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  • Writer's pictureAbir Mohammed

Major Economic Indicators

Economic indicators refer to statistics that act as a source of evidence to indicate the well-being of a nation’s future economy. Such indexes hold significant importance within the subject of economics as they are used in numerous models, thus influence both political decisions at a macro level and investment decisions at a micro level. There is one major issue, however, with economic indicators: there’s too many of them. Different economists prefer to use different indicators when speaking about different topics- just like you and your friend may use different statistics when comparing football teams. This article will give you a detailed explanation of the most common indicators, allowing you to choose for yourself which measure you find the most appropriate.

Gross Domestic Product (GDP)

This is defined as a measure of how many finished goods and services are produced in a country in a year. For instance, in 2020, the US had a GDP of $20.93 trillion, ranking it first among all the nations on our planet.

However, is this really a good indicator? Generally, it is the best estimate for how well an economy is performing, since it takes into the value of absolutely everything that is produced. It is the most common indicator seen in economics. The one issue, though, is that it only takes into account the value of finished products. Therefore, products in the secondary sector that are being processed from raw materials are not included in the GDP value. For instance, the value of a million car axles in a factory that are waiting to be put into cars. Only the value of the final car will be taken into account, regardless of the production of a million car axles that would add millions to a country’s GDP for that year.

A second issue with GDP is that the value of products is dependent on the country you are from. A phone may be much cheaper in India compared to the same in the UK. Traditionally, economists would overcome this problem by simply multiplying GDP by a country’s exchange rate. However, since the exchange rate is derived from other economic indicators, this method was somewhat inaccurate. Thus, a new measure known as Purchase Power Parity (PPP) was invented. Purchasing Power Parity means that the value of a Big Mac in America is the same as one in Russia. Thus, GDP with PPP gives all products equivalent value, allowing for much more precise and accurate comparisons between nations.

Gross Output (GO)

Gross output is a relatively new measure that was introduced to the US in 2005. Gross output overcomes the challenges of GDP, regarding certain products in the manufacturing industry, by including secondary stages of production (such as axles in cars or motherboards in computers). Thus, the reason many economists deemed this measure as more appropriate was due to the fact that it takes into account absolutely everything that is made in a country in a year.


However, the issue with this indicator is that it is not as commonly used as GDP. This means that most nations do not measure GO, diminishing the utility of this indicator in the international comparison of economies.

Unemployment Rate

This is the total % of the active workforce that are not currently employed. The active workforce refers to those in the working ages (16 - 65 in the UK and US) who are either working or looking for a job. This is a great indicator that shows how well an economy is utilising its labour resources.

The problem, however, is that the unemployment rate does not take into account those who are marginally detached. These are workers that temporarily give up looking for a job or those over the age of 65 that are working/looking for employment. Data shows that adding marginally attached workers could potentially double the unemployment rate. Thus, the reliability of the unemployment rate as an economic measure is seriously put into question by many economists.

Productivity

This is a major economic indicator that measures the output of a country in terms of its input. In simple terms, this practically measures how much each worker within a nation is producing. Productivity is an extremely important concept that is widely talked about in economics as it can have drastic changes to the state of a country’s economy if it changes. This is because if productivity increased by 50%, the total output of a country by its labour force would also increase by 50%, with minimal changes to costs and without requiring additional labour resources. Thus, the comparison of productivity at a macro level is essential at gauging how well an economy can utilise its labour resource.

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