What are economic indicators and why are they important?

As their name suggests, economic indicators are statistics which are used to obtain a clearer picture of the current state of the economy. Three of the most important examples are the rate of inflation, the gross domestic product (GDP) and the percentage of the population that is unemployed. Economic indicators and their interpretation by knowledgeable sources are important in predicting how the state of the economy will take shape in the coming years.

These predictions in turn will allow both consumers and business people to come to informed conclusions regarding their future financial plans, such as where and how much capital to invest, whether to expand or diminish their work force, whether to purchase property, and so on.

Inflation as economic indicator
The Consumer Price Index (CPI) describes the prices of a sample “basket” of consumer goods and services at a specific point in time. Comparing the CPI over months and years indicates whether inflation is occurring and if so, at approximately what rate. The rate of inflation is an important economic indicator influencing investment decisions. Inflation diminishes the real value of an investment.

Therefore, the rate of return should more than make up for this decrease. It also has repercussions on consumer spending; as the rate of inflation rises, consumers often tend to spend more, fearing that the items they want will increase even more drastically in price in the future. This can cause double digit hyperinflation.

GDP as economic indicator
The gross domestic product (GDP) is an economic indicator which consists of a measure, in dollar terms, of the value of goods and services that a particular country has produced within a given time period. It includes such things as consumer spending, spending by businesses and government, and investment in housing. In addition, it encompasses the total value of exports minus imports.

The gross domestic product is used to determine whether the economy in question is expanding, via healthy growth, or contracting.

Employment as economic indicator
Employment is a relatively simple phenomenon to measure. A count is taken of employed citizens and compared to the number of people without a job who are actively looking for work, in order to calculate the percentage of unemployment. (The figure does not take into account unemployed workers who have, temporarily or permanently, given up the search for a job. Nor does it count workers who are illegally employed.)

With high levels of employment, a corresponding increase in inflation can usually be predicted as employers will offer higher wages, to increase the relatively few workers available.