Macroeconomic indicators

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.