Economic Indicators: Know the Key Indicators of an Economy

4 Feb 2021  Read 981 Views

Everybody knows that the Indian economy is in recession. You have read this in newspapers, articles, or heard this from someone, but somehow, everyone knows that the economy is not doing so well. 

But have you ever wondered how an economy's condition is decided? How do we conclude the state of an economy? What are the indicators that actually determine the state of the economy and tell us whether it's good or bad?

Investors and economists analyse these economic indicators, understand the state of the economy and then, speculate its present and future situation.

Let's understand this better.

What are the Economic Indicators?

An economic indicator is a system of measurement to assess, measure, and evaluate the overall situation of the economy.

These economic indicators are data which is mostly collected by government sources or by private sources through census or survey. These sources analyse the collected data and then generate economic indicators based on it.

Investors, economists, or analysts monitor these economic indicators. These economic indicators help them to analyse the situation of the economy, whether the conditions are favourable or unfavourable, what are the risks because of all these effects on the state of industries and companies of the economy. 

Categories of Economic Indicators

There are mainly three broad categories of economic indicators used by investors, economist, and analysts, which are based on the period of events.

They are:

Leading Indicators 

Leading indicators are indicators that are used to forecast future market conditions. They are not always accurate, so it is better to evaluate them with other indicators as well. 

Following are a few types of leading indicators are: 

Stock indices 

Stock indices are used as a leading indicator of the economy. Company share prices will surge, when it will perform well, earnings will be more than speculation and prospects are favourable.  

Stock prices and value of stock also predict the future economic conditions, as supposed by the investors. If the market participants will believe that the economic growth will continue, the stock indices will rise, and vice-versa.

For these reasons, stock indices are used to get an idea about future economic growth. 

Money supply 

The money supply in an economy is also used as a leading indicator. More money circulation means that consumers are willing to spend their money, so businesses can invest more in expanding their business or in R&D. All these things are good for an economy. 

However, tracking money circulation is a perplexing task since a wide range of factors affects the money supply in an economy. 

Level of New Business Start-ups 

The new start-ups entering the economy is also a leading economic indicator. In the overall economic scenario, the small business employs more people as compared to large business or corporates, thereby decreasing the unemployment rate. 

Small indicators contribute a significant amount in an economy's GDP. Hence, an increase in the number of new small businesses is a significant factor of growth in an economy, and it shows that the economy is moving ahead in a good direction and vice-versa. 

Lagging Indicators 

Lagging indicators show the change in the economy after the changes take place. These indicators confirm a pattern that is in progress. 

Some of the lagging indicators are: 

Unemployment rate 

The unemployment rate is a lagging indicator in an economy. The unemployment rate, as the name suggests, is the number of unemployed people as a percentage of the total labour force in an economy. 

If the unemployment rate is high, it means that companies are not interested in hiring more employees. Also, given this situation, the consumption in the market will eventually decrease, and further payoff is anticipated. Such conditions depict a poor condition of the economy. 

Centre for Monitoring Indian Economy (CMIE) releases a monthly estimate for the unemployment rate in India. The unemployment rate data is released by NSSO (National Sample Survey Office).

A lower rate of unemployment depicts favourable economic situations and vice-versa. 

Month

Unemployment Rate (%)

 

India

Urban

Rural

Jan 2021

6.53

8.08

5.83

Dec 2020

9.06

8.84

9.15

Nov 2020

6.50

7.07

6.24

Oct 2020

7.02

7.18

6.95

Sep 2020

6.68

8.45

5.88

Aug 2020

8.35

9.83

7.65

Jul 2020

7.40

9.37

6.51

Jun 2020

10.18

11.68

9.49

May 2020

21.73

23.14

21.11

Apr 2020

23.52

24.95

22.89

Mar 2020

8.75

9.41

8.44

Feb 2020

7.76

8.65

7.34

Source: CMIE

Gross Domestic Product (GDP) 

Gross Domestic Product (GDP) report calculates the total value of goods and services produced in an economy during a particular period. The GDP report is a vital indicator which shows a broader outlook of an economy. The health of the economy is indicated by the growth rate of GDP. 

Although the GDP report shows the overall outlook of the economy, it has a muted effect on the market as there as various other timely reports that can be more useful in anticipating the economic activity. 

Source: Statista 

Currency Strength 

Currency rate is a significant economic indicator. A strong currency suggests that the country's purchasing power and selling power will increase with the global world. With a strong currency, the country import bill will decrease, and exports will bring in more foreign exchange.

However, sometimes, a weak currency is also useful for an economy. Suppose, the value of the Indian rupee value declines. In this situation, India will be able to draw more foreign tourists; at the same time, Indian products in the foreign market will become inexpensive, so exports will also increase.

Income and Wages 

Income and wages will regularly increase in a favourable economy, and thereby the living standard of its citizens will also improve. On the other hand, when income decreases, it shows that employers are cutting remuneration, layoffs are happening, and the economy is not functioning accurately. 

For investors, declining incomes indicate an unfavourable business environment, where investment is not performing well. 

Hence, income and wages are important economic indicators to understand the health of an economy.

Coincident indicators

Coincident indicators are used to clarify the actual state of the economy. They are real-time indicators. Investors and others use these indicators to understand the current situation of the economy. These indicators do not have a predictive value. 

Some of the coincident indicators are:

Consumer Price Index 

Consumer Price Index (CPI) is a significant coincident economic indicator. CPI is a vital report that shows the inflation level in an economy. The CPI report measures the price of goods and services for the retail customer. 

Investors closely monitor the CPI report, as the central bank changes the interest rate according to CPI. An increase in CPI will lead to a higher interest rate and vice versa. 

The CPI report is released by the Ministry of Statistics and Programme Implementation(MoSPI) in India. 

Industrial production 

Industrial production data is also a vital coincident economic indicator. It measures the change in the overall inflation-adjusted worth of production produced by the industries. 

Industrial Production shows the current economic situation as production responds to any changes in the business cycle.  

In India, the Index of Industrial Production (IIP) is released by the Central Statistical Organisation (CSO). It shows the operation of the different industrial sectors in the Indian economy. 

Investors, economists, and others use IIP data to understand the state of the economy and speculate the future economic situation. 

                               

Closing words 

The health of a country's economy is important for all its citizens as it affects all of them in the long run, directly or indirectly. 

Hence it becomes even more important for economists, or financial analysts or even investors to correctly understand the state of the economy. And this can be done by a careful evaluation of economic indicators. It is important to remember that economic indicators work better when incorporated with each other. 

For investors, knowing and understanding the health of an economy can facilitate better decision making regarding investment plans. 

About the Author: Harshit Roy | 34 Post(s)

Harshit Roy is a BMS student at St. Xavier's College, Kolkata majoring in finance. He is bibliophile in nature, and quite eager to learn and read about new things in life.

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