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2.5: The Relationship between Expenditure Components and Economic Indicators

  • Page ID
    214025
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    GDP is used as a broad representation of the entire economy. And when broken down into its expenditure components (C+I+G+NX) one can better track changes and trends in the overall economy.

    Economic indicators can be linked to the expenditure components of GDP. We can monitor the behavior of one -- or many -- of these indicators to assess the past, current, and future health of the economy. Figure 3 shows examples of economic indicators that represent individual expenditure components of GDP.

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    Figure 3

    If you wanted to monitor overall consumption in the U.S. economy, then I would recommend that you track the monthly economic indicator, retail sales. Retail sales reports on all merchandise sold (using statistical sampling techniques) for cash or credit by businesses primarily engaged in retail trade (e.g., food, cars, VCRs, clothing, etc.). If you see this monthly indicator falling for months, then you might expect a drop in output and income (all else being equal, of course).

    Figure 3 shows a sampling of other indicators that can be mapped to the other expenditure components of GDP. Keep in mind that these are only a small selection of the myriads of indicators that represent overall economic activity.

    Market Expectations

    Market participants are extremely interested in predicting changes in economic activity. Therefore, they eagerly await the indicator reports that are released every day. This anticipation is understandable when you take into consideration that most market participants want to exceed average market returns on their investments. For them to ‘beat’ the market they need to predict changes in market activity. In other words, they place bets on the direction and timing of economic turning points. This is why there is a hush over a crowded Wall Street trading floor right before a major economic indicator is announced. The data from that report will let quite a few traders know if their bets are winners or losers. And if the data indeed does confirm a mistake, the trader must reverse his/her position as quickly as possible to minimize his/her loss.


    This page titled 2.5: The Relationship between Expenditure Components and Economic Indicators is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Martin Medeiros.

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