Hello, Hi, Bonjour and welcome back to another episode of Economics Explained. This one is focused on Economic Indicators.
So, let's paint the picture. Blood pressure, heart rate and cholesterol levels are all indicators that suggest how healthy you are. Well, the economy needs them too (not a blood pressure check, obviously). The economy needs economic indicators. Economic indicators are macroeconomic data strands that are used to analyse the overall health of the economy. There are 4 main types...
3. Gross Domestic Product (GDP)
4. Balance Of Payments
We’re going to take you through what the hell each of them mean and give you some current, real life examples of the indicators at work.
This is all about the price stability in the economy. It impacts how much you and I pay for goods and services. By definition, Inflation is the sustained increase in the general price level in an economy. In simple terms, when you see the word Inflation, think about the price of your favourite lipstick going up in price in comparison to the previous year. Well, that’s inflation.
It is measured by something called the Consumer Price Index (CPI). This is the change in the prices of ordinary goods that most people spend money on, such as clothing and medical services.
At the time of writing this article, the 12-month inflation rate is 0.5% in June 2020. This is not bad going as it is the lowest rate since August 2016. It means the goods and services are around 0.5% more expensive than they were in the previous year.
This is the indicator that looks at the conditions of the labour market in a country. Specifically, how many people are in work and how many people are out of work. An unemployed person is someone who is not engaged in a paid employment or self-employment position, however they are able to secure a job and actively seeking an opportunity to do so.
Once the relevant bodies understand who is unemployed, they can calculate the unemployment rate. This is the number of unemployed people falling under the official definition as a percentage of the total employed and unemployed people in an economy.
The April 2020 unemployment rate in the UK is 4.0% of the total population. If you wanted to see this by gender (because who run the world…GIRLS) the estimated unemployment rate for men is 4.2% and the estimated unemployment rate for women is 3.7%
Gross Domestic Product
There is no better way to measure the economy than looking at all the newly produced final goods and services produced within a given time period. This is the Gross Domestic Product (GDP). It’s calculated by adding up all consumer expenditure, capital investment expenditure (all the money spent on capital goods, or goods used in the production of capital, goods, or services such as; machinery, land, production inputs, or infrastructure), government expenditure and the difference between exports and imports.
GDP = C + I + G + (X-M) where:
• C: Household spending on goods and services
• I: Capital Investment spending
• G: Government spending
• X: Exports of Goods and Services
• M: Imports of Goods and Services
GDP is usually recorded in quarters. And for the UK, gross domestic product (GDP) was negative and fell by 2.0% from Jan to Mar 2020, the largest fall since Quarter 4 2008 (the global recession times, boo)
Balance of Payments
Ever wanted to know all financial transactions made between consumers, businesses and the government in our country and other countries? Well, this is the Balance of Payments. The current account of the balance of payments is the one we tend to focus on. This looks at the trade of goods and services plus net investment incomes from overseas assets and net transfers.
What is an inflow and an outflow?
• Inflows are counted as a positive entry, these can be things such as exports sold overseas
• Outflows are counted as a negative entry e.g. when we import our favourite foreign goods and services
The Balance of Payments in the UK is negative at the moment i.e. we are running a current account deficit. BUT the good news is that the UK current account deficit narrowed substantially to £5.6 billion between Oct to Dec 2019.