Economic indicator is something which functions in a variable way relatively straightforward, based on previous experience, can function as signal for the changes in a number of other variables often more complex in the economy. Only one economic indicator that can function as proxy for the combination of other variables to some extends. New business opportunities for start-ups, for example, can show a group of interrelated changes in business and the economy as a whole. In the United States in 1920s and also in 1930s, charges of freight cars reported in the pages of business newspapers and were eagerly read by business leaders, investors and others like the movement of raw materials and products finished around the U.S. rail system was the time considered a trustworthy indicator of the overall economy.
Microeconomic point of view, economic indicator may be used for information that helps management in decision making. The indicators can be utilized to guide policy of the government, like the plans for the collection of funds and distribution of public spending priorities.
Lagging and leading indicators
Leading indicator points to a set of statistics that could be anticipated to predict alterations in certain related areas of economy usually precedes changes in a comparatively persistent period; where as leading indicator is used to forecast something or predict. For instance, if demographic graph indicate that there is a chance for a good expansion of size in almost 16-25 years among the males in coming few years, it is finer to expect on that country would need to experiment a “crime wave”. Reason is in many countries the majority of crimes committed by young men. This information would be of interest, particularly the Ministries involved in crime and justice; companies that provide facilities the private prison, the insurance industry can expect to be invited to subscribe and to offset the economic cost of crime to businesses and individuals.
Leading indicators including investment plans, machine tool orders, and building a new home can be just combined to measure confidence, which again help to forecast the seasonal variation of gross national income. In a similar way, confidence of the consumers related to variables as future costs, production and income via economic measures like the principle factor.
“Dragging” indicator variable or a set of statistics can be expected to respond to changes in the past in some areas related to the economy, which usually follow a fairly consistent with the changes over time. Indicator of delay can be used to make an analysis of past trends for the economy or the early detection of problems in order to avoid similar problems next time. Inflation, for example, has been calculated in recent historical information on the developments of prices within the statistically constructed “basket” of typical products and services. If the analysis shows that inflation causes are demand-driven, then the appropriate policy response (eg, setting interest rates) can provide a solution.
If on the other hand, the diagnosis is that inflation is due to world market prices for the process (rather than a cost factor in the demand for an actor), then the interest rate approach is not necessarily appropriate or even harmful to the economy. Since the government politicians are not known for their infallibility, the data of lagging indicators is as important as the main indicators, such as a piece of management intelligence, given that this information can help business owners prepare in advance of changes broader economic context, some of which come from changes in government policy, whether it is appropriate or inappropriate.
It is possible that an indicator which need to be evaluated as the leaders and laggards simultaneously. The unemployment rate in a country, for instance, tells us about the economic performance in history, and exhibits end result of several factors, including the effectiveness of the corporate sector, labor market of the state, and effectiveness or government policies rather than on “hard” economic variations such as rates of interest and taxes, and “soft” economy for education, investment training and in human capital. However, unemployment rate can be used to make predictions about possible future trends directly affected variables such as savings and consumer spending to call more effects on variables like investment, production and income national levels.
Economists analyze the “leads and lags,” refer to temporary differences, however, the rise and fall seasons of leading indicators and indicators of late, and on the other hand, the rise and fall in periods of cycles Economic. For example, if the 11-year cycle can be detected and the level of economic activity, culminating with the GDP growth rate in four and a recession in eight, it is possible that investment in production is a leading indicator of the peaks of two and depressions in six years, while the building of the house is left evidence that the peaks in the six and a decline in periods of ten. It should be noted that the indicators of this type can act very differently in different countries.
The state of manufacturing and housing may have a very different meaning in Germany, said, in relation to United Kingdom and the United States, according to such factors as the structure of their industries, and role that different types of industry in contributing to national production and employment.
Using economic variables as indicators, it is useful to distinguish between independent and dependent variables. Economic theory is largely based on assumptions and observations of functional reduction in employment and unemployment rise. If you believe that inflation is driven by demand, the increase in economic activity is likely to coexist with higher inflation if it is true that there are no problems taking advantage of excess capacity because of problems such as poor infrastructure, or the existence of skill gaps.
C stands for “consumption” or consumer purchases of goods and services. I mean “investment” or cost of goods (as opposed to consumption). Capital goods or investment such as factory buildings and production facilities used to produce goods and consumer services.
G refers to the spending of government and the notation X-M points to the net result of earnings from export and that of import rates, which means to the total effect of global trade or the deficit.
