Macroeconomic indicators are essential for understanding how a country’s economy is performing. It’s always useful to keep an eye out on indices as they help us understand the output of an economy and the effectiveness of economic policies. Let’s learn more about how we can evaluate performance and growth!
What are macroeconomics indicators?
Macroeconomic indicators are important tools for policymakers that help them understand the performance of the economy. They provide information on the success or failure of the various policies implemented, like fiscal and monetary policies. Macroeconomic indicators are also useful for analysing whether current policies are on track to achieve certain economic objectives which were set before implementing the policy.
The size of the national budget deficit is a good macroeconomic indicator of how well fiscal policy is performing.
Macroeconomic performance indicators are important tools for policymakers that help them understand the performance of the economy. They provide information on the success or failure of the various policies implemented (like fiscal and monetary policy).
What are types of macroeconomic indicators?
There are two types of macroeconomic performance indicators:
- lead indicators
- lag indicators.
Lead indicators
Lead indicators look towards the future. These tend to predict the future state and future changes in the economy. Lead indicators are based on current expectations about the future.
If the economic cycle is experiencing the beginning of a recession, investments will start decreasing due to lower share prices and low levels of confidence in the economy. This may also lead to low levels of consumer confidence and therefore a fall in consumer spending. As a result, due to the uncertain economic environment, we may infer that levels of aggregate demand are likely to fall in the near future.
Lag indicators
Lag indicators look towards the past performance of the economy. They are metrics that tend to have a late reaction to economic changes and therefore provide information on past and current economic events.
Information about real GDP or GDP growth rates are forms of lag indicators, as they provide information on the current and past state of the macroeconomy.
Unemployment is another form of a lag indicator. It might take firms some time to react to a decrease in output by laying off workers. Workers might have protection through contracts and labour unions, meaning they do not lose their jobs right away.
Index numbers as macroeconomic indicators
Index numbers are important performance indicators to use when evaluating the macroeconomy. They provide a basis for comparison and performance analysis.
An index starts in a certain year, which is known as the base year. The base year is given the index number value of 100. The base year is also the starting point of comparison for both future and past years. Setting the base year to 100 is useful because in future years the size of the variable is likely to change (either increase or decrease) and it makes it easier to compare values based on percentages when the starting point is 100. A percentage increase will cause the index number to exceed 100, whereas the percentage decrease will lead to a fall below 100.
As we know, the base year’s index number is 100. In the following year, the index number is equal to 110. This would signify a 10% increase from the base year. Similarly, if the index number changes to 90 in the following year, it signifies a 10% decrease from the base year.
Calculating and interpreting index numbers
Now, let's take a look at some specific examples of index numbers and how to calculate and interpret them.
The GDP deflator is a variable we can use to calculate real GDP from nominal GDP (by dividing nominal GDP by the price deflator). Real GDP measures the total output of goods and services produced in an economy over time, taking into account inflation and price changes. In the macroeconomic context, it is important to look at real values as it provides more objective insights.
The GDP deflator is a price index that measures average prices in one period relative to another period, the base year.
The consumer price index (CPI) is also an example of an index number. This price index measures the costs of living by creating a general basket of goods and services. The price (value) of the same basket of goods and services is then compared between the current year and a base year. This can be used to measure inflation and deflation. A positive change, like 110 compared to 100 (base year) indicates inflation. A negative change, like 95 compared to 100 (base year) indicates deflation.
Let’s take a look at consumer price inflation for coffee. We can see that the base year for this index is 2015 (= 100). The value of this index in 2020 is 103.6. Compared to the base year, we can conclude that the price of coffee has increased by 3.6%.
Fig. 1 - CPI Index for Coffee 2015-2020. Source: UK Office for National Statistics, ons.gov.uk
The producer price index (PPI) is a compilation of multiple price indices to understand changes in price during the production process. There are different PPIs for inputs, outputs, and intermediate goods, which measure changes in price.
Economists can also make indices for other macroeconomic factors such as affordable housing indices, labor productivity indices, or currency indices.
Let’s take a look at the labour productivity of the UK’s entire economy.
