An economic indicator is the compilation of economic data, usually of macro-economic scale, which is used to interpret current and future investment possibilities. Economic indicators include various indices, earnings reports, and other economic data such as consumer price index (a measure for inflation), industrial production, gross domestic product, price index, etc. Economic indicators can be used to study past economic trends, analyze and understand current movements in the market and future market trends. Understanding economic indicators help professionals identify those market forces which may affect the supply and demand for a particular commodity, product or service. Data released by the government and non-profit organizations is usually followed to understand market conditions and future investment possibilities. Some of the important economic indicators are mentioned below:
Index
Types of Economic Indicators
Leading Indicators
Leading indicators are a measure of economic activity that changes before the business cycle and therefore they indicate future predictions of economic condition. Some examples of leading indicators are yield curve, consumer durables, net business indicator, share prices. These indicators have to be used carefully as they may be incorrect sometimes.
Lagging Indicators
The lagging indicators confirm that a change has occurred in the economy and they follow the changes in the economy. Some examples of lagging indicators are labor costs, business spending, interest rates, unemployment rates, gross national product (GNP) and CPI. These indicators are seen only after some changes in the economy has occurred. However, determining whether a specific company may grow its earnings based on one indicator of GDP is nearly impossible.
Coincidence Indicators
Coincidence indicators usually change concurrently, according to change in the economy. Some examples of coincidence indicators are personal income, industrial production, GDP, employment levels and retail sales. Many economists follow this indicator for obtaining real time data.
Some of the important indicators are discussed below:
Produce Price Index (PPI)
Producer price index (PPI), measures the average change over time in the prices received by domestic producers of goods and services. The PPI is based on the selling price rather than on the total cost to produce an item. PPI is a family of indexes published by many national agencies including the U.S. Bureau of Labor Statistics (BLS) and the UK Office for National Statistics (ONS). It is a measure of inflation based on input costs to producers.
Consumer Price Index (CPI)
Consumer price index is one of the most popular measures of price inflation for retail goods and services. The CPI measures the average change in retail prices over time for a basket of major groups of various goods and services such as food, medical care, etc. It is an important indicator because it affects everyone, determining how much consumers must pay for goods and services. The CPI should not be used to predict swings in the economy because it is a lagging indicator.
Gross Domestic Products (GDP)
Gross domestic product (GDP) is the measure of total market value of all the finished goods and services produces within the country in a specific time period. GDP is also used for international comparisons and it is a measure of economic condition of a country.
Custom Indexes
Custom indexes are used by the organizations to measure, investigate and control price changes within the organization.
Implicit Price Deflator
It is also called GDP deflator and it is a measure of inflation. It is the ratio of the value of goods and services produced by a country in a particular year at current prices to the value of goods and services prevailed during the base period. This indicator tells us the extent to which the gross domestic product has increased on account of higher prices rather than increase in output.
It is an index of prices for everything that a country produces, which is different from CPI in a manner that the CPI considers consumption only. Since it covers the entire range of goods and services produced in the economy therefore it is a more comprehensive measure of inflation.
Example
The implicit price deflator for the first quarter of 2015 in a country was 101.5, means that prices in the economy increased 1.5% from the first quarter of 2014.
Balance of Trade
The balance of trade is the difference between the value of export of a country to the value of import of a country over a given particular period of time. If the value of exports is more than the value of imports, the country’s balance of trade is defined as ‘favorable’ and if the value of import is more than the value of export, the balance of trade is considered as ‘unfavorable’.
Balance of Payments
Balance of payments (BOP) is a statement which records all the flow of fund to and from a country to the rest of world. This indicator compares the amount of international currency coming to the country from exports and international investments and the amount of domestic currency going out from the country for imports or investments. In an ideal situation, the sum of amount of export and import should be zero which does not happen in practical case.
A surplus balance of payments (BOP) indicates that the country’s export is more than import, while a deficit balance of payment (BOP) means that the country’s import is more than its export.
In case of a trade deficit, the country must export some of its gold reserves or send some to its currency reserves to the country with a surplus. In case there is a surplus BOP, the country must receive either or both the gold and currency from the countries having deficit BOP.
Key Takeaway
(1) An economic indicator is the compilation of economic data, usually of macro-economic scale, which is used to interpret current and future investment possibilities.
(2) Economic indicators include various indices, earnings reports, and other economic data such as consumer price index (a measure for inflation), Industrial production, gross domestic product, price index, etc.
(3) There are three types of economic indicators, i.e., leading indicators, lagging indicators and coincidence indicators.
(4) Producer price index (PPI), measures the average change over time in the prices received by domestic producers of goods and services.
(5) The CPI measures the average change in retail prices over time for a basket of major groups of various goods and services such as food, medical care, etc.
(6) Gross domestic product (GDP) is the measure of total market value of all the finished goods and services produces within the country in a specific time period.
(7) Implicit price deflator is the ratio of the value of goods and services produced by a country in a particular year at current prices to the value of goods and services prevailed during the base period.
(8) The balance of trade is the difference between the value of export of a country to the value of import of a country over a given particular period of time.
(9) Balance of payments (BOP) is a statement which records all the flow of fund to and from a country to the rest of world.
