How do we know if a country’s economy is doing well?

Experts speak of recessions, of signs that anticipate an economic crisis. Governments defend their management speaking of economic prosperity and growth. There are many news and information about the progress of the economy of a country. But how can we know if the economy is going from strength to strength?

In order to get closer to the economic reality of a country and understand the economic moment it is going through, we have a series of macroeconomic indicators. It is not that these indicators provide us with the absolute truth or that they are irrefutable, but they can help us get an idea of ​​the good performance of the economy or the type of economic problems that the country is suffering.

By themselves they are insufficient, but if we take them together, we will have a more approximate view of the economy as a whole. Analyzing and interpreting them,

we will be able to know how to tackle inflation, why the economy is not growing or what is the cause of a high unemployment rate.

macroeconomic objectives

Therefore, in order to make a good economic diagnosis at the country level, we will resort to macroeconomic indicators. And it is that, macroeconomics will be our key tool, since it is the part of the economy that studies the interaction between companies and domestic economies and that also deals with the study of the role of the public sector in the economy.

Thus, economists consider a series of macroeconomic objectives to be fundamental in order to achieve a smooth running of the country. Among these objectives are a strong and sustained growth in production and consumption, a low unemployment rate or a stable price level to avoid the dreaded inflation.

Other no less negligible objectives will be a control of public spending that prevents the country from incurring a deficit, foreign trade that allows the country to enjoy a balanced balance of payments and a stable exchange rate.

GDP or Gross Domestic Product

When it comes to taking a look at the great economic indicators, the king, first of all, is the GDP or Gross Domestic Product. This macroeconomic indicator shows the value of the production of goods and services of a country in a period of time that is usually one year. Also keep in mind that GDP includes the wealth of a country’s citizens inside and outside its borders.

Now, if within the same year, we find two consecutive quarters with negative GDP data, we will have to talk about the dreaded economic recession. And it is that, a fall in GDP usually means a decrease in production, a decrease in private consumption and falls in employment levels.

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It is true that GDP is a very useful indicator, but it also has its limitations and can even be misleading. Already in our article, the GDP, an indicator with many limitations, we warned of deficiencies of this magnitude.

Created during the Great Depression by economist Simon Kuznets, GDP measures the value of all production. Clearly, growth in output usually brings with it prosperity, growth in employment, and increased consumption.

However, the GDP leaves certain aspects to chance or abandoned. In this sense, the quantity produced is valued, but not its quality or the way it is distributed. In other words, it leaves aside the distribution of wealth or the degree of social prosperity. It is worth highlighting the Japanese case, whose GDP has remained stagnant for many years and, despite this, shows high levels of economic and social well-being.

employment levels

A healthy economy usually goes hand in hand with high levels of employment. However, it must be taken into account that there are situations in which employers will only hire when the economy is doing very well.

On the other hand, it is not enough to observe the unemployment rates at a specific moment throughout the year. We are facing the so-called temporary employment. In this way, on the occasion of the Christmas campaigns, the countries register excellent employment figures, but, at times of the year, such as after the summer, the unemployment data will no longer be so bright.

Not only will it be necessary to assess the degree of employment in a country, but also the salary received by its workers. In fact, the higher the salary, the greater the purchasing power of the population, which will stimulate consumption and the smooth running of the economy.

Now, there is an important debate among economists regarding wages. All this is because there are those who consider that salary increases negatively affect employment. Thus, increases in wages can translate into increases in wage costs, which can discourage employers from hiring new workers.

In any case, to assess employment levels it is advisable to analyze the data shown by the unemployment rate. Thanks to it, we will know the number of unemployed with respect to the total of the active population.

Likewise, the activity rate, which relates the active population to the total population, and the employment rate, which relates the employed population to the total population, are very enlightening indicators.

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Inflation

How do we know if what we buy is expensive or cheap? Have we lost purchasing power? Has the price of bread gone up too much? Why is the electricity bill more expensive?

In all the questions raised above, inflation comes into play. To assess the evolution of prices, the CPI or Consumer Price Index is taken as an indicator at the national level. This is an indicator prepared by the National Institute of Statistics, in the case of Spain.

To create a representative index of the prices that families pay for the products they buy in their daily lives, the so-called shopping basket is used. This shopping basket comes to be a set of products that are considered representative of household economies.

After preparing the weighted average of the products purchased by households, the CPI is obtained. The percentage change in the CPI will give us the inflation rate.

We already know what is taken into account to calculate inflation, but when can inflation be dangerous for our pockets?

Depending on the percentage increase in the CPI, we will find different types of inflation. We will consider, therefore, that an inflation of less than 10% is classified as moderate. In fact, it is usual for economic growth to lead to some inflation.

Now, the situation will be worrying if we find percentages of two and three digits. It is what is known as galloping inflation, where the unbridled growth of prices quickly gobbles up the purchasing power of citizens.

The worst of all scenarios would be the dreaded hyperinflation, where price growth exceeds 1000%. Such levels of inflation bring with them harsh economic crises. A clear example of the effects of hyperinflation is Germany between the wars or the situation that Venezuela has recently suffered.

The increase in prices is not the only risk. Falling prices, known as deflation, also poses various dangers to a country’s economy. In fact, deflationary spirals depress the economy, reduce consumption, prices, wages and cause increases in unemployment.

Public debt

A closely watched indicator when analyzing the economic health of a country is the public debt held by the State and its administrations. Public debt is nothing more than the total debt held by a nation in relation to its creditors (individual investors, companies and other states).

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It should be noted that public debt should not be confused with public deficit. Thus, the public deficit is the result of public spending that, over the course of a year, is higher than public revenue. On the contrary, the public debt represents the total accumulation of State debts.

It should be noted that a country’s indebtedness is measured as a percentage of GDP. To finance this public debt, countries will go to the markets offering debt securities at a certain interest rate for investors.

Depending on the country’s ability to pay, the rating agencies will rate the debt with greater or lesser quality, which will affect the interest that countries must pay for borrowing in the markets.

So, the question arises: when will a country maintain an excessive level of public debt?

The European Union establishes convergence criteria to allow access to new States. To this end, among other things, emphasis is placed on the consolidation of public finances. In this line, it is required that the public debt of the new Member States does not exceed 60% of their GDP.

However, there are countries that manage to survive with levels of public debt well above those set by the convergence criteria of the European Union. This is the case of Japan, which maintains a public debt that exceeds 250% of GDP. Despite such a level of public debt, Japan shows high standards of social and economic prosperity and has ample room to continue borrowing. All this is largely due to the fact that the Japanese themselves are the main holders of Japanese debt and that they still have room to raise taxes and continue paying the debt.

As a general instrument to assess the good or bad economic performance of a country, these are just some of the main indicators. There are also many other indicators that say a lot about the economic health of a nation, such as: exports, GDP per capita, the human development index or the consumer confidence index.

The point is that these indicators, taken together, would allow us to obtain a magnificent picture of a country’s economy. In this way, assessments and judgments can be made, as well as proposing measures to correct possible economic imbalances.

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