What is Economics? Definition of Economics, Economics Meaning

Economics

Economics is the study of scarcity and how it affects the use of resources, the production of goods and services, the growth of production and well-being over time, and many other important and complicated issues that affect society.

What is economics all about?

Economics is the study of how things are made, moved around, and used. It looks at how people, businesses, governments, and countries choose to use their resources. Economics is the study of how people act, based on the idea that people act rationally and try to get the most value or benefit. Economics is the study of how work and business are run. Since there are many ways to use human labour and many ways to get resources, it is the job of economics to figure out which ways produce the best results.

In general, economics can be broken into two parts: macroeconomics, which looks at how the economy works, and microeconomics, which looks at how people and businesses work.

Varieties of Economics

There are two main ways to learn about economics.

A person, a family, a business, a group, or the government can all make decisions independently. Microeconomics looks at different parts of human behaviour to figure out how people react to changes in prices and why they want certain things at certain prices. Microeconomics tries to explain why and how different things have different values, how people make financial decisions, and how they can trade, work together, and cooperate in the best way. Microeconomics looks at how supply and demand change over time and how well things are made, and how much they cost. It also looks at how people divide and share work, set up and run businesses, and deal with uncertainty, risk, and strategic game theory.

Macroeconomics looks at the economy as a whole, both nationally and globally. It does this by simulating the economy with a lot of data and variables from the economy. It could be a certain part of the world, a country, a continent, or the whole world. It mostly looks at how economies grow, change, and go through cycles. Foreign trade, government fiscal and monetary policy, unemployment rates, inflation and interest rates, the growth of total production output as shown by changes in Gross Domestic Product (GDP), and business cycles that cause expansions, booms, and recessions are all looked at.

There is a connection between microeconomics and macroeconomics. The sum of all microeconomic events makes up an aggregate macroeconomic event. But these two areas of economics use very different theories, models, and research methods that can make them seem to go against each other. Many economists study how to put together the basics of microeconomics with macroeconomics into theory and research.

Economic Indicators

Economic indicators show how a country's economy is doing in a specific area. When government agencies or private groups put out these reports regularly, they usually have a big effect on the stock, fixed income, and foreign exchange markets. They can also help investors figure out how the economy will affect markets and make decisions about investments.

Gross national product (GDP)

Many people think that a country's gross domestic product (GDP) is the best way to measure how well its economy is doing. It is the total market value of all finished goods and services made in a country during a certain year or other time period. The Bureau of Economic Analysis (BEA) releases a monthly report at the end of each month. Many investors, analysts, and traders pay attention to the advance GDP report and the preliminary report, which come out a few months before the annual GDP report.

Retail sales

The Department of Commerce (DOC) puts out a report on retail sales in the middle of each month. This report measures the total amount of money made or the dollar value of all products sold in stores.

Using sample data from stores across the country, the report figures out how many products were sold, which is a good indicator of how much money people are spending.

Industrial manufacturing

The Federal Reserve puts out a report every month called "Industrial Production" that shows how the production of U.S. factories, mines, and utilities has changed over time. One of the closely watched variables in this study is the capacity utilisation ratio, which shows how much of the economy's productive capacity is being used instead of sitting idle. A country should see its production values increase and its capacity is used to its fullest.

Employment Data

The Bureau of Labor Statistics (BLS) reports "nonfarm payrolls" every first Friday of the month with information about jobs.

Most of the time, a strong economy means that jobs are being added quickly. In the same way, big drops could mean that contractions are coming. Even though these are broad trends, it is important to look at how the economy is doing.

Changes in prices for consumers (CPI)

The Consumer Price Index (CPI), which the BLS also puts out, is the standard way to measure inflation. It shows how much retail prices (consumer costs) have changed. The CPI compares price changes from month to month and from year to year by putting goods and services from the economy into a basket.

Which kinds of economies are there?

There are four main types of economic systems: traditional, command, mixed, and market.

What kinds of economics are there?

The two main parts of economics are microeconomics and macroeconomics.

What is the most important economic problem right now?

In economics, the main problem is that there are only so many resources and so many wants. Economics has also shown that people can't get everything they want. As time goes on, the more our needs are met, the more we want.

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How Do Economists Determine Whether the Economy Is in a Recession?

What is a recession? While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle. Instead, both official determinations of recessions and economists’ assessment of economic activity are based on a holistic look at the data—including the labor market, consumer and business spending, industrial production, and incomes. Based on these data, it is unlikely that the decline in GDP in the first quarter of this year—even if followed by another GDP decline in the second quarter—indicates a recession.

