economic indicators essay pdf

SOUTH AFRICA'S ECONOMIC AND SOCIAL INDICATORS GRADE 12 NOTES - ECONOMICS STUDY GUIDES

• Key concepts
• The performance of an economy
• Economic indicators
• Social indicators
• International comparisons

Economic and social indicators are useful tools to determine a country’s well-being. There are many economic and social indicators, including production, employment, education and demographic indicators. Overview

11.1 Key concepts

These definitions will help you understand the meaning of key Economics concepts that are used in this study guide. Understand these concepts well.

Use mobile notes to help you learn these key concepts. Learn more about mobile notes on page xiv in the introduction.

11.2 The performance of an economy

When we assess the economy, there are a few things that should be considered:

• Performance Economic indicators are used to establish the state of the economy. An economic indicator is a statistic (data) that shows the behaviour of one or other variable.
• Comparisons Changing statistics (data) inform us of changes in the economy. By comparing these changes we can determine whether there is a growth or slowdown in the economy.
• Specifications To be meaningful, indicators have to be compiled in terms of their rules of compilation.
• Purposes Indicators are compiled for specific purposes. Example, the CPI is calculated to show increases in consumer prices and reflect the cost of living.

11.3 Economic indicators

11.3.1 Price change indicators Price increases occur either because of scarcities of a product or changes in consumer preferences. Price increases over long periods of time are known as inflation. There are two key price change indicators:

• Producer Price index (PPI): This is the indicator used to measure an increase or decrease over time in the prices of goods produced locally when they leave the factory floor; and an increase or decrease in the price of imported goods.
• Consumer Price index (CPI): Weights are obtained from the expenditure of households and show changes in the purchasing power of the rand. This is the official index used in inflation targeting.

11.3.2 Foreign trade indicators International trade is important in a globalised world. Exports stimulate employment and imports widen the choice of consumers.

• Terms of trade: The ratio of export and import prices. If the ratio deteriorates (gets worse), a greater volume of exports must be produced that may cause a spill-over effect into the balance of payments.
• Exchange rate: The value of one country’s currency in relation to another country’s currency.

11.3.3 Employment indicators

• The economically active population (EAP): The labour force between15 – 65 years of age.
• Employment: The number of employed persons as a percentage of the economically active population (EAP), e.g. 73.5% in South Africa.
• Unemployment: The unemployed (who are actively looking for work) as a percentage of the economically active population.

11.3.4 Productivity indicators Labour productivity is watched very closely, particularly in relation to real wage increases.

• Labour productivity: This is measured by dividing the real GDP by the number of workers employed.
• Remuneration per worker: If productivity increases are lower than the real wage increases, inflationary pressures will occur.

11.3.5 Interest rates Interest is the charge made for borrowing money.

• Repo rate is one of the most important interest rate indicators. It is the rate at which the SARB lends money to banks.

11.3.6 Money supply The supply of money is controlled by the SARB. The money is classified in three categories.

• M1: notes and coins in circulation and demand deposits of the domestic private sector at banks.
• M2: M1 plus other short term and medium term deposits of the domestic private sector at banks.
• M3: M2 plus long term deposits of the domestic private sector at banks.

11.4 Social indicators

Social indicators are concerned with people. They monitor identifiable and definable issues related to human well-being over a period of time.

11.4.1 Demographics The size of the population is important for infrastructure and social programmes.

• Population growth: The population numbered 46.8 million in 2005. Growth is slowing down. Measuring population growth is important for delivering social services and for identifying the size of the tax base (the total number of people paying taxes).
• Life expectancy: South Africa’s life expectancy rate is down from 62,8 years to 47 years.

11.4.2 Nutrition and Health The standard of living of the population is related to the quality of nutrition and health: Nutrition

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• Child malnutrition: Malnutrition is expressed in two ways – weight for age (under weight) and height for age (dwarfism). The proportion of underweight children is the most important indicator of malnutrition.
• Overweight children: there is an association between obesity of children and other diseases.
• Infant mortality: The number of children that will die before one year of age is one way of measuring the health of a population.
• Under-five mortality: the number of children that will die before the age of 5 years.
• Health expenditure: the amount of health expenditure as a percentage of GDP.
• Access to safe drinking water: the percentage of a population that has reasonable access to safe drinking water.
• Access to sanitation facilities: the percentage of a population with at least adequate sanitation facilities that can prevent human, animal and insect contact.

