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

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In “8 Economic Indicators You MUST understand Part (1/2) I illustrated the importance of following economic indicators through the examples of GDP, GDP per capita, inflation and national debt. In this article I cover four additional economic indicators I believe are worthwhile following:

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.

“To illustrate this last point, imagine the extreme case where you bought a $300,000 house that is now worth $150,000. Assuming you bought the house through a mortgage, you will still owe $300,000 to the bank for a house that is worth half the price. Not only did your net worth fall by a substantial amount, but the bank may probably increase your mortgage’s interest rate to cover the risk of not recovering the loan completely.”

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 behaviours. 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 understand 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 to your country’s economic development by reading: things you can do to help your country’s economy.

 

Thanks to Pierre Emmanuel Paradis for his contribution to this article

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