Portfolio Management - Economic Indicators (Part 1 of 2)

Economists spend much of their time predicting the next turn of the business cycle, determining where along the cycle the economy is today and confirming for historical purposes what stage the economy was in on a given date. To perform these tasks, they rely on leading, coincident and lagging business cycle indicators, respectively.

  • The measure most closely associated with a nation's overall economic output, or economic activity, is gross domestic production(GDP), the total market value of all goods and services produced within the country's borders during a specific period, typically a quarter or a year. The GDP is one of the most important economic indicators.

  • Another is the unemployment rate, which measures the number of people actively seeking work as a proportion of the civilian population over age 16 that is either a) actively seeking work or b) already employed.

  • One other key indicator is the consumer price index (CPI), which compares the cost of a broad "market basket" of consumer products in a recent period with the cost of the same items in a previous period. CPI is the key measure of inflation, a continued rise in prices of goods and services which has the effect of reducing the purchasing power of a nation's currency.

Look Out!
Each of these indicators has its flaws. GDP does not account for production by a nation\'s resources located abroad. The unemployment rate does not register people who give up the job hunt in frustration. CPI cannot compare the costs of consumer products - digital audio players, cable modems, anti-cholesterol medication - that did not exist until recently. Economists do have finer tools, but GDP, unemployment and CPI are the three basics you need to know for the Series 7 exam.

Economic Indicators (Part 2 of 2)
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