11.4.3 Education The standard of living is related to the level of education. Education is a key social indicator:

• Public expenditure: The percentage of the national budget that is directed towards education.
• Secondary enrolment: This shows the percentage of an age group attending high school.
• Primary completion: The percentage of an age group that has completed primary education is an indicator of the efficiency of the education system.
• Youth literacy rate: The percentage of the 15–24 age group that are literate.

11.4.4 Services A number of services that are vital to enhance people’s lifestyle and level of economic and social development:

• Electricity
• Refuse removal
• Water supply

11.4.5 Housing and urbanisation The standard of living of the population is related to the quality of their housing and services: Housing

• Housing: Many South African citizens are poor and cannot afford property. The government supplies housing subsidies and the private sector provides housing loans.

Urbanisation The level of urbanisation is one of the indicators of a country’s social development. It is measured by:

• Natural growth of the urban population
• Establishment of new towns

11.5 International comparisons

International comparisons are the key means of measuring a country’s economic and social development. 11.5.1 Globalisation

• International trade: Payments are affected by the exchange rate.
• Internationalisation: Branch offices in foreign countries monitor indicators to publish financial reports in a single currency and pay dividends in different currencies.

11.5.2 International standardisation

• Economic and social indicators are useful. International organisations, like the World Bank and the IMF, are very specific in determining, utilising and applying these indicators.
• Benefits from organisations cannot be measured if indicators are not available, e.g. bridging finance from the IMF, World Bank and the UN.

11.5.3 Aid and support

• Foreign countries, governments, international institutions and NGOs are globally involved in providing financial aid.
• A country needs indicators, including domestic income, production and expenditure, poverty, education and health data, to receive aid and to measure the impact of this aid.
• Human rights (children’s rights), environment (pollution) and governance (corruption) indicators might also be requested by aid organisations.

11.5.4 Comparison and forecasting

• Capital markets are liberated through globalisation.
• Capital moves where it receives the best returns.
• Publications for global players give indicator values for the 3 previous and 3 future years to spot underlying trends.

Learn these four points that are used by international organisations to measure a country’s level of economic and social development. Activity 1 Choose the correct word between brackets:

• The key rate of interest in SA is the (repo/exchange) rate. (2)
• The growth performance of a country is measured in terms of the (per capita real GDP/increase in the real GDP). (2)
• The economically active population is the labour force between 15 and (55/65) years of age. (2)
• The index used to determine the prices of inputs is called the (consumer/producer) price index. (2)
• Social indicators are concerned with people, such as education and (corruption/health). (2) [10]

Activity 2 Give ONE answer for each of the following:

• An international bank established to promote economic recovery and development (2)
• Used to establish the performance of the economy in terms of basic economic objectives of growth, price stability, exchange rate stability and full employment (2)
• It is depicted in the Lorenz curve and shows the distribution of income (2)
• The price of one country’s currency in terms of another country’s currency (2)
• Ratio of export and import prices (2) [10]

Activity 3 Distinguish in tabular form between the Consumer Price Index and the Producer Price Index. (2 × 4) [8]

Answers to activity 3

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Gr. 12 Economics Lesson T3 W4: Economic Pursuits - Economic and Social Indicators

Grade 12 Economics Lesson Term 3, Week 4: Economic Pursuits - Economic and Social Indicators

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Economic indicators

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Economic Indicators Types and Interpretation Essay

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Introduction

Interpretation of each indicator.

Economic indicators show the statistic of an economy. They are used to analyze the economic performance of a country. Besides, they are used to predict future performance. Another use of economic indicators is to study the business cycle in the economy. That is, they can tell whether an economy is at recession, boom, or recovery. Based on timings, economic indicators can be categorized into three. These are coincident, leading, and lagging indicators. Some of the economic indicators include gross domestic product, employment rate, stock market prices, consumer price index, and industrial production (The Federal Reserve Bank of Minneapolis, 2012).

