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College Finance Economic Indicators: Description & What They Mean

Economic indicators are useful tools for understanding the financial markets. Read on to learn about the different types of indicators, why they're important and how you can learn more about them.

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Economic Indicators Defined

An economic indicator is a figure, statistic or trend that analysts study to figure out the state of the economy. These indicators are often used by:

  • Investors
  • Businesses
  • Politicians
  • Government agencies

Investors frequently use these indicators to decide on potential investments or to gauge how the economy could impact their current investments. A business might determine its inventory levels or business forecasts using economic indicators. They can also utilize these indicators for purchasing and hiring decisions.

The Federal Reserve studies indicators so they can write monetary policy, and politicians use indicators to influence policy decisions or make reforms.

Real Disposable Personal Income

This indicator is the total income earned by every citizen in the United States. Taxes are subtracted. The number is then adjusted for inflation. Finally, the total is divided by every person in the country. The number is a per capita number, meaning it is per person.

This is important because: Real disposable personal income is calculated every month. If the number goes up, that means everyone has more money to spend and save. The standard of living has increased.

Consumer Confidence Index

The consumer confidence index is a rating created by The Conference Board, a non-profit organization. Every month the Conference Board randomly surveys 5,000 people and asks them questions about their confidence in the economy. The results are plugged into a formula, which calculates a number. The number is plotted on a graph to compare the trend.

This is important because: There is strong correlation between rising CCI and new jobs and higher wages. When consumers are confident, spending goes up.

Gross Domestic Product

The benchmark of all economic indicators, the Gross Domestic Product consists of the sum of all goods and services produced in a given time frame. When you want to measure if a country is growing, you look at the GDP. GDP is calculated with this formula: GDP = consumption + investment + government spending + (exports - imports).

This is important because: Economists predict GDP numbers to gauge how the country is humming along. When GDP exceeds analyst's estimates the stock market is often positively affected. GDP is also used to measure a country's standard of living. When GDP moves upwards, so often does the quality of life.

Housing Starts

Housing starts are the number of houses beginning to be built in a given time. The number is calculated by the U.S. Census Bureau.

This is important because: New housing starts can be a predictor of what the housing market may do in the coming months. Also, banking, construction and interest rates are all tied to housing starts. If you're looking to invest in companies related to the housing industry, you'll likely want to look at future growth.

Learning Options

These concepts are commonly taught to economics majors or students in business courses. However, if you're a non-major and you want to explore these topics, you can find numerous learning options available on your college campus.

Some potential on-campus learning options include:

  • Free online courses
  • Seminars and workshops
  • Investment clubs for students
  • Library resources
  • Continuing education programs
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