Introduction
Out of all the economic and socio-economic indicators, inflation and the gross domestic product have a greater impact on the stock market. The six economic indicators that affect our economy every day include the Treasury Department Policies, Monetary Policies, Raw Resources, Fiscal Policies, Productivity, Balance of Payments.
According to Graham, “inflation is an economic indicator for securities markets since it establishes an estimated value of an investment lost on how to compensate for the loss” (n.p.). For instance, if inflation is at 15% at a particular time, and your investment increases by 15%, then the investor stays even during that time. Gross domestic product (GDP) is a component of inflation as well as an economic indicator (Graham 2).
Economic indicators measure the economic activities of an economy, individual’s welfare and the socio-economic development, the country’s sustainability of economic activities, inputs to the production units, scarcity or depletion of the natural resources, a country’s dependency on other economies and the economic efficiency (Cohen, Grémont, Mudgal & Tan 4).
Several people assume many factors as causing the market to rise and fall. There are many factors including the employees incomes, living standards, political influences affecting the market, but economic factors form the major factor that influence the market performance (Graham 2).
This paper focuses on three economic indicators and their utilization. Productivity has been discussed in the light of the labor and workforce productivity, how it affects the economic growth, where it is found, its relationship to inflation and the influences of the unemployment to productivity. Monetary policy and the raw resource have also been discussed.
Productivity
Productivity refers to the ratio of the volume of output measure to the measure of the use of the inputs. Labor productivity as a measure of productivity shows the main economic measure for the economic growth of the country, welfare and the socio economic development of people (Freeman 1). Growth in the levels of productivity forms a crucial economic indicator.
The growth in production means that the real incomes of individuals and the nation at large improve. This means that productivity growth clearly indicates the growth of the economy of a country. Productivity shows the amount of input needed to generate a certain amount of output.
In spite of the significance of productivity as an economic indicator, there are many challenges faced when quantifying the productivity. Productivity growth and levels of different countries or different industries within a country can be measured in comparison with one another (Pilat & Schreyer 1).
The main challenges faced in measuring and comparing productivity relate to the technological innovations and innovations that affect most of the economies in the world today. Information Communication Technology (ICT) influences the productivity growth largely.
When comparing the productivity growth of economies that employ ICT in their production processes, the problem arises when measuring the prices and the quality of the ICT products in the use because no standard measures exist. Labor input from the personnel forms another critical measure of productivity growth.
To measure the growth in productivity levels several measures are used classified as single-factor and the multifactor productivity measures. Applying either of these depends largely on the intention of carrying out the productivity measurement and the data available.
A single-factor measure compares a single measure of output directly to a one input measure whereas a multi-factor measure compares a single output measure to the multiple input measures (Pilat & Schreyer 2).
Productivity and Inflation
The slower rate of productivity growth in US as reported by the Federal Reserve Bank affects inflation. To begin with, it may increase the business costs for a time. This attributes to the fact that firms would spend more in labor requirements and they sell their products at higher prices so that they can maintain their profit margins.
Ultimately, raising the unit labor costs translates to the slower rates in the work volume because workers will be paid less wages since they work at slower rates. Workers and the firms will take a long time to adjust to the new conditions leading to the increase in inflation overtime (Yellen 1).
The slower growth in productivity trend leads to a slow growth in demand resulting in an increased inflation. The customers and consumers would reduce their spending rates due to the lower wages brought by the slower working rate. Furthermore, this will reduce the firm’s production rates because the market is slow. This is well illustrated in the line graph below.
Fig.1 A line graph showing that a slower growth in productivity trend translates to an increased inflation (Sachs & Warner 3).
How to Read Productivity
In measuring a workforce or labor productivity of an economy, economists focus on the number of working hours per day, the kind of work and the number of workers undertaking a certain task. Productivity as a social indicator focuses on the quality of work done by the workers as input to the firm.
Greater labor productivity is achieved when an organization balances the dimensions of quality and quantity of work delivered in time. The growth and development of the US economy has been attributed to the labor productivity growth.
Effects of Productivity
It is important to follow productivity because all the firms are trying to minimize the costs and maximize the profits. Productivity will provide information on whether the inputs to the firm equally translate to the output. For instance, there is need to measure the labor and workforce productivity as this will provide the information on the quality of work delivered within a given period by a certain workforce.
Where Productivity Is Found
Productivity economic indicators can be obtained from the workers of a firm. To assess the productivity indicators of a firm, one has to analyze the inputs of the workers in a firm and then compare with the outputs of the firm. The labor productivity outputs constitutes the amount of work done at a particular time, the quality of work done compared with the number of people undertaking a particular task.
