5 Most Important Economic Indicators

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An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance

Retail Sales – Retail sales are particularly important measure and function hand in hand with inventory levels and manufacturing activity. Most importantly, strong retail sales directly increase GDP, which also strengthens the home currency. When sales improve, companies can hire more employees to sell and manufacture more products, which in turn puts more money back in the pockets of consumers.

In general, an increase in retail sales indicates an improving economy.

Inflation – If the RBI thinks inflation is rising, it’ll put on the economic brakes by raising interest rates.

Inflation can be both beneficial to economic recovery and, in some cases, negative. If inflation becomes too high the economy can suffer; conversely, if inflation is controlled the economy may prosper. With controlled, lower inflation, employment increases, consumers have more money to buy goods and services, and the economy benefits and grows. A low and stable inflation rate is a perquisite for sustained high economic growth.

Repo rates – Repo rates are one of the most important drivers of the economy. From affecting the inflation (decrease in repo rate leads to increase in inflation) directly to influencing the foreign exchange rate (increase in repo rate leads to fall in exchange rate due to strengthening of domestic currency), repo rate plays a central role in the money supply of an economy. Also if repo rate decreases then the GDP of a country increases (increase in money supply leads to increase in demand of goods). Repo rate has a multiplying effect on the economy.

It is used by a central bank as a tool to manage the economy – either by raising the interest rate to curb inflation, or lowering the interest rate to promote growth.

If the central bank increases the repo rate, then borrowers have to pay more for the money they borrowed. This reduces the amount of money they have for spending on other things and thus impacts the economy.

Foreign Direct Investment – Foreign Direct Investment (FDI) is a leading economic indicator which greatly influences the general economy as whole.

FDI which is a direct investment into the country from an entity in another country, either by setting up a new company or by way of a merger or acquisition etc., also indicates the positive perspective or approach of the overseas investors.

FDI has had a positive impact on an economy. FDI inflow supplements domestic capital, as well as technology and skills of existing companies. It also helps to establish new companies. All of these contribute to economic growth of an economy.

Total New Vehicle Sales – New car sales are a reliable economic indicator which tells us whether the economy is starting to pick up. People buy a car only when they feel certain about their job prospects and hence, feel financially secure. Further, once car sales pick up, sale of steel, tires, auto-components, glass etc., also starts to pick up as well. New car sales are a good indicator of economic growth.

Economic Indicators

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