Economics and The Time Value of Money - Economic Indicators

Basic Indicators
The following basic economic indicators are important to understand:

  • Gross Domestic Product (GDP) - this is the total amount of all goods and services produced in the country. This includes consumer spending, government spending, and business inventories. Real GDP is a variant that takes out the impact of inflation, so that GDP can be compared over time. Real GDP is the basic measure of business activity and tracks the business cycle.
  • Consumer Price Index (CPI) - this is a measure of the price of a basket of goods and services; increases to this index indicate an increase in inflation.
  • Producer Price Index (PPI) - this is a measure of the price of commercial items such as farm products and industrial commodities. It indicates the cost to produce items and is the leading indicator of inflation.
  • Trade deficit - this results when a country's imports exceed its exports. The U.S. usually has a trade deficit.
  • Trade surplus - this results when a country's exports exceed its imports.
  • Balance of payments (BOP) - this is the amount of foreign currency taken in minus the amount of domestic currency paid out; the U.S. usually has a balance of payments deficit.
  • Unemployment rate - the Bureau of Labor Statistics releases employment statistics each month that note the number of employed and unemployed people in the U.S., as well as the percentage of unemployed. Increases in the unemployment rate tend to occur when the economy declines, and vice versa.

Exam Tips and Tricks
The unemployment term above may seem redundant, but the number of unemployed and percentage of unemployed are very different. If the population increases, the number of unemployed may increase, but the percentage could remain the same.

Leading, coincident and lagging indicators
Certain economic indicators serve as a barometer of economic activity. These barometers are divided into three categories: leading indicators, coincident (or current) indicators and lagging indicators.

Leading indicators preview signs of improvement or decline in economic conditions. Some of these leading indicators include orders for plants and equipment, money supply, stock prices, consumer expectations, average work week for production workers and average weekly claims for unemployment insurance.

Coincident indicators coincide with current economic activity. Examples include nonfarm employment, industrial production, manufacturing and trade sales, and personal income minus transfer payments such as Social Security, disability benefits and unemployment compensation.

Lagging indicators are signs that do not emerge until after a change in economic conditions. They include the unemployment rate, business spending, labor costs, bank loans outstanding and bank interest rates.
Business Cycles
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