METRICS TO MEASURE ECONOMIES

A number of metrics are used to measure and assess the health of a country’s economy.

• GDP. Gross Domestic Product:?It is defined as the market value of all the goods and services produced in a country in a year. This is one of the most commonly used metrics to measure the growth of an economy.

What you’ll commonly hear of is GDP growth - for example 5%.

This means that the GDP grew by 5% in a given year.

The method to calculate GDP varies from country to country - there’s no standard method in use by all countries of the world.

• Employment and unemployment rate: ?The percentage of a country’s working population that is working is often used to estimate a country’s economic health. When people have jobs, they spend money not just on essentials like food and clothing but also on optional expenditures like entertainment and luxuries. This results in better economic activity. When more people are unemployed, they spend less and therefore the economic activity goes down. When the pandemic hit, many countries reported a very sharp increase in unemployment indicating a poor state of the economies
• Inflation: The rate of inflation shows how fast goods and services in a country are getting expensive. This is a tricky metric because there isn’t a simple right number. If the inflation is too high, it signals that spending might reduce as people avoid unnecessary expenses to deal with the higher prices. On the other hand, if goods and services keep getting cheaper (deflation) for a long period of time, it isn’t good news. Economies experiencing deflation tend to have slowing economic activity - which isn’t good either.

A small amount of inflation is actually the healthiest indicator for a country’s economy - this is usually around 2-4% inflation.

• Interest rates: Central banks of countries use the power to set the interest rate as a way to control the economy. When the economy slows down too much, they reduce the interest rates to spur demand and stimulate growth.

Similarly, when the economy starts growing too fast such that the inflation rate starts climbing, they raise the interest rates to cool the economy down.

Since the start of the pandemic, the interest rates worldwide were reduced to increase economic activity. Now, countries are gradually increasing the rates.

Besides these, there are several other parameters that people look at to understand the health of the economy. Some others are core sector output, consumer confidence index, tax collected, and more. No one indicator ever serves as the perfect metric to track the economy. The best practice would be to track multiple metrics to assess how a country’s economy is.