Analysis of a Country’s Economy
The COVID 19 pandemic has impacted economies all over the world. There are many indicators of the economy like inflation, GDP, interest rate, unemployment rate, and so on. The most commonly spoken about indicator on the internet and media however is the GDP. But is this the right indicator to analyse during and in the post-COVID 19 period? Answers to this question and others such as what factors should one consider while analysing the economy will be answered.
What is GDP?
It is the total market value of all goods and services produced in a country in a specific time period.
Expenditures, production, and income are the 3 methods of calculating GDP.
Using expenditure approach, GDP = C + I + G + (X — M)
● Consumer (or household) spending (C)
● Business spending (or gross investment) (I)
● Government spending (G)
● Exports (or foreign spending on domestic products and services) (X)
● Imports (or domestic spending on foreign products and services) (M)
We often keep hearing about how low the GDP is and how the unemployment rate is very high. But, these 2 factors alone do not determine the future of the economy. Moreover, high GDP and low unemployment rates do not imply a bright future for the economy.
Here is an example to substantiate the above statement.
In the USA, non farm payroll employment increased by 271,000 in October 2015. The unemployment rate was at 5%. On November 6th, 2015 all stock market indices fell.
Yet can we say that this is always the case?
Let’s have a look at an example that says otherwise. In the USA, in April 2017 employment increased by 211,000 and unemployment fell to 4.4%. But this time, the stock market rose and the dollar fell.
Does this contradiction imply that economic indicators are flawed and do not actually give the correct results?
The answer is No. Every day is a different day and the macroeconomic conditions play a role in the indicators.
The COVID 19 pandemic has affected economies all over the world due to lack of import-export, reduction in cash-flow as a result of which jobs were lost. As day to day things start getting back to normal, the GDP will start to increase. This pandemic was totally unexpected and such unexpected things happen at the micro-level on a day-to-day basis which is reflected in the country’s economy.
It can be said then that the economy neither keeps increasing nor decreasing indefinitely. It is a cycle comprising 5 phases. They are:
● Expansion
● Peak
● Contraction
● Trough
● Recovery
The USA, India, and other countries which are badly affected by COVID 19 are moving towards Trough and Recovery.
Even if things are back to normal, the economy won’t be the same as it was before the pandemic. So, certain fiscal policies and monetary policies are implemented to stimulate the economy.
Monetary policies are implemented by the Central Reserve Bank of a country which includes open market operations and other tools. Fiscal policies are implemented by the government which includes increased spending and/or decreased taxes.
The effectiveness of these policies changes according to the circumstances. In a recession with rising unemployment, cuts in the income tax will not always raise consumer spending because consumers may want to increase their savings in anticipation of further deterioration in the economy.(increased consumer spending => increase in GDP)
GDP, Inflation, unemployment rate, and other indicators are definitely linked to one another. But, an increase or decrease in one of them may or may not have a direct impact on the other.
In conclusion, there is no right or wrong indicator to measure the economy. It’s like choosing a company while buying stocks. It is totally up to us as participants in the economy to choose the criteria to judge the particular company. Certain indicators are more sensitive than the others which is why a combination of multiple indicators has to be used while assessing a company which of course extends to a country’s economy as well.
For more info, please visit the link below
