Modern economies are incredibly complex and it can be difficult to sort out whether our economy is doing well or not. Economists have developed a number of key indicators that can help us to make sense of what is going on in different parts of the economy. These parts can be analysed together to allow experts like George Bardwil to develop a picture of overall economic health. Here are some of the most important.
GDP refers to gross domestic product, which is measure of market value of all goods and services produced in an economy in a given year. As a static measure, GDP provides a snapshot look at the current wealth of an economy. However, this may be less useful for some people than an understanding of whether an economy is becoming more or less wealthy. To get at this, we need to consider GDP growth – which can be calcuated as a percentage. Positive values indicate that an economy is growing. However, GDP growth rates considered over a number of years might reveal that while the GDP is growing, it is growing at a declining rate. Thus, a “decline in GDP growth” means that in absolute terms the wealth of the economy has increased, but that it is not increasing as much as it has in previous years.
Exchange rates are a measure of the value of one currency compared to other currencies. For example, 1 US dollar can buy approximately 18 Mexican pesos, which means that the dollar can purchase more than the peso. As an absolute measure, this has both positive and negative consequences within an economy depending on who you ask. For American tourists and importers it is a good thing when the dollar is worth more because it means that American tourists can get more pesos for the dollar when they are on vacation, while importers of Mexican goods can buy more for the same dollar. However, for exporters, it may not be a good thing because it means that American goods are more expensive for Mexican customers. Leaving aside the absolute values, it is also important to consider not just the exchange rate itself but the stability of the exchange rate. A stable exchange rate allows people – consumers, producers, investors and governments – to make financial decisions with some expectation that the costs won’t change over night. This can be especially important for governments that tend to borrow money and purchase key resources like oil in US dollars.
Interests rates reflect the cost of borrowing money, and also the returns from lending money. Governments can manipulate interest rates to stimulate spending (lower rates will encourage people to borrow) or to slow an overheated economy (higher rates will slow borrowing and spending and encourage people to save). As with exchange rates, a key consideration is whether rates are stable. Stable rates give a degree of predictability that investors and consumers alike respond well to, and are generally taken to be an indicator of an economy that is enjoying sustainable growth.
These are just some of the important indicators to be looking at as you think about the health of the economy, not just in absolute terms but also in terms of their dynamic implications.