Leading indicators

Reflectively, “leading indicators change before changes in the economy are felt” (“The Conference Board: Business Cycle Indicators Handbook”, par. 4). That is, they change direction in advance before the business cycle. Some of the leading indicators include average weekly hours, stock prices, interest rate spread, housing permits, new orders, and consumer expectations. In as much as the indicators are given much attention in the economy, they are meaningful when used within the framework of lagging and coincident.

Lagging indicators

In the ideal situation, “lagging indicators change after the economy as a whole does” (“The Conference Board: Business Cycle Indicators Handbook”, par. 8). They change direction after coincident indicators. These lags usually occur after a quarter of a year. Therefore, they are not beneficial for economic analysis and are often ignored. In some instances, they help to confirm the movements of leading and coincident indicators. In addition, the series help to warn us of structural imbalances growing within the economy. For instance, “represent costs of doing business, such as inventory-sales ratios, change in unit labor costs, and the average prime rate charged by banks” (The Conference Board, 1999)

Coincident indicators

Coincident indicators provide information about the current state of the economy. They are expansive series that measure aggregate economic movement. This is because they change approximately concurrently as the whole economy. Some of the coincident indicators are trade sales, production, employment, manufacturing, and personal income.

The Principle Federal Economic Indicators are “Consumer Price Index, Employment Cost Index, The Employment Situation (which includes the unemployment rate and payroll employment), Producer Price Indexes, Productivity and Costs, Real Earnings, U.S. Import and Export Price Indexes” (United States Department of Labor, 12). The table below summarizes the statistics for some of the economic indicators.

Table 1.0 Statistics for economic indicators.

Stock prices 500 common stocks

This indicator shows the price movement of a variety of stock traded in New York Stock. Movement of this stock shows general sentiments of investors and the movement of interest rates.

Money supply, M2

M2 “is inflation-adjusted money supply which comprises of demand deposits, currency, savings deposits, and traveler’s checks” (“The Conference Board: Business Cycle Indicators Handbook”, par. 12). The money supply in the economy determines interest rates. This, in turn, determines the level of investment in the economy.

Personal income less transfer

This gives data for the aggregate amount of income individuals receive. They are inflation-adjusted dollars. The income levels are important because they determine aggregate spending and state of the economy.

The average duration of unemployment

This indicator measures the average period in weeks a person is not at work. This index gives the amount of idle human resources in the economy.

The Conference Board: Business Cycle Indicators Handbook . (1999). Web.

The Federal Reserve Bank of Minneapolis: The Federal Reserve’s Beige Book: A better mirror than crystal ball . (2012). Web.

United States Department of Labor: Bureau of Labor Statistics . (2010). Web.

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IvyPanda. (2020, August 30). Economic Indicators Types and Interpretation. https://ivypanda.com/essays/economic-indicators-types-and-interpretation/

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Bibliography

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Economic indicators of resource scarcity: A critical essay

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What Is an Economic Indicator?

• Interpretation

The Stock Market As an Indicator

• Pros and Cons
• Economic Indicators FAQs

The Bottom Line

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Economic Indicator: Definition and How to Interpret

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An economic indicator is a piece of economic data, usually of macroeconomic scale, that is used by analysts to interpret current or future investment possibilities. These indicators also help to judge the overall health of an economy. While there are many different economic indicators, specific pieces of data released by the government and non-profit organizations have become widely followed. Such indicators include but aren't limited to the  Consumer Price Index (CPI) , gross domestic product (GDP), or unemployment figures.

Key Takeaways

• An economic indicator is a macroeconomic measurement used by analysts to understand current and future economic activity and opportunity.
• The most widely-used economic indicators come from data released by the government and non-profit organizations or universities.
• Indicators can be leading, which tend to precede trends; lagging, which confirm trends; or coincident, which occur simultaneously with economic conditions.
• Indicators can give investors insight as to how trades may play out, though unreliability of data and inconsistency of variables may make them less helpful.

Investopedia / Candra Huff

Types of Economic Indicators

Economic indicators can be divided into categories or groups. Most of these have a specific schedule for release, allowing investors to prepare for and plan on seeing information at certain times of the month and year.

