8 Economic Indicators you MUST understand (Part 1/2)

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Okay, so you have been hearing about growth, GDP, inflation, national debt, recession, unemployment rate, and in case you’re still confused, 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 eight 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 neighbouring country.

The first part of this article covers the following 4 economic indicators:

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.

“The change in the production level of specific sectors of the economy will be frequently published in the media because those sectors contribute a lot to the country’s economy and directly impact several other segments of the market. Examples are mining, oil & gas, agriculture, construction, manufacturing and finance.”

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).

3. Inflation: 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 a 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.

“Several European nations are presently experiencing severe debt crises, mainly due to over-indebtedness, combined with several other factors (globalized speculative financial practices, loose fiscal policies, low growth, high historical debt, pre-existing deficits, government overspending, real estate bubbles and expensive bailouts of the banking system). All these eventually led to drastic austerity measures in countries like Greece, Spain, Portugal and Cyprus, followed by massive bankruptcies, an increase in unemployment rates and a decrease in production, creating the need to borrow more money. And the vicious cycle goes on…”

Read 8 Economic Indicators you MUST understand (Part 2/2) to learn about the next 4 economic indicators (unemployment rate, house price index, consumer debt and interest rates)

 

Thanks to the economist Pierre-Emmanuel Paradis for his contribution to this article. 

 

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