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Before you can determine the proper indicators for economic health, you must understand what causes an economy to grow and expand. An economy grows when labor becomes more productive, investments lead to more and cheaper goods and the standards of living rise for participating economic actors. In short, a healthy economy has rising standards of living, labor productivity and high levels of productive investment.

This does not necessarily include popular measures such as gross domestic product, or GDP; gross national product, or GNP; the consumer price index, or CPI; or even unemployment. All of these measures are inexact and imperfect representations of economic effects, which demonstrates why it can be so challenging to evaluate economic matters.

Economic Value and Productivity

Economic transactions involve trades of subjective value. An individual who receives $20 per hour in wages is therefore willing to trade an hour of his time, up to a point, for $20, while a company is willing to trade $20 for an hour of his labor. If the individual then takes that $20 and buys a T-shirt, he is again transmitting signals of economic value.

When labor becomes more productive, individual workers are able to trade the same amount of labor for more goods and services. This directly raises the standard of living unless the rising productivity occurs at the same time as rising levels of inflation.

Productivity and Capital Investment

Labor productivity only increases through improved technique or improved capital goods. Economists have a phrase for improved technique: specialization and division of labor. Unfortunately, it is very difficult to quantity specialization.

Capital goods are researched, financed and built through invested savings; current consumption is foregone and traded for increased future consumption. This can be tracked through reinvested profits from private business and raised capital through stocks and bonds.

Capital investment is a good measure of economic health for two reasons. The first is current investments correlate very well with future productivity. The second is current capital investment, which is only possible when money is saved and people feel secure in losing a little liquidity.

Employment and Economic Health

One very popular measure of economic health, employment, is not as useful a number as it may appear. Economic growth is not driven by more labor hours; it is driven by an expanding pool of real wealth. The government could pass a law making it illegal for anyone to be unemployed. It could also offer everyone who is unemployed a job trying to stack marbles. Neither of those events would increase productivity, increase real wealth or create an environment for increased capital investment, yet employment would be 100%.

People do not want jobs for the sake of work. Work is difficult and, for many people, less preferable to leisure. Rather, people want jobs to exchange their labor for material goods and services. Unemployment is a major concern for all economies, even in wealthy developed nations. Yet, it is a concentrated individual problem; unemployment hurts the standard of living for the affected individual or family. It does not generate wealth; it results from it. In other words, employment and wages are lagging, not leading, indicators.

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