Effect of Productivity on Unemployment
Economists argue that if the rate of unemployment goes beyond its natural or normal rate, it leads to the low wages offered by the employers and finally resulting in the reduced prices of the finished goods. Firms need to effectively utilize labor as a factor of production.
Raw Resources
The rate at which an economy utilizes the raw resources influences the growth of that economy. An economy may utilize the resources as raw inputs to the production units and produce finished goods. An economy should use the available resources more efficiently to increase the value of those resources.
However, challenges exist in trying to utilize effectively the resources available for instance the lack of or the shortage of the resources and change in the prices. These short term challenges cause long-term economic crisis linked with the use of the resources. Raw resources as an economic indicator affect the economic growth in terms of its use efficiency (Cohen, Grémont, Mudgal & Tan 4).
The current trend in natural resource utilization is that the economies with abundant natural resources tend to develop much slower than the economies with scarce natural resources. If the exports of the resources of a country like agriculture and minerals are higher the Growth Domestic Product tends to have a lower growth rate (Sachs & Warner 3).
How to Read the Raw Resources
A change in manufacturing and trade inventories shows how the raw resources are utilized. When the manufacturing companies utilize all the raw materials in their stock in the manufacture of the finished goods, it is said that the resources are used efficiently while on the other hand if the finished goods (outputs) inventory have all been sold then the firm is making profits.
Effects of Raw Resources
It is important for a manufacturing firm to analyze their resource utilization so that they can maximize their profits. Raw materials acts as inputs to the firm and there is need to understand the quantity and quality of the resources spent and then compared to the outputs of the firm.
Where Raw Resources Is Found
Manufacturing firms are the best places where the raw resource indicators can be seen. In a manufacturing process, the raw materials form the inputs while the finished goods form the outputs. To analyze this economic indicator, economists compare the volume of the raw materials with the outputs of those raw materials in terms of finished goods so that they can analyze whether the firm is making a profit or not.
The Influence of Natural Resources on Economic Growth
When an economy has a plenty of natural resources, it tends to avoid exports and capital inflows. In addition, it tends to avoid the production of the goods and services within the country because of the abundance of the natural resources.
This results in a closed market scenario and subsequent reduction in trade. The local investors tend to block the foreign investors from investing in their country protected by the government to avoid the competition. Natural capital dominates the foreign capital. This ultimately leads to a slower rate of economic growth.
Monetary Policy
Monetary policy refers to the way the monetary and financial authorities in a particular economy controls and regulates the flow of money. Such authorities include the central banks. The main target is the prime or interest rates at which the money lenders impose on the borrowers so that they can control economic growth and stability.
Effectiveness of a monetary policy is measured by the rate at which it addresses inflation expectations. This means the expectations people have on the prices increasing in the future. Monetary policies specify the level of banks’ credibility as set out by the central bank. Banks credibility affects inflation expectation and price increases.
Central banks should state the future price stability in their monetary policies; they should look forward for the unexpected unless the economic shocks occur. Inflation rates change when the price level changes especially changes in the prices of international goods. A good monetary policy should have medium-term plans to address the effects caused by the economic shocks.
The economic indicators of an economy provide statistics to the central banks so that they can draft a viable monetary policy that caters for the inflation changes. This means that the reliability, accuracy and completeness of the economic indicators influence the kind of monetary policies formulated and subsequently the economic growth.
A good monetary policy focuses on the broad terms to consider all the necessary information for a good knowledge of the factors influencing the social and economic developments; hence, it relies on a broad range of the economic indicators.
Monetary Policy and Inflation
Monetary policy influences inflation and increased demand for goods and services. An increase in the demand for goods and services means that more employees are needed to produce the larger number of goods and services to satisfy the demand. This is due to the effects of the monetary policy on the financial status of people’s households and industries.
In the United States for example, Federal Reserve affects the banks and financial institutions lending rates during the normal times without inflation. Short-term federal funds influence the lending rates of short-term loans for small firms and households.
Influence of Monetary Policy and Inflation on Employment
Monetary policy significantly affects inflation of an economy. In the United States for example, the reduction of the federal funds rate leads to an increased demand for essential goods and services. This will result in the increase in the firms’ expenditures in terms of salaries and other costs.
Furthermore, monetary policy stance affects what people think about the future in terms of the economy. Such expectations include increase in the prices of goods and services as well as the remuneration of workers, which will result in increased inflation. This is illustrated in the bar graph below.
Fig 2: A bar graph showing that an increase in inflation causes a decrease in firm’s expenditure and hence increases in employment rates (Baumohl 34-35)
Where Monetary Policies Are Found
The best places of assessing this economic indicator are the central banks, banks, financial institutions among other money lenders. Money borrowers also show some signs of the money policy that stands. The interest rates imposed by the banks show the monetary policy in place.
