UNIT II

Economic Indicators: Definition & Types

Introduction
Imagine that you've just received your degree in economics and have landed
your dream job working for the Secretary of the Treasury. You've been tasked
with creating a report of which leading and lagging indices the Treasury
Department should focus on in its assessment of the economy. Which
economic indicators will you use for your report?
An economic indicator is a general term used for any statistic about
an economic activity. An economic indicator allows for the analysis of
economic performances and attempts to give a prediction of future
performances in the economy. Some of the major indices that are used are the
unemployment rate, housing statistics, and the consumer price index. All of
these indicators measure a specific economic sector or movement, but also
give an overall look at economic behavior and growth in a nation.
Economic indicators can be divided into two main categories: leading
indicators and lagging indicators. Leading indicators are generally those
indices that change before the economy as a whole change. Lagging
indicators are generally those indices that change after the economy as a
whole has changed.

Leading Indicators
Leading indicators are usually short-term predictors of the economy and, as
mentioned above, come before the economy changes as a whole. The stock
market is usually a leading indicator because it will rise in the months before
the rest of the economy expands. The market usually begins to improve before
the general economy does because money is being directly pumped into the
economy via the markets.
The unemployment claims are also major leading indicators of economic
activity. Each week or month a report will come out on how many new
unemployment claims have been filed. It is usually an indication that the
economy is getting better when the number of new claims decline over a
period of months.
The manufacturers' orders for consumer goods and materials is another
major leading indicator for the performance of the economy. This is an
indicator because an increase in orders for consumer goods usually indicates
that the economy is getting better, production is increasing, and people are
able to afford more goods.
The Standard & Poor's 500 (S&P 500) is another leading indicator of the
economy. The S&P 500 is a stock market index that is based on the market

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capitalization of the 500 largest companies in the stock market. This is a
leading indicator because it shows investors' confidence in the economy and
their expectations. As the index rises, so does the confidence of investors and
the economy.
Money supply is also a leading indicator for economic performance. In this
context, the money supply measures deposits, commercial lending, and inter-
bank lending. An increase in these measurements can indicate that the
economy is expanding and that the economy will soon increase. The opposite
is true as well -- when money supply decreases and savings increase, the
economy will soon decline.
The index of consumer expectations is one of the only leading indicators
that is purely speculative. This means that there is no data which backs its
measurement. This index is based on the business cycle and presumed
consumer expectations, which can indicate future consumer spending. For
example, it is assumed that consumer spending will increase around holidays,
such as during Christmas and in the months of July and August, when most
people take their family vacations. It is assumed that consumer spending will
decrease in the month following December, and increase again in March and
April to coincide with tax season.

Lagging Indicators
As stated above, a lagging indicator is one that changes after the economy
as a whole changes. Unemployment is a unique indicator because it can be
both a leading and lagging indicator of the economy. It is a lagging indicator
because unemployment will typically decrease after an upward turn of the
economy as more jobs are needed for the increase in productivity.
The value of outstanding commercial and industrial loans are a lagging
indicator, because after an increase in economic activity and an increase in
profits, companies generally will try to pay off existing loans more quickly, or
they have no need to take loans out.

What is Economic Growth? - Definition, Theory & Impact

Definition
Economic growth is the increase in the goods and services produced by an
economy, typically a nation, over a long period of time. It is measured as
percentage increase in real gross domestic product (GDP) which is gross
domestic product (GDP) adjusted for inflation. GDP is the market value of all
final goods and services produced in an economy or nation.
So how does a nation or economy continually increase the GDP such that the
economic growth trends upward? There are three main types of economic

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growth theories over time that have all attempted to answer that exact
question. The Classical, Neo-Classical, and Modern Day theories will each be
described.

Classical Theory
The classical theory of economic growth was a combination of economic
work done by Adam Smith, David Ricardo, and Robert Malthus in the
eighteenth and nineteenth centuries. The theory states that every economy
has a steady state GDP and any deviation off of that steady state is temporary
and will eventually return. This is based on the concept that when there is a
growth in GDP, population will increase. The increase in population thus has
an adverse effect on GDP due to the higher demand on limited resources from
a larger population. The GDP will eventually lower back to the steady state.
When GDP deviates below the steady state, population will decrease and thus
lower demand on the resources. In turn, the GDP will rise back to its steady
state.

Neo-Classical Theory
Next, we have Neo-Classical theory. Two economists, T.W. Swan and Robert
Solow, made important contributions to economic growth theory in developing
what is now known as the Solow-Swan growth model. The theory focuses on
three factors that impact economic growth: labor, capital, and technology, or
more specifically, technological advances. The output per worker (growth per
unit of labor) increases with the output per capita (growth per unit of capital)
but at a decreasing rate. This is referred to as diminishing marginal returns.
Therefore, there will become a point at which labor and capital can be set to
reach an equilibrium state.
Since a nation can theoretically determine the amount of labor and capital
necessary to remain at that steady point, it is technological advances that
really impact the economic growth. The theory states that economic growth will
not take place unless there are technological advances, and those advances
happen by chance. Once an advance has been made, then labor and capital
should be adjusted accordingly. It also suggests that if all nations have access
to the same technology, then the standard of living will all become equal.
There were two major concerns with this era of theories. One is the conclusion
that continuous economic growth can only occur with technological advances,
which happen by chance and therefore cannot be modeled. Secondly, it relies
on diminishing marginal returns of capital and labor. However, there is no
empirical or real-life evidence to support this claim. Therefore the model is
known for identifying technology as a factor in growth but fails to ever
substantially explain how.

