Economic Indicators Meaning
An economic indicator is an aspect of the entire economy that analysts, traders, and investors use to evaluate the present and future investment opportunities or even the economy as a whole. They help such people to establish the performance and trends and use them to predict the future.
The key economic indicators are mainly data points which include the gross domestic product (GDP), levels of unemployment, inflation, prices of commodities tracked using the consumer price indices (CPIs), and the rate at which the economy is growing, among others. These data points provide a statistical background of the economic activities within a country. Notably, there are leading federal or non-governmental institutions such as the World Bank that provide these important economic development indicators. They are available online for free.
Types of Economic Indicators
Dozens of economic indicators are published for every financial period. They show the latest changes in economic development and serve as data for different forecasts. Nonetheless, only a few indicators are important to fundamental analysis in trading.
Gross Domestic Product (GDP)
The GDP refers to the total value of goods and services that a country produces within a given year. Interpreting the GDP effectively is a prerequisite to making informed projections about the economy. An increase in the GDP is a measure of economic growth and has been observed to lead to increased profits by companies. Importantly, the economic growth rate is the percentage change in GDP.
Consumer Price Indices (CPIs) and Inflation
CPIs illustrate variations in the cost of items and services that buyers normally utilize. They encapsulate other important parameters such as inflation, increasing and declining prices, and deflation. A CPI is calculated by averaging the price changes of commonly used goods known as the basket of goods. The CPI is indicative of inflation and a positive value shows that the cost of living has increased. A high inflation rate negatively impacts the economy since basic goods cost more and consumers can not afford them. As such, manufacturers slow down production. Also, high inflation corresponds to increased interest rates. As a result, lending reduces, thereby translating to a lack of capital for businesses. The converse is also true.
Unemployment levels are measured using the unemployment rate. This rate is the fraction of the entire non-working population to the sum total of the labour force. Importantly, the labour force combines both employed and unemployed adults. A high unemployment rate shows that the economy is struggling. On the other hand, an extremely low unemployment rate is an indication of disaster. This is because it shows that the economy is experiencing long-term growth which corresponds to rising inflation and interest rates.
Prices of Commodities
Analysts mainly focus on the price of crude oil. The impact of increases in oil prices can be analysed based on oil-exporting and importing countries. For the former, increases in price result in an increase in the GDP. However, such nations ultimately suffer because of the declining demand for the commodity. For oil importers, an increase in oil prices causes high inflation, an increase in production costs, and lower investments.
Conclusion: the value of economic indicators
These data points are indicators of economic development or lack thereof. The key economic indicators are positive GDP growth, low inflation, low crude oil prices, and relatively low unemployment levels. The indicators prove to analysts which countries investors can invest their real money in and make money in the future.
Today, Germany is the leading country in Europe with its low unemployment levels, low crime rates and $3.7trn GDP. Also, the UK economic indicators lead this country to 2nd place ($2.6trn GDP). France is slightly behind the United Kingdom with a $2.5trn GDP.
There are over 20 economic indicators, which determine the level of economic development. Nonetheless, traders mostly use 3 of them to make a fundamental analysis. They are GDP, CPI, and an unemployment rate.