How to Read the Monetary Policy
Monetary policies are read from the following signs. First are the Gross Domestic Product and the components of consumption rates of goods and services.
In this regard, the signs would be obtained from the individual incomes and rate of spending, unemployment rates, sales trends, new claims for unemployment insurance among other signs. Secondly are the signs of price pressures causing inflation for example the consumer price index, unit labor costs, producer price index , import and export prices among other signs (Baumohl 34-35).
The business fixed investments of people shows the monetary policy stance too. The rate of investment on the non-residential and the residential houses are read from the manufacturers’ shipment of goods, inventory rates and the orders they make, the rate of the mortgage applications, house and home sales surveys.
Effects of the Monetary Policy
Central bank uses the data on the money supply to analyze the current economic, social and financial conditions of the country. This assists in the formulation of the monetary policy like increasing or reducing the interest rates by the banks and other money lending institutions. They achieve this through the reduction of the money supply.
Today, monetary policy plays a role in the US economy. It directly influences the interest rates, employment, and inflation (Charles 1). In the past two decades, the rate at which economy grew was lower and so many people were not employed while money growth was high.
Economists reported that increase in inflation rates affects the economic growth since the prices will not be worth and since people spend money evading the costs that inflation imposes on holding money (Charles 13).
Influence of the Monitory Policy on the Economic Growth
The institutions with the authority to control the money supply do price stability maintenance. Monetary policy therefore affects the economic growth through a stabilizing role. The stabilizing role by the central bank may be limited by the attempt to pursue other objectives of the monitory policy formulation, how the policy is implemented among other detrimental factors like uncertainty and doubtfulness of the policy makers.
Monetary policy plays an important role in the economic growth of a country. It does not raise the long-term economic growth but it initiates and maintains economic growth by stabilizing the prices of goods and services. Monetary policy contributes to the economic growth and stability through the maintenance of price stability.
Monetary policy tools check money supply to sustain price stability in the medium and long term. Economists argue that to maintain a long-term economic growth, an economy should maintain a low price level.
Monetary policy determines the interest rates of a particular country. If central bank cuts down the interest rate, so many people will borrow the short-term and the long-term loans resulting in a higher rate of investments and the purchase of permanent and temporary assets. The banks will be forced to give out the loans because so many investors are in need leading to increased spending.
People will buy many household financial assets because they are attracted to buy. Reduction in the interest rate will cause reduction of the value of the currency due to the increased demand for goods and services, especially when the prices for the imported goods rise.
Combination of all these elements increases individual and the entire economy’s output reduces unemployment rates and the increase in investments and the consumer expenditure, hence, an increase in the country’s economy.
Conclusion
Inflation occurs when the overall demand for goods and services goes higher than the supply. This leads to the reduction for resources. The most common measure of the economic slack or the unutilized productive resources is the rate of unemployment. A growth in productivity level improves the welfare and living standards since many people have increased incomes and can buy essential goods, services, and access necessities.
To the production firms, a growth in productivity implies that it can effectively satisfy its stakeholders and remain competitive hence an increase in the economic growth. Monetary policy is the change in demand of goods and services due to the changes in the interest rates and money supply by the central banks thereby influencing the economic growth.
Raw resources of a firm represent the inputs to a production unit and the outputs determine the market value hence an increase or reduction in the economic growth. Inflation and Gross Domestic Product form the major economic indicators and influence the effects of other economic indicators on a country’s economic development.
Works Cited
Baumohl, Bernard. The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities. New Jersey: Pearson Education Inc., 2005. Print.
Charles, Nelson. The Monetary Policy: Chapter Nine. New York: OECD Publishing, 2010. Print.
Cohen, François, Grémont, Marine, Mudgal, Shailendra & Tan, Adrian. Indicators on Linking Resource Use to the Economy: Environmental Data Centers on Natural Resources and Products: European Commission, DG Environment. Berlin: Bio Intelligent service, 2012. Print.
Freeman, Rebecca. Labor Productivity Indicators: Comparison of Two OECD Databases Productivity Differentials & the Balassa-Samuelson Effect. Paris: Organization for Economic Cooperation and Development (OECD), 2008. Print.
Graham, Jim. The Big Three Economic Indicators. Libertyville: OptionVue Systems International, Inc, 2011, Print.
Pilat, Dirk & Schreyer, Paul. Measuring Productivity. Paris: OECD, 2001. Print.
Sachs, Jeffrey & Warner, Andrew. Natural Resource Abundance and Economic Growth. Cambridge: National Bureau of Economic Research, 1995. Print.
Yellen, Janet. FRBSF Economic Letter: Productivity and Inflation. San Francisco: Federal Bank of San Francisco, 2005. Print.