Economic Indicators and filters have become increasingly important because of their role in shaping all sorts of decisions especially when choices and trade-offs need to be made. As investors continue to look for regions and geographies that offer the optimal return on investment for their hard-earned funds, they will seriously consider macroeconomic indicators.

As a whole, the field of macroeconomics is concerned with large-scale economic factors and their effect on national productivity. It studies the behavior of the economy as a whole unlike its sister field Microeconomics which is concerned with specific companies and individuals. Below are the top 5 macroeconomic indicators continuously monitored by the government and indicators.

– Gross Domestic Product (GDP): This is, more or less, the cornerstone of national productivity as it is a direct reflection of how much a country produces, earns or spends in a given period, usually a year. This figure provides a snapshot of the economy per time, and is useful for compiling projections into the future. GDPs also provide a relatively level-playing basis for country to country comparison as nations with higher figures are known to be larger than others via-a-vis economic might. When an economy grows or contracts, this would usually reflect in its GDP for the period, and this is why the growth rate of an economy is useful for understanding its GDP.

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– Inflation: This figure provides a measure of price increase per time. Inflation means there is a reduction in the purchasing power of each unit of currency because it can buy fewer goods and services, this can happen when there is excess cash in the economy. High rates of inflation can result in a reduction in savings and investments, and ultimately leads to shortages of goods as consumers will likely hoard them out of concerns that prices will further increase. However, inflation can have some positive effect such as mitigating recessions and stimulating investment in non-monetary capital projects. Therefore, some controlled amount of inflation is actually desirable for every economy, most governments aim for a single digit inflation scenario.

– Unemployment Rate: This simply states how many people from the nation’s labour pool are unable to find jobs. Every government strives for low unemployment rates along with rising GDP growth rates because this indicates an efficient economy that grows steadily and absorbs more workers as it grows and expands. High unemployment rates also depict a country with largely idle workers which may constitute security threats, something that terrifies international investors.

– Balance of payments: Also known as the balance of international payments, this figure summarizes an economy’s transactions with the rest of the world over a period of time. It reflects the true economic position about a country and tells whether or not a country has enough savings and other financial transactions to pay for its consumption of imports. It also states if a country is producing enough economic output to pay for its growth. A country with a deficit balance of payments, for instance, imports more than it exports, meaning it borrows to pay for its imports. This scenario may make economic sense because the country is able to fuel growth this way; however, in the long run, the country will be seen as a net consumer, not producer, and this could impact negatively on its ability to keep borrowing. In the reverse scenario, the country can actually pay for its economic growth because of its surplus balance of payments; however, over time, the country may become dependent on export-driven growth and may need to encourage its residents to spend more in order to build a domestic market. Just like inflation, the best position is somewhere close to the middle of both scenarios.

– Monetary & Fiscal Policy: A country’s monetary policy is usually controlled and determined by its Central Bank while the accompanying fiscal policy is usually set at the discretion of the government. Both policies have a very real domino effect on the economy they represent. Monetary Policy is usually manifested by adjusting interest rates which represent the cost of borrowing money. So, a central bank may reduce interest rates by buying government bonds, this injects lots of cash into the economy which, because of the core law of demand and supply, reduces the cost of borrowing cash. Over time, more people and businesses will buy and invest because of the availability of cash in the economy, this means demands for goods and services will rise, output (and GDP) will increase, and unemployment levels will fall because more people will be hired to meet the rising demand. The reverse is the case when there is a need to absorb excess cash in the economy usually due to high inflation rates.

With fiscal policy, the government may decide to increase taxes or reduce government spending in order to cause a contraction which reduces output as higher taxes result in less disposable income for consumers. This is usually harmonized with monetary policy in order to create certain macroeconomic outcomes that may or may not be favourable to investors.

After considering these core indicators, investors, business leaders and policy makers get a clearer picture of a country’s performance and are able to make informed and guided decisions, going forward. A country with low inflation and unemployment rates, favourable balance of payments, relatively stable fiscal and monetary policies and a sizable GDP that grows as much as 5 percent every year will always attract international attention and investment. This is why governments around the world continue to push for single digit inflation and unemployment but, as much as possible, double digit growth.

By Emmanuel Iruobe

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