Understanding Economic Indicators


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“A collapse in U. S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U. S. economy? If Wall Street crashes, does Main Street follow? Not necessarily. ” -Ben Bernanke

Financial advisors and skilled investors will often look at economic indicators to predict whether the stock market will be up or down. Sometimes these economic indicators are right and sometimes they are wrong. Regardless, it is important to understand that the economy is not the stock market and vice versa. While they may be different things they do effect each other. Smart investors know what these economic indicators are and monitor them closely. The two most important economic indicators are the gross domestic product and unemployment.

Gross Domestic Product – This term refers to the value of all goods and services produced by a country in a year. It takes into account all production, both private and public, investments, exports, and imports. The following is the formula used to determine the gross domestic product : GDP = C + G + I + NX. It is not as complicated at it seems. The “c” is the consumer spending, the “g” is the government spending, the “i” is country's spending capital, and “nx” is exports minus imports. The gross domestic product is a common tool to monitor the economy in America and standard of living increases or raises are usually determined by it. Many financial experts believe that the gross domestic product should be used to measure the productivity of a nation and not the state of its economy. Information about the gross domestic product is released four times a year.

Unemployment - Unemployment is another important economic indicator. The information about unemployment is release each month. The term refers to the amount of people that are actively looking for work. Most financial experts believe that unemployment rates can not predict the motion of the stock market but can be used to confirm a trend in progress. In general, when the stock market is up unemployment will be down. When the stock market is down unemployment will be up.

While both of these economic indicators seem like common sense, many new investors fail to use them as tools to help them invest. Many online financial websites and online brokerage firms offer free data and charts on a number of economic indicators. It's important to remember that the stock market and the economy are different things and are influenced in different ways. Simply because the economy is up does not mean it is a great time to invest. The opposite is also true. Just because the economy is low does not mean it is a bad time to invest. There are relationships between the economic indicators and the stock market however the assumed relationship is not always the correct one.

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