Leading Indicators

Leading indicators , such as the yield curve, consumer durables, net business formations, and share prices, are used to predict the future movements of an economy. The numbers or data on these financial guideposts will move or change before the economy, thus their category's name. Consideration of the information from these indicators must be taken with a grain of salt, as they can be incorrect.

Investors are most often interested in leading indicators, as a correctly placed leading indicator can accurately predict future trends. Leading indicators may make broad economic assumptions. For example, many investors track forward-looking yield curves to project how future interest rates may dictate stock or bond performance. This analysis relies on historical data. Based on how investments performed the last time the yield curve was a certain way, some may assume those same investments may repeat their performance.

Coincident Indicators

Coincident indicators , which include such measures as GDP, employment levels, and retail sales, are seen with the occurrence of specific economic activities. This class of metrics shows the activity of a particular area or region. Many policymakers and economists follow this real-time data, as it provides the most insight into what is currently happening. These types of indicators also allow for policymakers to leverage real-time data without delay to make informed decisions.

Coincident indicators may be somewhat less helpful to investors, as the economic situation unfolds simultaneously. As opposed to a forecast or a prediction, a coincident indicator informs investors of what is actually happening in the present. Therefore coincident indicators may only be useful to those who can correctly interpret how economic conditions today (i.e. falling GDP) will impact future periods.

Lagging Indicators

Lagging indicators , such as gross national product (GNP), CPI, unemployment rates, and interest rates, are only seen after a specific economic activity occurs. As the name implies, these data sets show information after events have happened. Such trailing indicators are technical indicators that come after large economic shifts.

One drawback of lagging indicators is that a strategy developed in response to such indicators may arrive later than optimal. For example, by the time the Federal Reserve interprets CPI data and decides how best to enact monetary policy to stem inflation, the numbers it is observing can be slightly outdated. Though lagging indicators are still used by many governments and institutions, they also pose the risk of guiding incorrect decision-making due to erroneous assumptions about present-day economics.

Indicators provide signs along the road, but the best investors utilize many economic indicators, combining them to glean insight into patterns and verifications within multiple sets of data.

Interpreting Economic Indicators

An economic indicator is only useful if one interprets it correctly. History has shown strong correlations between  economic growth , as measured by GDP, and corporate profit growth. However, determining whether a specific company may grow its earnings based on one indicator of GDP is nearly impossible.

There is no denying the objective importance of interest rates, gross domestic product, existing home sales, or other indexes. The indicators reflect the cost of money, spending, investment, and the activity level of a major portion of the overall economy.

Like many other forms of financial or economic metrics, economic indicators hold tremendous value when compared across a period of time. For example, governments may observe how unemployment rates have fluctuated over the past five years. A single instance of unemployment rates doesn't yield much value; however, comparing it to prior periods allows analysts to better understand the issue as a whole.

In addition, many economic indicators have a benchmark set, whether by a government agency or other entity. Consider how the Federal Reserve's target rate of inflation is usually 2%. The Federal Reserve then enacts policies based on CPI measurements to achieve this target. Without this benchmark, analysts and policymakers wouldn't know what makes a indicator's value good or poor.

Leading indicators forecast where an economy is likely headed. One of the top leading indicators is the stock market. Because stock prices factor in forward-looking performance, the market can indicate the economy’s direction if earnings estimates are accurate.

A strong market may suggest that earnings estimates are up, which may suggest overall economic activity is up. Conversely, a down market may indicate that company earnings are expected to suffer. However, there are limitations to the usefulness of the stock market as an indicator because the relationship between performance and estimates is not guaranteed.

Stocks are also subject to price manipulations caused by Wall Street traders and corporations. Manipulations can include inflating stock prices via high-volume trades, complex financial derivative strategies, and creative accounting principles, both legal and illegal. The stock market is also vulnerable to the emergence of “ bubbles ,” akin to false positives regarding the market’s direction.

If you're particularly interested in a specific economic indicator released monthly by the government, be aware that reports are often released on the same day of every month at the same time.

Advantages and Disadvantages of Economic Indicators

Pros of economic indicators.

