Page 89 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes 6.1 Economic Indicators

Economic indicators are reports released by the government or a private organization that
detail a country’s economic performance. Economic reports are the means by which a country’s
economic health is directly measured, but do remember that a great deal of factors and policies
will affect a nation’s economic performance.

These reports are released at scheduled times, providing the market with an indication of
whether a nation’s economy has improved or declined. The effects of these reports are comparable
to how earnings reports, SEC filings and other releases may affect securities. In forex, as in the
stock market, any deviation from the norm can cause large price and volume movements.
You may recognize some of these economic reports, such as the unemployment numbers, which
are well publicized. Others, like housing stats, receive little coverage. However, each indicator
serves a particular purpose, and can be useful. Here we outline major reports, some of which are
comparable to particular fundamental indicators used by equity investors:
Gross National Product (GNP)

The Gross National Product measures the economic performance of the whole economy.
This indicator consists, at macro scale, of the sum of consumption spending, investment spending,
government spending, and net trade. The gross national product refers to the sum of all goods
and services produced by United States residents, either in the United States or abroad.

Gross Domestic Product (GDP)

The Gross Domestic Product (GDP) refers to the sum of all goods and services produced in the
country, either by domestic or foreign companies. The differences between the two are nominal
in the case of the economy of the United States. GDP figures are more popular outside the United
States. In order to make it easier to compare the performances of different economies, the United
States also releases GDP figures.

Consumption Spending
Consumption is made possible by personal income and discretionary income. The decision by
consumers to spend or to save is psychological in nature. Consumer confidence is also measured
as an important indicator of the propensity of consumers who have discretionary income to
switch from saving to buying.

Investment Spending
Investment – or gross private domestic spending – consists of fixed investment and inventories.

Government Spending

Government spending is very influential in terms of both sheer size and its impact on other
economic indicators, due to special expenditures. For instance, United States military expenditures
had a significant role in total U.S. employment until 1990. The defense cuts that occurred at the
time increased unemployment figures in the short run.

Net Trade

Net trade is another major component of the GNP. Worldwide internationalization and the
economic and political developments since 1980 have had a sharp impact on the United States’
ability to compete overseas.

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