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee—the official recession scorekeeper—defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The variables the committee typically tracks include real personal income minus government transfers, employment, various forms of real consumer spending, and industrial production. Notably, there are no fixed rules or thresholds that trigger a determination of decline, although the committee does note that in recent decades, they have given more weight to real personal income less transfers and payroll employment.

Also, because the committee depends on government statistics that are reported at various lags, it cannot officially designate a recession until after it starts.[1] So how might the NBER committee assess the health of the economy?

Figure 1 shows the trend in four of the NBER committee’s recession-indicator variables—real income minus transfers, real spending, industrial production, and employment—relative to their values in April 2020 (the trough of the last recession, and thus, the month before the current expansion began). All of these indicators have exhibited strong growth in the U.S. economy since the start of the pandemic, and have continued to expand through the first half of this year. And while real income net of transfers has been flat in recent months, industrial production, employment, and real spending have grown this year. The committee does not directly consider inflation; however, it is embedded in the real income and spending variables it tracks, including those plotted in Figure 1. Those data show that while inflation is highly elevated, real spending is still growing, powered by one of the strongest labor markets on record and an elevated stock of household savings.

The fact that the NBER committee looks for a “significant decline” in activity that is broad-based puts this year’s 1.6 percent rate contraction in first quarter real GDP into context. Far from being a broad contraction, the negative estimate of the growth rate was a function of inventories—one of the noisiest components of GDP growth[2]—and net exports, in part reflecting our economic strength relative to that of our trading partners, as well as less snarled global supply chains. Private domestic final demand—consumer spending and fixed investment (which together make up over 80 percent of nominal GDP)—grew at a 3.0 percent real annualized rate in the first quarter, demonstrating solid, above-trend growth. And payroll employment grew at an even stronger 4.7 percent annualized rate, followed by 3.4 percent in Q2. In fact, the 1.1 million jobs created in the second quarter—an average of around 375,000 jobs per month—is more than three times more jobs created than in any three-month period leading up to a recession.

Finally, although the unemployment rate is not on the committee’s list, the fact that it has held at a historically low 3.6 percent in the past four months also has bearing on the recession question. A widely cited indicator of recessions (the “Sahm rule” named after economist Claudia Sahm) maintains that a recession is likely underway when the three-month moving average of the unemployment rate rises by at least half a percentage point (50 basis points) relative to its lowest point in the previous 12 months. The fact that the Sahm indicator is 0, far below its 50 basis-point threshold, provides yet another indication that the economic expansion is ongoing.

Recession probabilities are never zero, but trends in the data through the first half of this year used to determine a recession are not indicating a downturn.

Looking ahead, we know that the U.S., along with the rest of the global economy, faces significant headwinds—and little relevant data are yet available on the third quarter (2022Q3). At the same time, there is a good chance that the strength of the labor market and of consumer balance sheets help the economy transition from the rapid growth of the last year to steadier and more stable growth. But, whatever path the economy takes, CEA will continue to carefully track these indicators to assess the state of the economic cycle.

[1] In fact, when recessions are short-lived, the committee typically announces them after they are over.

[2] Inventories in the GDP accounts reflect not a level change, as for example, with consumer spending, but a change in a change, whether inventories were growing or shrinking faster or slower than the previous quarter. In fact, the level of inventories rose in 2022 Q1, just not as fast as in the previous quarter.

Economic Indicators: Definition, Types and Usage

Economic indicators are key stats about the economy that can help you better understand where the economy is headed. These indicators can help investors decide when to buy or sell investments. For example, if the stock market is at its peak, you may want to sell. If the market is low and on the rise, you may want to buy. Economic indicators can help you understand this ebb and flow of the market, as well as other important financial factors. If you’d rather have a more hands-off approach and let a professional take these indicators into account then you may want to consider working with a financial advisor.

Types of Economic Indicators

Economic indicators come in multiple groups or categories. Most economic indicators come with a specific schedule for release and can be helpful in the right circumstance. Here are the three important types of economic indicators that we can group most into.

Leading Indicators: Leading indicators point to future changes in the economy. They are extremely useful for short-term predictions of economic developments because they usually change before the economy changes.

Leading indicators point to future changes in the economy. They are extremely useful for short-term predictions of economic developments because they usually change before the economy changes. Lagging Indicators: Lagging indicators usually come after the economy changes. They are generally most helpful when used to confirm specific patterns. You can make economic predictions based on the patterns, but lagging indicators cannot be used to directly predict economic change.

Lagging indicators usually come after the economy changes. They are generally most helpful when used to confirm specific patterns. You can make economic predictions based on the patterns, but lagging indicators cannot be used to directly predict economic change. Coincident Indicators: Coincident indicators provide valuable information about the current state of the economy within a particular area because they happen at the same time as the changes they signal.

