A basic understanding of the economic foundations of our economy will also allow you to better identify trends. Often, the media and sometimes even political figures misinterpret economic concepts and as a result mislead the general public with falsified trends. The following are some basic economic indicators that everyone should know about—especially aspiring businesspeople.
GDP : The gross domestic product (GDP) is a basic measure of the well-being of our country. It possesses four primary components: consumer spending, government spending, investments, and net exports (exports minus imports). Consumer spending represents the largest fraction of the GDP, while net exports has been a negative number for some time now.
Unemployment : Unemployment has plummeted in the 1990s. The natural rate of unemployment is the unemployment rate below which the economy could not sustain itself and would collapse. Many economists feel that the current unemployment rate is very near to the natural rate, implying that the economy is at its peak performance level. We’ll see what the rest of the baby boomers have to say about that. Conversely, when unemployment rises, consumer confidence often falls because of lower wages.
Inflation : The public views inflation extremely negatively. However, declining inflation rates come at a great price : rising unemployment, which is perhaps even more loathed by the public. Inflation affects everybody in a different way. As expected, the overall effect balances out, but you would much rather be on the end that benefits. For example, borrowers benefit from inflation because the money they repay their lenders is not as valuable as their original loans.
Trade : Exports and imports have been a controversial topic in recent years. As you may know, the United States has had trade deficits for the past few years. In other words, we have imported more than we have exported. However, this is not necessarily an unfavorable situation. Many media representatives and politicians have mistakenly depicted these trade deficits as harmful to the U.S. economy.
In reality, trade deficits are actually a reflection of the growth of an economy. A weak dollar is commonly mistakenly associated with trade deficits, whereas the truth is that strong dollars cause trade deficits. The reason? A stronger dollar (with higher interest rates) means that Americans can buy more of foreigners’ goods because they are relatively cheaper. In other words, we import more foreign goods and export less of our own, resulting in the trade deficit.
