ECONOMIC PERFORMANCE MEASUREMENT

Economic Performance Measurement



Economic Performance Measurement

Economic Indicator

An Economic Indicator, generally issued by a government agency, is statistical data that attempts to signal, measure or describe current economic growth and stability. Economists use these indicators to assess trends in the economy and set policy directions for the government to consider before implementing. Economic indicators come in three types: 1) leading, which are ones with predictive value related to future prospects; 2) lagging, ones that become apparent only after a specific activity has shaped market trends; and 3) coincident, those occurring at the same time as the economic activity they seek to describe. Sometimes called Business Indicators, these figures allow for analysis of economic performance, support forecasts of future directions, and aid in the study of business cycles (McEachem, 2008, pp. 78).

Economic growth is perhaps the most important performance indicator for an economy. This is because the growth of GDP tells us something about the extent to which an economy has expanded in order to provide more resources for its country's inhabitants.

Economic growth mainly depends on the growth of GDP. The GDP growth rate measures how fast the economy is growing. Technically, it is the percentage increase or decrease of GDP (Gross Domestic Product)compared to the previous quarter. The GDP growth rate is driven by retail expenditures, government spending, exports and inventory levels. Rises in imports will negatively affect economic growth.

The GDP growth rate is the most significant indicator of economic health. If it is growing, so will business, jobs and personal income. If it's slowing down, then businesses will hold off investing in new purchases and hiring new employees, waiting to see if the economy will improve. This, in turn, can easily further depress the economy and consumers have less money to spend on purchases. If the GDP growth rate actually turns negative, then the U.S. economy is heading towards or is already in a recession (Brue, 2007, pp. 28).

When the economy is expanding, the GDP growth rate is positive. However, in a recession, the economy contracts. When that happens, the GDP growth rate is negative. This happened most recently in 2008 and 2009, when the GDP growth rate was negative for four quarters in a row (McConnell, 2005, pp. 21). The last time this happened was during the Great Depression. The growth rate turned positive in Q2 2008, and then turned negative again, prompting concerns about a double-dip recession. The growth rate was negative for two quarters during the 2001 recession.

Limitations

Real GDP is defined as the measure of the value of goods and services produced in a country(McConnell & Brue, 2005; Wessels, 2006). Mostly it considers the output that goes through a manufacturing process. Real GDP per capita is not a suitable measurement of the standard of living or the welfare because it has a number of limitations. Some of these include;

Income distribution

GDP used as a measure of economic growth does not take into account the disparities in income distribution in that a country could comprise of the rich ...