Economic indicators rely on data to substantiate predictions of what is to come in the future. When analyzed correctly, investors can capitalize on data to make successful trades or correctly assess future market conditions.

Economic indicators are often free and publicly accesible . In addition, economic indicators reported by governments often have a fixed cadence and steady form of measurement. This means you can usually rely on the method of how an indicator was calculated and the timing of when that indicator will be released.

Cons of Economic Indicators

A downside to economic indicators, particularly leading or coincident indicators, is that they rely on some degree of forecasting. While leading indicators are projections to the future, even coincident indicators rely on some assumptions. Such indicators do not always predict the future correctly, and the actions they recommend may not play out as expected.

Economic indicators, when boiled down to a single number, can also fail to capture complex realities. For example, consider all of the variables that contribute to the unemployment rate. This can include a wide range of influences, from macroeconomic conditions to minor details like weather patterns. As an indicator, the unemployment rate may not fully encapsulate all the factors contributing to an issue.

Finally, economic indicators are somewhat open to interpretation. Consider an example where inflation has dropped from 4.6% to 4.5%. Is this considered a good change, or should the drop have been larger? Economists and policymakers often debate the appropriate approach for interpreting economic data. Though the numbers may be concrete, different interpretations may lead to drastically divergent conclusions.

Economic Indicators Pros and Cons

May accurately forecast what is to come based on prevailing data

Often use publicly available information

May be calculated using the same process over and over, particularly when issued by governments

May be released on a fixed, predictable cadence

May not accurately predict the future

Rely on many assumptions, some of which may be unpredictable

Can be open for interpretation

Still require expertise to interpret and understand

What Is the Most Important Economic Indicator?

Every economist may come up with their own favorite economic indicator. For many, a country's GDP usually represents the best overall picture of a country's economic health. It combines the monetary value of every good and service produced in an economy for a certain period, and it considers household consumption, government purchases, and imports and exports.

Is Inflation an Economic Indicator?

Yes, inflation is a lagging indicator that is reported after a rise in prices has occurred. This type of economic indicator is helpful for government agencies to set public policy, as without this type of data, they would not know the direction of the economy. Therefore, while inflation and other lagging indicators are still useful to investors, they are especially critical for developing future policy responses.

What Are the Economic Indicators of a Strong Economy?

An economy may be strong if it has a robust amount of economic activity and job growth. This is measured by low unemployment, steady inflation, increases to construction, positive consumer index readings, and increasing GDP.

Do Traders Use Economic Indicators?

Traders and investment professionals may use economic indicators to predict how broad economic policy will impact their trades or investment strategy.

Economic indicators are leading, coincident, or lagging figures that indicate broad conditions. Economic indicators such as GDP, unemployment, inflation, or certain prices inform policymakers, individuals, companies, and investors of not only where the economy is today but perhaps where the economy may be headed. Economic indicators can be used to guide government policy or set investment strategies.

IMF. " Gross Domestic Product: An Economy's All ."

Board of Governors of the Federal Reserve System. " FAQs ."

IMF. " Inflation Targeting: Holding the Line. "

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A monthly statistical publication presenting data for a wide range of indicators for OECD countries as well as for a selection of non-member economies.

The international comparisons section presents comparable indicators by subject, including the composite leading indicator (CLI) the consumer price index (CPI) and exchange and interest rates. The country-specific tables present more detailed information by country. Reference tables include purchasing power parities (PPP), comparative price levels and gross domestic product (GDP) data.

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2021 Main Economic Indicators, Volume 2021 Issue 7

This monthly publication presents comparative statistics that provide an overview of recent international economic developments for all the OECD countries, the euro zone and a number of non-member economies.

This indispensable and unique source of key short-term statistics is a vehicle for analysis for corporate planners, economists, academics, researchers and students. Using the most up-to-date, user-friendly tabular presentation, the indicators cover national accounts, business surveys and consumer opinions, leading indicators, retail sales, production, construction, prices, employment, unemployment, wages, finance, international trade and balance of payments.

13 Jul 2021 256 pages English

https://doi.org/10.1787/19729ed5-en

Author(s): OECD

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