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The 4 Key Indicators of Economic Development
The following points highlight the four key indicators of economic development.
The key indicators are: 1. Per Capita Income 2. Poverty 3. Social and Health
Indicators 4. Operational Pattern.

Key Indicator : 1. Per Capita Income:

The most important indicator of economic underdevelopment is low per capita
income. Usually, an LDC is defined as one in which per capita real income is
low when compared with that of USA, Canada, Australia and Western Europe.
Statistical studies show low-in- come countries are much poorer than
advanced countries like the USA.

In fact, their measured per capita incomes are above 20% of those in high-in-
come countries. However, Prof. Samuelson states that standard comparisons
are distorted by the use of official exchange rates to compare living standards.

A new technique, looking at ‘purchasing-power parity’, or what incomes will

actually buy suggests that incomes in poorer countries are probably
considerably exists.” What is more serious is that over the years the gap,
instead of narrowing, is actually widening.

However, some economists have expressed the view (and rightly so) that one
cannot treat a country as developed only because its per capita income is as
high as that of the USA, or Switzerland. As Joan Robinson has commented,
“For several of the Arab States, GNP per capita suddenly jumped to levels
which exceed that of the richest western states. Yet, in these countries are
found some of the poorest and least developed communities in the world”.

Similarly, Italy is a developed country by current standard. But some parts of

the country that the level of development or the state of underdevelopment of
a country may not necessarily be reflected in its per capita income or the
average living standards.

Key Indicator : 2. Poverty:

The second important indicator of economic underdevelopment is poverty. Not

only per capita income is low, there is inequality in the distribution of income.
Many people in LDCs do not get the minimum level of income necessary for a

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minimum caloric intake are said to be living below the poverty line. In India it is
25% at present.
It is easier to describe poverty than to measure it. Typically, poverty is defined
in an absolute sense: a family is poor if the income falls below a certain level.
The World Bank uses per capita GNP of less than $480 as its criterion of
poverty.
Poverty is also a relative concept. Family income in relation to other incomes
in the country or region is important in determining whether or not a family
feels poor.

Basic Human Needs:

Since per capita income figures of different countries are a rough indicator of
poverty, some economists suggest indicators of how basic human needs are
being met. Although there is hardly any agreement on the exact definition of
basic human needs, the general idea is to set minimal levels of caloric intake,
health care, clothing and shelter.

PQLI:
An alternative to per capita income is a physical quality-of-life index to
evaluate living standards. The most common approach uses life expectancy,
infant mortality and literacy as indicators. In this context Boyes and Melvin
comment that “Per capita GNP and quality-of-life indexes are not the only
measures used to determine a country’s level of economic development,
economists use several indicators to assess economic progress.”

Key Indicator : 3. Social and Health Indicators:

There are also certain social and health indicators of economic backwardness.
These show the effects of poverty in poor countries. Life expectancy at birth is
low, but rate of infant mortality is high. The percentage of illiterate people in
total population is high. Educational attainment by most people is modest,
reflecting low levels of investment in human capital.

Key Indicator : 4. Operational Pattern:

Another important indicator of economic backwardness is occupational

pattern. It is widely believed that the countries in which most of national output
or national income is derived from the primary sector (i.e., agriculture, forestry,
animal husbandry, mining etc.) are underdeveloped.

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In other words, the greater the contribution of agriculture, the more
economically backward a country is supposed to be. Most people in LDCs live
in rural areas and work on farms. In India, for example, 70% of the total
population depends on agriculture directly or indirectly.
In advanced countries most people work on factories or are engaged in trade
and professions. Similarly, the contribution of agriculture and allied activities to
net national product is quite high. In India, it is around 40% at present. In
advanced countries the percentage is between 8 to 10.
As Misra and Puri have put it, “Most of the poor countries are essentially
agricultural and even if some industries have been established in these
countries, their impact is yet to be felt on the socio-economic life of the
people.”
However, a related point may also be noted in this context. There is great
diversity in income and living standard among developing countries. Some live
under severe hardship and are on the verge of starving (e.g., Bangladesh or
Ethiopia).
Others that were in this category two or three decades ago have achieved
some progress and move into the rank of middle-income countries, (e.g.,
Egypt, Philippines, and Mexico). The most successful ones are called the
newly industrialising countries (e.g., Hong Kong, South Korea and Taiwan).