Usually economists mostly uses a model called as the circular flow of the income to show how variables involved in above equations is related to each other and also to project that injections into circular flow (government spending, investment, and export earnings) tend to enhance level of activity, while leakage or withdrawals of circular flow (savings, taxes and import costs) tend to shorten economic activity. It also brings about alternative way to express the condition of macroeconomic equilibrium (Equation No.2): relationships between variables. If, for example, suggests that “consumption is a function of income,”
I + G + X = S + T + M
Then we say that income is an independent variable, while consumption is a dependent variable. We say that people spend depends on your income, and not vice versa.
Economists use the following equation (1) to show a fundamental relationship between wide ranges of variables:
This tells us that if the sum of planned investment, government spending, exports and revenues (i.e., a total planned injections) have the same goal of saving, tax and import costs (for example, for a total planned upgrades) , so there is no reason to work in an increase or decrease.
Y = C + I + G + (X – M)
Here Y is “national income”, as in economic theory is equal to the value of the estimated domestic production, which in turn is equal to the projected total national expenditure on goods and services. Income, production and costs are clearly linked to the labor market, because more jobs will tend to coexist with revenues, expenses and higher output, while a decrease in these three variables can be expected This allows them to complex and sophisticated, or they may be relatively simple, but no less valuable for their simplicity. For example, a sudden change in interest rates will affect many companies. These consequences can be predicted by a reasonable inference of the basic models described above.
Same principles also applied to the Equation 2, where changes in interest rates have a direct impact on savings and investment. Similarly, changes in other indicators, such as the exchange rate can be applied to these equations and predictions about their possible effects on variables such as income from exports (X) and the cost of imports (M). The effects of the variables under direct control of government spending (G) and taxes (T) can also be provided. From experience, companies must be able to extrapolate the ripple effect of changes in the level of economic activity. There are, of course, different effects on different types of cases, with sectors such as tourism, housing construction, automobile manufacturing and often act like weather vanes, and in turn be used as indicators of likely future levels of activity in the rest of the economy.
Use and the Interpretation
Companies which provide economic forecasts, of course, to use economic models, which are highly complex, and some people try to imitate the great power of computer models used by government departments and agencies, such as the Federal Reserve and the Bank of England, but the basic models upon which these programs are similar to the ideas of the basic equations and relationships described above. Person “average” business does not fall into the trap of believing that the effects of changes in economic indicators are too complex to understand and interpret the doctor every day.
Suppose business people use economic indicators to assist in management decisions, it is important that they are careful not to react to changes that may be outside “jump”. Some indicators are more volatile than others and in general terms the more volatile it reflects what one might call the “virtual economy” rather than “real” economy.
Trends in medium-and long-term stock price are the most reliable indicators of economic trends in the prices of day to day monetary instruments as “forward” and “options” for the simple reason that these variables are not show the main activity of wealth creation, but are reflecting short-term profit based on the hopes and fears of speculators. During the rise in oil prices in 2008, for example, some experts considered that the activities of speculators adds up to 25 percent in the price of oil and the vast majority of these dealers are, in fact, the game in an increase or decrease in future oil prices, instead of having no intention of returning to owning a barrel of oil today.
Mid-1990, British statistics of unemployment faced relatively abrupt changes. The major reason given those long-term unemployed individuals due to chronic problems related to health and asks for social security benefits become “skeletal muscle” and “mental health” issues, or put it simply, the “back pain” and ” stress “. This could leave policy makers and employees as a statistical blip, but it actually turned out to be a continuous signal a trend that will likely continue to feature in the British labor market for some time, as shown in many other economies, especially in adoption of the Anglo-Saxon model of “flexible labor markets.” So in the long-term blip rather than a trend, it requires a political solution, what are the benefit strategies for the health and welfare.
1. The first secular trends showing relatively easy development over long term, for example, growth of gross domestic product in the established economies and the trend towards economic development lead to a decrease in the proportion of national income and employment s’ explained by the primary sector, first to be replaced by an expansion of the secondary sector along with tertiary sector, which is now the main source of the economic activity.
Cyclical patterns for example, short-term fluctuations of the real growth rate of about a long-term trend rate of economic growth, where the “gap” (excess capacity) that occur during a “boom” and “output gap negative “during the” recession “. This is a classic “sine wave” model, which is related to the business cycle or economic cycle. Output for a significant indicator of anti-inflation system, which has been approved in different forms in Great Britain and the euro area, for example, when setting the interest rate, has been moved close to an independent central bank.
Seasonal variations in the short term, but normal and reasonably foreseeable activities such as off-season in much of the winter tourism, retail sales in western economies before Christmas.
Exogenous shocks, tend to be non predictable, wrongly forecasted or unexpected and leads to erratic changes in already furnished trends. A fine example will be the branching of U.S. subprime type of market in the year 2008 and credit crisis that followed the world or the rapid increase in prices of food arises as an unexpected consequence of land use of biofuels, which was response to the faster level of expected increase in energy values and raw material costs, especially oil prices.