Gross Domestic Product (GDP).
GDP is a representation of the total value of all goods and services produced in an economy during a given year. It is a gauge used in assessing the health of an economy in comparison to previous quarterly reports (Frumkin, 2006). Measuring GDP involves two methods, which logically should arrive at the same totals. The methods used in measuring GDP are; income and expenditure approach. The income approach sums up gross profits for all incorporated and incorporated companies, total employee compensations, taxes and less any government subsidies. The expenditure method, on the other hand, sums up total investments to total consumption, net exports (the excess of exports over imports), and government spending. This is the commonly used method in GDP calculations (Sexton, 2013).
GDP has a massive impact on production and economical growth and affects nearly everyone involved in economical growth. A significant change in GDP whether an increase or a decrease affects the stock market, labor availability, investment rates, consumption and savings, among other economical sectors (Sexton, 2013). For example, an increase in GDP implies low unemployment rates, wage increases, and increased demand for labor, which are essentials needed for investments.
Additionally, the value of GDP may explain low profit rates, and low stock prices, which may imply an unhealthy economic growth. Investors use the GDP value in making decisions as to whether it is worthy to invest in an economy or not. It determines whether an economy is at recession or growing economically. The government also uses the GDP value in determining its national expenditure (Tainer, 2006). For instance, decreased GDP levels may indicate recession, and this may trigger increased government spending.
Consumer Price Index (CPI).
This is a measure of average changes in the consumer price over time usually a year. CPI represents changes in levels of retail prices, which affect consumption rates. As a macro economic indicator, CPI is uses as an economic indicator, as a deflator of other macro economic variables, and a means of adjusting currency values (Sexton, 2013). As an economic indicator, CPI measures the effectiveness of existing government economic policies and measures the effects of inflation. It provides information on price changes to consumption goods, government expenditures, business, and labor owners, and acts as a guide in making decisions on policy implementation. It is also used in adjusting consumer’s income payments for instance social security’s, income eligibility levels, and provides adjustments to cost-of-living standards.
CPI is determined from detailed expenditure information provided by individuals and families on their consumption expenditure (Frumkin, 2006). Each month data collectors from the Bureau of Labor Statistics (BLS) or economic assistants visit different retail stores, rentals, hospitals, and service establishments to collect information on prices. Some of the components used in CPI determination include food and beverages, housing, medical care, apparel, water and sewerage charges, transport, recreation, education, and communication.
The information generates the current Consumer Price Index, which is based upon the 1982 base of 100. For instance, the CPI of 350 would indicate a 35% increase in inflation since 1982. CPI measures inflation as experienced in daily lives of consumers: It is considered as an effective measure for adjusting payments with intent to allow consumers purchase goods and services at a current price, and at equivalent quantity to that they could have purchased at an earlier period (Tainer, 2006).
Unemployment.
In order to determine how an economy functions, it is crucial to know the number of jobs being created or destroyed, within a year. The percentage of the available workforce to the number of people claiming unemployed determines if an economy is growing or at a recess (Sexton, 2013). The unemployment rate is determined by expressing available labor as a percentage of the sum of unemployed and employed. It indicates the degree to which an economy can provide jobs for those seeking for employment (Frumkin, 2006). The data is used as a measure of national utilization of the labor force, and as an indicator of slackness or tightness of the labor markets.
Unemployment rate is used in analyzing the trade off that may exist between inflation rates and unemployment. In theory, there is an inverse relationship between inflation and unemployment: when unemployment increases, inflation declines, while when unemployment declines, inflation increases. However, in practice the theory may not apply when an economy is functioning at low and high rates of unemployment. For inflation measures, monitoring the wage growth rate may determine the rates of unemployment in an economy.
Unemployment rate is, however, considered as a lagging macro-economic indicator as it does not automatically change with an economic recession and does not change even after an economy starts to recover. This may be explained from employer’s reluctance to lie off or hire with economical changes. Additionally, not everyone who is jobless can be considered unemployed, as per BLS, but while collecting the data even such individuals are added to data. This implies that the rate may not express the real employment structure in the job market, and therefore, may provide a biased representation.
Interest Rates.
Interests are costs of borrowing money while interest rates are prices of money. An interest rate is a yield or the annualized percentage paid against the principle of a loan. Interest rates impact on borrowing and spending to households, government, and businesses (Frumkin, 2006). When interest rates are high, borrowing decreases while on decrease borrowing increases. Additionally, if interest rates are expected to rise, there is an increased rate in public borrowing while when they are expected to fall there is an incentive to delay borrowing.
Interest rates are used to react to money supply, value of domestic currency against foreign currencies, movements of GP, and in monitoring inflation and recession. The Federal Reserve uses interest rates as tools while conducting and implementing the monetary policy in fostering economic growth (Sexton, 2013). During periods of recession, for example, the Federal Reserve reduces the interest rates to act as an incentive to public borrowing. At low rates investors and consumers borrow loans, and this increases public expenditure, which reduces recession. During inflation, on the other hand, the Federal Reserve issues a directive to commercial banks to increase their rates. This acts as a discouraging factor to borrowing as high interest rates imply expensive borrowing. This way public expenditure and money supply is reduced (Tainer, 2006).
Whether nominal or real, interest rates impacts on an economy’s savings, investment, and expenditure decisions made by households and firms (Frumkin, 2006). When these rates increase, borrowing decrease leading to decrease in consumption levels, savings and investments. Most households prefer to use their savings, and this reduces their investment abilities. The opposite applies when the rates decrease. Since currencies represent a country’s economy, differences in interest rates affect the flow of foreign investments.
Reference.
Frumkin, N. (2006). Guide to economic indicators. Armonk, NY.
Sexton, R. L. (2013). Exploring macroeconomics. Mason, OH: South-Western Cengage Learning.
Tainer, E. M. (2006). Using Economic Indicators to Improve Investment Analysis. Hoboken: John Wiley & Sons.
