Economic Indicators: A Closer Look at GDP and Unemployment - Essay Example

? Economic Indicators: A Closer Look at GDP and Unemployment Due Introduction The average American would, generally, not pay much attention to the specifics of the economy’s status of the United States. However, due to the most recent economic crisis, which still continues to negatively cripple financially many United States citizens, that “norm” has changed. These occurrences over the last decade have caused Americans to pay more attention to what is happening in current economics. This interest is encouraging people to understand how the United States economy actually works, what contributes to it, and what that means, or rather translates to, in the practical day-to-day workings of the present day economy. One of the many contributing factors used to determine the status of the economy as well as the logical near future outcomes for the economy are economic indicators. Economic indicators, a set of statistics used to help gauge the economy, are important and extremely depended upon. Two of these important indicators are the Gross Domestic Product (GDP) and the Unemployment Rate. Background The most basic definition of an economic indicator refers to it being any economical statistics, from different sources, which literally indicates whether the economy is doing well or doing poorly. There are a number of different economic indicators that provide different focuses of information and serve differing purposes; also, not all indicators are available or reviewed at the same time. In order to understand the differences, it is essential to look at the basic background of how indicators are categorized. There are three different aspects of economic indicators. The first one, Relationship to the Business Cycle/Economy, is based on how a particular indicator moves in relation to the economy. Procyclic indicators move along with the economy, mirroring its motion. If the economy rises, then this indicator will rise as well. Countercyclic indicators are those that move against the motion of the economy. So if the economy drops, this indicator will rise. Next are acyclic indicators, which have no direct effect on or relationship with the economy. The second major attribute of economic indicators involves the Frequency of Data. Some indicators are presented quarterly or monthly, whereas others such as the Dow Jones can change every minute. The third attribute is the Timing. There are three different categories that an indicator fits into depending on how it relates to the economic results. A “leading” economic indicator will change before the economy does, such as the stock market. “Lagged” indicators change directions after the economy does. The last is “coincidental,” which moves alongside the economy whatever direction it follows (Moffat, 2013). Understanding how the indicators are organized is important in distinguishing the significance of each indicator. Discussion The attributes discussed above allow analysts to look at the economic indicators and determine where the economy presently is and, potentially, predict where it, most likely, heads. However, not everyone has the same faith that they once did in the reliability and dependability of the indicators that have been used for so long. Some simply feel that perhaps reformed or alternative measurements might make better indicators for the modern economy. There are a number of indicators with components that are used to calculate all of the economical indicators. Not all of the indicators reviewed will ever point in the same directions; all of the indicators are, in fact, linked (Graham, 2013). This means that changing them or omitting them alters the whole process of determining the state of the economy. As stated before, there are a number of different indicators, but the two extremely important indicators worthy of further investigation are the Gross Domestic Product (GDP) and the Unemployment Rate. To understand the individual indicators, it is best to address them separately. Unemployment Rate The unemployment rate is a countercyclic lagged economic indicator. This means that it moves in opposition to the economy; essentially, if the economy plummets, unemployment would rise. It is called lagged because unemployment is a reaction, be it positive or negative, and only presents itself 2 or 3 quarters after the economy shows change (Moffat, 2013). Unemployment has been considered a serious and continuing problem that has yet to be remedied. Despite occasional drops, ultimately, the number of unemployed Americans is not decreasing quickly enough to truly make a difference that can be significantly identified, but has seemed to “sputter.” Job growth has appeared to be strong early in 2012, with an increase of 226,000 jobs filled, which dropped significantly to a mere 75,000 towards the conclusion of that year (Wiseman, 2012). The chart on the next page details some of the dramatic changes in unemployment in recent years. There is always some unemployment even when the economy is running at optimum efficiency; it is called the “natural level” of unemployment. It is decidedly a simple fact of society that total employment, or zero unemployment, of all American citizens at the same time is an unrealistic expectation (Graham, 2013). The statistics are provided by the Labor Bureau monthly and are made up of, at least, 300,000 different establishments within, approximately, 600 different specific industries. Looking at the chart it is obvious that the unemployment rate has been on a bumpy road over the last couple of years. It shows that as of January of this year we were at the lowest level of unemployment since the unemployment crisis began; however, unfortunately, even the low of 7.5 is still considerably higher that the unemployment rate has been since the Great Depression ("The top 10," 2013). Gross Domestic Product (GDP) The gross domestic product, or GDP, is considered a procyclic coincidental economic indicator (Moffat, 2013). This means, simply, that this indicator moves in parallel with the economy at the exact same time. The GDP includes all personal consumption, private investors, foreign trade balances, “paid-in” construction costs, and government purchases (Barnes, 2013). Ultimately the GDP is the culmination of all wages, profits, salaries, interest on debts collected, taxes taken, and it represents the overall dollar value of all the goods and services that are produced by the country. The GDP is such an important indicator that it gives reviewers not only the present growth or contraction of the economy but also a general idea of what direction it is most likely to move in the future (Graham, 2013). As one can see in the chart below, a positive future for the economy has been projected. While professionals openly admit that no one can predict the future perfectly, they simply feel economic indicators will help them to determine the likely future based on present data (Moffat, 2013). As can be seen in the chart, in the years of 2011 and 2012 the actual GDP was 15 trillion and 15.5 trillion, respectfully. However, for the years 2013, 2014, and 2015 there is an estmate postive growth with the GDP increasing by, nearly, 20 trillion dillars over the next three years. However, this is a predcition and not a gurantee. Therefore, it is easy to see why many skeptics believe that such an increase is, both, too optimistic and may border on “wishful thinking.” Overall, if the economic indicators are to be believed in, then it would appear that America is moving in a postive direction, but whether that is the outcome we will actually experience in the future is yet to be seen. Issues/Solutions As mentioned, not everyone feels that the modern faith in and dependence on certain economic indicators as helpful reflections of the actual future economy, as opposed to what they hope it will be, may be misplaced. For example, the GDP has been the primary economic indicator since the Second World War. It is perceived, by some, not to be timely enough to still be referred to as a dependable potential indicator. Today, there are three suggested indicators that experts claim are far better suited to reflect the “goings on” of the actual economy and the citizens in the United States today. The Human Development Index (HDI), implemented by the United Nations Development Program, measures things such as American life expectancy and literacy. The Genuine Progress Indicator (GPI) works by incorporating elements of “social welfare” and income equity. Lastly, the Happy Planet Index (HPI) uses the applied economic metrics with analysis of life satisfaction (Schwartz, 2010). Ideally they hope that if they are not sufficient to replace all of the existing indicators, then, at least, they advise to see them added to the list of statistics that are reviewed in determining the status of the economy. Although there are a great many questions in relation to the potential weaknesses of the GDP, it remains, at present, the most viable and trusted of economic indicators. The unemployment rate, by comparison, has no real opposition; after all, as a lagged indicator, it is less relied upon immediately than the GDP, for example. Conclusion The current unpleasant state of the American economy has drawn more than unusual scrutiny from its citizens. Many Americans have struggled through the economic and unemployment crisis. Some have been fortunate to benefit from the recent economic improvement, but others are still struggling; the journey to recovery has begun but is hardly to cover. American consumers were spending less and less each year, besieged and overwhelmed by extremely high unemployment, soaring gasoline prices, and diminished or stagnated wages (Rugaber, 2011). It has not been an easy time for many citizens. However, some recent economic changes for the good has brought hope that the United States can survive, recover, and come back strong in the future. For this reason, getting the American economy back in track is imperative. Ending the unemployment crisis is, absolutely, essential. Whether the “powers that be” choose to focus on trusted economic indicators or enlist new ones in order to accomplish positive goals is irrelevant. Sound, successful solutions must be found for the good of the country and all of those who live in it. References Barnes, R. (2013). Economic indicators: Gross domestic product (GDP). Retrieved from http://www.investopedia.com/university/releases/gdp.asp. Government spending in the United States. (2012). Retrieved from https://www.google.com/search?q=U.S.%20GDP%20charts%202000-2013&client=firefox-a&hs=T9w&rls=org.mozilla:en-US:official&tbm=isch&tbo=u&source=univ&sa=X&ei=Ri2GUfiVAYqmiQLqyoHwBw&ved=0CFgQsAQ&biw=1024&bih=461. Graham, J. (2013). The big three economic indicators. Retrieved from http://www.discoveroptions.com/mixed/content/education/articles/bigthreeeconomicindicators.html. Moffat, M. (2013). A beginner's guide to economic indicators. Retrieved from http://economics.about.com/cs/businesscycles/a/economic_ind.htm. Rugaber, C. S. (2011, July 21). Unemployment claims, economic indicators both rise. USA Today, 1. Retrieved from http://usatoday30.usatoday.com/money/economy/2011-07-21-weekly-unemployment-claims_n.htm. Schwartz, J. D. (2010, Jan. 30). Is gdp an obsolete measure of progress? Time, 1. Retrieved from http://www.time.com/time/business/article/0,8599,1957746,00.html. The top 10 economic indicators: What to watch and why. (2013). American Association of Individual Investors, 1. Retrieved from http://www.aaii.com/investing-basics/article/the-top-10-economic-indicators-what-to-watch-and-why. United States unemployment rate. (2013). Retrieved from http://www.tradingeconomics.com/united-states/unemployment-rate Wiseman, P. (2012, July 19). Unemployment claims jump, economic indicators fall. USA Today, 1. Retrieved from http://usatoday30.usatoday.com/money/economy/story/2012-07-19/unemployment-claims-weekly/56329144/1. Read More