Top Economic Indicators and How They’re Used

There are several economic indicators that are grouped into the three types listed above. Each one can help investors, economists and financial analysts make smart financial decisions. Below we cover some of the most important indicators that you might find helpful, depending on what you’re wanting to predict or plan for.

Gross Domestic Product (GDP)

GDP is a lagging indicator. It is one of the first indicators used to gauge the health of an economy. It represents economic production and growth, or the size of the economy. Measuring GDP can be complicated, but there are two basic ways to measure it.

One measurement is the income approach. This approach adds up what everyone earned in a year, including gross profits for non-incorporated and incorporated firms, taxes less any subsidies and total compensation to employees. The other approach is the expenditure method. This method adds up what everyone spent in a year, including total consumption, government spending, net exports and investments. The results of these two measurements should be roughly the same. However, the expenditure method is the more common approach because it includes consumer spending, which accounts for the majority of a country’s GDP.

GDP is usually expressed in comparison to the previous quarter or year. For example, if the GDP of a country is up 2% in 2018, the economy of that country has grown 2% since the previous measurement of GDP in 2017. Annual GDP figures are often considered the best indicators of the size of the economy. Economists use two different types of GDP when measuring a country’s economy. Real GDP is adjusted for inflation, while nominal GDP is not adjusted for inflation.

An increase in GDP indicates that businesses are making more money. It also suggests an increase in the standard of living for people in that country. If GDP decreases, then it suggests the reverse. The market’s responses to GDP shifts may also depend upon how one quarterly GDP measure compares to prior quarters, as well as how it compares to economists’ expectations for that current quarter.

The Stock Market

The stock market is a leading indicator. It’s also the indicator that most people look to first, even though it’s not the most important indicator.

Stock prices are partially based on what companies are expected to earn. If companies’ earnings estimates are accurate, the stock market can indicate the economy’s direction. For example, a down market could indicate that overall company earnings are expected to decrease and the economy could be headed toward a recession. On the other hand, an upmarket could suggest that earnings estimates are up and therefore the economy as a whole may be thriving.

The stock market is not necessarily an accurate leading indicator. Earning estimates could be wrong, and the stock market is vulnerable to manipulation. Wall Street corporations and traders can manipulate numbers to inflate stocks via complex financial derivative strategies, high-volume trades and creative accounting principles. (Wall Street’s version of creative accounting is not always legal.)

In addition, the government and Federal Reserve have used federal stimulus money and other strategies to keep markets high in order to avoid public panic in the event of an economic crisis. Since the market is vulnerable to manipulation, a stock or index price is not necessarily an accurate reflection of its value.

There are also stock market bubbles, which can give a false positive for the economy’s direction. If investors ignore underlying economic indicators, and there are unsupported increases in price levels, a market crash could happen. We saw this when the market crashed in 2008 as a result of overvalued credit default swaps and subprime loans.

Unemployment

Unemployment is a lagging indicator. The Bureau of Labor Statistics releases a monthly estimate of the cumulative number of jobs lost or created in the previous month, as well as a percentage figure that represents how many Americans are unemployed and actively looking for work.

This unemployment rate is determined through a monthly survey of 60,000 households. It estimates the proportion of Americans who were unemployed during the period when the survey was taken. The unemployment rate only reflects people who are unemployed and looking for work.

The non-farm payrolls represent the total number of workers employed by U.S. businesses, other than general government employees, workers in private households, employees of non-profit organizations that provide assistance to individuals and farm workers.

The number of jobs created or lost in a month is an indicator of economic health and can significantly impact the securities markets. When more businesses are hiring, it suggests that businesses are performing well. More hiring can also lead to predictions that more people will have more money to spend since more of them are employed.

If unemployment rates rise unexpectedly or decline less than expected, that can sometimes be associated with a drop in stock prices as it may suggest that employers cannot afford to hire as many people. Remember, how an economic indicator comes in relative to expectations is very important.

Consumer Price Index (CPI)

CPI is a lagging indicator, and the U.S. relies on it heavily as one of the best indicators of inflation. This is because changes in inflation can spur the Federal Reserve to make changes to its monetary policy.

CPI measures changes in prices paid for goods and services by urban consumers for a specified month. It’s essentially a measure of the cost of living changes. It offers a gauge of inflation as it relates to purchasing those goods and services.

CPI takes a sampling of several hundred goods and services across 200 categories. The Bureau of Labor Statistics collects this data through both phone calls and personal visits in 87 urban areas across the U.S. CPI does not include Social Security taxes, income, or investments in stocks, bonds or life insurance. However, it does include all sales taxes associated with the purchase of those goods.

