When economic information is passed on to us, it is usually represented in the form of an indicator. All the concepts that we have seen previously are indicators that give a data or figure that represents an economic or financial indicator, which can refer to countries, people or companies. However, to know really what they mean, we have to know how to interpret them.
Firstly, the concept of indicator must be known, which is defined as a data or figure that reflects the behaviour of an economic or financial variable, prepared from statistical data.
To this end, the measurements used must be relevant and precise, faithfully reflecting the magnitudes to be analysed.
We can find many types of indicators:
- Quantitative or qualitative: If the representation is numerical or by a scale of qualities.
- Indicators that measure the relationship between results and impacts.
- Management or strategic indicators.
- Indicators of efficacy, efficiency or effectiveness.
An economic indicator focuses on a specific aspect of the economy or the economic agents that make part of it, and allows the situation and evolution of economic activity to be analysed. An indicator makes it possible (i) to measure and record the behaviour of economic agents; (ii) to analyse the economic or financial evolution of a country, a company, a family, etc.; (iii) to make comparisons with the economic situation of other regions or countries, or with the financial situation of another company; (iv) to guide the economic and financial policy of the countries.
Therefore, the decisions to be made will vary depending on the conclusions drawn from the analysis of the indicators.
Next, we must take into account what type of indicator we are considering, depending on its relationship with the economic cycle:
- Lagging economic indicator: Lagging indicators are those whose value changes after the economic situation has registered a turn. This change will be reflected later in the indicator. For example, the unemployment rate is a lagging indicator: There is a trend towards job creation months after there has been an improvement in the economic situation.
- Leading economic indicator: Leading indicators are those whose value changes before the economic situation does. For example, the demand for business financing.
- Coincident or matching economic indicator: Coincident indicators are those whose value changes practically at the same time as the economic cycle. For example, GDP or retail sales are considered coincident indicators. Matching indicators are very helpful in identifying potential peaks and troughs within the business cycle.
Likewise, the economic indicators can be, depending on the direction they take by reference to the economic cycle:
- Procyclical indicators: They move in the same direction as the economic cycle. They grow when the economic situation is good and decrease when the economic situation is bad. For example, GDP is a procyclical indicator.
- Countercyclical indicators: They move in the opposite direction to the direction of the business cycle. For example, loan delinquency rate grows when the economic situation is bad.
- Acyclical indicators: The direction of these indicators has little or no correlation with the direction of the economic cycle; they can go up or down at any point in the business cycle. For example, agricultural production.
Once we are clear about what they tell us, we can use them to make decisions.