Fig. 2 - UK’s whole economy output per hours worked 2010-2020. Source UK Office for National Statistics, ons.gov.uk
In 2020, the total output per hour worked increased by 0.8% (2020 = 100.8) compared to the base year (2019 = 100).
On the other hand, output per hour worked was 4% lower (2014 = 96) in 2014 compared to the base year.
It is, however, important to note that an increase or decrease in the index number is not equal to a similar percentage change when comparisons are made between years other than the base year.
Let’s say we wanted to compare the changes in labour productivity between 2014 and 2017. Labour productivity increased by approximately 3 points (from 96 in 2014 to approximately 99 in 2017). This does not signify a 3% increase as the year of comparison is not the base year. How can we calculate the percentage change between these two years?
As a result, rather than a 3% increase, there was actually a 3.13% increase in labour productivity between 2014 and 2017.
Therefore, you can’t use index numbers on their own in absolute terms. However, they do allow for relative comparison.
The national income data as a macroeconomic indicator
National income monitors the flow of the output of goods and services in the national economy. To create the flow of national income, the economy needs to have a stock of capital goods and human capital, in addition to various factors of production such as land and resources.
The national wealth includes all physical assets owned by residents as well as capital stock. Capital stock includes both capital goods (except for consumer goods) and social capital owned by the government. Capital stock excludes consumer goods, although these are part of the national wealth.
It is also important not to confuse wealth, which is a stock, with income, which is a flow.
The issue with capital stock is that it eventually deteriorates. This deterioration is known as depreciation, which results due to consumption. In order to keep the size of capital stock to be able to produce as much as in the previous years, it needs to be replaced.
If no investment is made in replacing capital goods, capital stock shrinks and economic growth decreases. For positive economic growth to occur, an investment beyond replacement investment has to occur.
It is important to distinguish between gross domestic product (GDP) and gross national income (GNI). GDP measures the flow of output produced within the economy, whereas GNI takes into consideration the flow of income coming in and leaving the country. This makes GNI more representative (a better indicator) of the income available to spend in the country’s current economy.
Comparing living standards and national income data as macroeconomic indicators
National income statistics can be used to compare countries’ economic performance based on macroeconomic indicators.
The total output of a country can be used as an indicator of how well the country’s economy is performing. An economy that is growing at a sustained rate, in other words, its output is increasing sustainably, is considered to be performing well. Such economic growth might increase living standards. As a result, national income data can be used to compare living standards between different countries and to assess changes in living standards over the course of several years.
The GNI can be used as an indicator to measure economic growth. An increase in GNI could indicate economic prosperity and rising standards of living. However, it is also important to assess additional indices, as increased GNI could also mean that the distribution of wealth in society is less equitable.
Beyond the fact that national income data may not provide insights on the distribution of wealth in society, other problems with using national income data to compare living standards include:
Quality: over time, the quality of goods and services in an economy may increase or decrease. A decrease in the goods’ quality is not taken into consideration when using income data for comparisons, although it may well lower living standards.
Exchange rates: exchange rates might be incorrectly valued. As a result, the comparison between two countries might be slightly distorted.
Hidden economy: the hidden economy represents all transactions in an economy that are not recorded, as they are illegal. These transactions are not included in national income data.
Non-monetary production: certain activities like housework, which is a form of productivity, are not part of national income data as they do not have a monetary value (no money is exchanged for the activity). Such omissions may lead to the underestimation of economic activity.
Macroeconomic Indicators - Key takeaways
- Performance indicators are important tools for policymakers to understand the economy’s performance.
- Performance indicators are also useful for analysing whether current policies are on track to achieve certain economic objectives which were set before implementing the policy.
- Lead indicators tend to predict the future state and future changes in the economy.
- Lag indicators look towards the past and current performance of the economic environment.
- Index numbers are important economic metrics (performance indicators) to use when evaluating the macroeconomy.
- An index starts in a certain year, which is known as the base year. The base year is given the index number value of 100.
- Some examples of index metrics are:
- Consumer price index.
- GDP deflator.
- Producer price index.
- Labour productivity index.
- National income monitors the flow of the output of goods and services in the national economy.
- National income data can be used to compare living standards between different countries and to assess changes in living standards over the course of several years.
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