployed for a while.
2. GDP per capita
It is the GDP divided by the whole population. GDP per capita measures how much production is generated by the average person, and how it evolves over time.
GDP per capita is often used as an indicator of the standard of living in a country. Thus, richer countries will tend to have a higher GDP per capita than their counterparts.
This may be due to longer average working hours, better employment rates or a more efficient production process allowing big production in short periods of time (as typically seen in highly industrialized countries with a very skilled population).
Inflation is a rise in the general price of goods and services in an economy over a period of time.
It is the percentage change of the consumer price index (CPI) which is the average price an individual pays for a basket of goods.
So positive inflation means products have become more expensive. What causes inflation is frequently the subject of heated debates and extensive literature, but a recurrent cause is the increase of money supply faster than the growth of the economy.
The idea is that if there is more money in circulation than what the economic system needs (either as a result of extensive borrowing or monetary policy), people will tend to spend more and prices will rise.
Inflation may also be caused by a sharp increase in the demand of some products or a drop in the supply of other products.
4. National Debt
National debt is the amount of money owed by the government to other countries (external debt), to financial institutions, to suppliers and to citizens (internal debt).
It is usual for a country to borrow money to finance infrastructure and social projects. However, if the debt burden becomes too large (compared to say, GDP), the country may struggle to repay its creditors.
5. Unemployment Rate
Unemployment rate is the proportion of people who are not working (legally) and are looking for a job.
Unemployment typically increases when companies produce less or sell less, when the cost of hiring workforce increases (for example due to an increase in inflation, corporate taxes or minimum wage), when the job market is looking for skills that most job seekers do not have, or when more people switch from the legal to the underground system.
6. House price index (HPI)
The HPI is a measure of the price of residential housing. It is an important indicator because fluctuations in home prices greatly affect homeowners and households’ wealth; they drive the supply and demand in properties as well as the level of credit, banks are willing to grant.
7. Consumer Debt
The amount of debt people owe compared to their revenue is an indication of a population’s consuming behaviour.
Some policies may encourage people to borrow more because the resulting increase in global consumption will boost aggregate production (GDP).
However, the higher the consumer debt, the more vulnerable we are to changes in the economy, like a rise in interest rates, inflation or job losses.
8. Interest Rates
The interest rates at which institutions borrow or lend money are among the most frequently watched economic indicators.
This is because of their inter-connexion with other important factors like investment, debt or currency value and their use by the government in monetary policy to control inflation, production, money supply, real estate, and consumption behaviors.
For example, when the central bank increases the rate at which it lends money to banks, the latter may also increase the rate at which they lend to businesses and individuals.
“Interest rates are also followed through what is called a yield curve, which shows interest rates across different “contract” terms: 3 months, 6 months, 1 year, etc. Long-term contracts normally have higher interest rates than short-term ones, because of the risk and opportunity cost associated with lending over longer periods.
However, an inverted yield curve may indicate a recession and occurs when short term bonds have higher rates than long term ones.
This happens when investors are reluctant to lend in the short-term due to a perceived deterioration of the economy.
Businesses may then have a hard time raising money, which would then impact production, unemployment, debt, and liquidity.”
Now that you know the importance of economic indicators, it’s time to do your part. Indeed, everybody has to contribute to the economy for it to be healthy.
Learn how you can participate in your country’s economic development by reading: 5 things you can do to help your country’s economy.
That’s all on the 8 Economic Indicators You Must Understand.
About The Author
Meinna Gwet works as a Chief Risk Analyst at the National Bank of Canada. Her specialty is in enterprise risk management for banks and insurance companies.