Macroeconomic Indicators: Four Ways to Assess a Nation’s Economy

Economists employ several metrics to gain a sense of total macroeconomic performance. While there are dozens of measures that show various aspects of economic health, four will be mentioned.

1. The most valuable and informative indicator of a nation’s macroeconomic status is the gross domestic product (abbreviated as GDP). The GDP is defined as the current monetary value of all final goods and services produced in markets over a specific period of time, such as quarterly or annually. Therefore, the GDP can also be considered income for a nation, since economic output can be measured by how much we spend on production. This value of production includes consumer spending (money spent on current consumer goods, like cars and clothing), government spending, investment spending, and net exports.

It is critical to recognize that GDP is measured nominally; in other words, in current market prices, which are subject to inflation. In order to compare the GDP across periods of time, we must adjust for inflation to get “real” GDP. Additionally, GDP is often presented as the % change in GDP quarterly or annually.

2. The rate of inflation, or the rate of change in price level of goods and services, is another critical metric for economic health. The target rate of inflation is about 2% per 12-month period. Here, the inflation is rate is defined as the percent change in the consumer price index (or the relative monetary value of a set of typical household goods). While a little inflation is a sign of a robust economy, inflation in prices of consumer goods unaccompanied by a rise in wages erodes consumer purchasing power, which leads to the devaluing of financial assets and a decline in consumer spending.

3. Inflation also drives up nominal interest rates, due to the devaluation of assets I just mentioned. Financial lenders want real returns on their loans, and if the purchasing power of currency declines due to inflation then interest rates must increase. Therefore, during a period of high inflation, it is well worth analyzing trends in interest rates over time. While inflation drives up interest rates, a period of high interest rates stifles the economy and slows its growth by reducing the amount of disposable income available to consumers. This combats inflation. Overall, inflation rate and interest rates are thought to have an inverse relationship.

4. Finally, we can assess the health of the economy through measuring unemployment. Unemployment is defined as the number of unemployed eligible workers divided by the current labor force. Recognize that the unemployment rate does not account for people who are not actively seeking employment, or those who have given up the job search. An unemployment rate of 4-5% at any given time is considered to be “full employment,” and is not a cause for concern. Additionally, in a healthy economy, we would expect to see no “cyclical” unemployment: a shortage of jobs for eligible workers. Unemployment and inflation generally have an inverse relationship, since unemployment is a sign of a slumping economy and inflation is driven by rises in market prices. But the seventies proved to be an exception to this rule.

If you are came to this article with a good understanding of economics, none of these should have surprised you! Over the next few weeks I will be applying these concepts to look at economic trends during two tumultuous decades in America: the 1970s and 1980s.

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