Producer Price Index (PPI)

PPI is a coincident indicator that tracks price changes in almost all goods-producing sectors, including mining, manufacturing, agriculture, forestry and fishing. PPI also tracks price changes for an increasing portion of the non-goods-producing sectors of the economy. The report measures prices for finished goods, intermediate goods and crude goods. Prices from thousands of establishments are tracked each month and are recorded on the U.S. Bureau of Labor Statistics website.

PPI is important because it’s the first inflation measure available in the month. It captures price movements on a wholesale level before price changes show up on the retail level.

Balance of Trade

Balance of trade is a lagging indicator. It’s the net difference between a country’s value of imports and exports and shows whether there is a trade surplus or a trade deficit. A trade surplus is generally desirable and shows that there is more money coming into the country than leaving. A trade deficit shows that there is more money leaving the country than coming in. Trade deficits can lead to significant domestic debt. In the long term, a trade deficit can result in a devaluation of the local currency, since it leads to significant debt. The increase in debt will reduce the credibility of the local currency. It could also lead to a major financial burden for future generations since they will be forced to pay off that debt.

However, if a trade surplus is too high, a country may not be taking advantage of the opportunity to purchase products from other countries. In a global economy, nations specialize in manufacturing specific products while buying the goods other nations produce more efficiently at a cheaper rate.

Housing Starts

Housing starts are a leading indicator. The U.S. Census Bureau releases housing start data each month. Housing starts are an estimate of the number of housing units on which some construction was performed that month. Data is provided for multiple-unit buildings as well as single-family homes. The data also indicates how many homes were issued building permits and how many housing construction projects were initiated and completed.

Housing starts are highly sensitive to changes in mortgage rates, which are affected by shifts in interest rates. Although housing starts are a highly volatile indicator, they represent about 4% of annual GDP. As a result, they can signal the effects of current financial conditions as well as changes in the economy. Economists and analysts watch for longer-term trends in housing starts.

Interest Rates

Interest rates are a lagging indicator of economic growth. They are based on the federal funds rate, which is determined by the Federal Open Market Committee (FOMC). When the federal funds rate increases, interest rates increase. The federal funds rate increases or decreases as a result of economic and market events.

When interest rates increase, borrowers are more reluctant to take out loans. This discourages consumers from taking on debt and businesses from expanding, and as a result, GDP growth may become stagnant.

If interest rates are too low, that can lead to an increased demand for money and raise the likelihood of inflation. Raising inflation can distort the economy and the value of its currency. Current interest rates are indicative of the economy’s current condition, and can also suggest where the economy might be headed.

Currency Strength

Currency strength is a lagging indicator. When a country has a strong currency, its purchasing and selling power with other nations is increased. A country with a strong currency can import products at a cheaper rate and sell its products overseas at higher foreign prices. However, when a country has a weaker currency, it can draw in more tourists and encourage other countries to buy its goods since they are cheaper.

Manufacturing Activity

Manufacturing is a leading economic indicator. Durable goods orders are an indicator of manufacturing activity. The term “durable goods” refers to consumer products that usually aren’t replaced for at least a few years, such as refrigerators and cars. Near the end of each month, the Department of Commerce Census Bureau publishes its report on durable goods.

Durable goods orders are a measure of new orders manufacturers receive for those types of goods. An increase in durable goods orders is generally taken as a sign of economic health, while a decline might indicate trouble in the economy. Increases and decreases in durable goods orders may also be associated with increases and decreases in stock indices, respectively.

Income and Wages

Income and wages are lagging indicators. When the economy is operating properly, earnings should increase to keep up with the average cost of living. However, when incomes decline relative to the average cost of living, it is a sign that employers are either laying off workers, cutting pay rates or reducing employee hours. Declining incomes can also indicate an environment where investments are not performing as well.

Incomes are broken down by different demographics, like age, gender, level of education and ethnicity. These demographics can give insight into how wages change for certain groups. A trend that may affect what seems to be only one smaller group may actually suggest an income problem for the entire country, rather than just the group it initially affects.

Consumer Spending

On or around the 13th of the month, the U.S. Census Bureau releases its retail sales report. This report acts like a leading indicator, but it’s actually a coincident indicator. This is because decreases can raise the fear of recession and increases often precede higher CPI numbers.

The retail sales report is a measure of all sales by U.S. retail stores. Its rise and fall can have a direct impact on the stock market, or at least the retail sector. When sales are higher, consumers are spending more and companies tend to perform better. When sales are lower, the reverse is true.

The Bottom Line

There’s no golden goose in investing, but considering these economic indicators can help you make informed investment decisions. The Federal Reserve releases a report known as the Beige Book eight times per year. The Beige Book outlines the nation’s economic conditions and it can be a useful resource for investors, economists and analysts. Economic indicators are important to take into account before making any investment decisions. With a little research, you’ll be able to maximize your portfolio.

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