Assessing The Vitality Of A Given Economy - 1122 Words

In order to evaluate the vitality of a given economy, one must have a thorough understanding of the key performance indicators related to economic health. Through careful research of government statistics, media outlets, and private individuals, it can be concluded that there are 3 main indicators that can predict and diagnose an economic situation. These main indicators, Gross Domestic Product, Consumer Price Index, and Standard and Poor’s 500 Index, each have a direct correlation to overall economic vitality. This report outlines each of the 3 indicators and provides an economic projection based on historical data. Gross Domestic Product A Lagging Indicator of Economic Vitality Gross Domestic Product (GDP), the sum of goods and†¦show more content†¦Real GDP takes into account inflation, and therefore is a more accurate reflection of economic vitality (1). One way in which GDP can reveal a country’s economic situation is a comparison of potential GDP and real GDP. Potential GDP is a metric that calculates what an ideal economy would produce if it were operating at full efficiency. The difference between the United States’ potential and realized GDP, known as the output gap, since the year 2004 is depicted below (2). As evident by this data, production output dropped drastically during the 2008 crisis and has yet to return to its pre-crash volume. While the output gap is shrinking slowly, the difference represents trillions of dollars of lost revenue. Despite slow progression, the steady lessening of the output gap does point to economic recovery. The Congressional Budget Office reports that real GDP is expected to rise 3% by the fourth quarter of 2014 and continue the same trend for the next 3 years (3). Consumer Price Index A Lagging Indicator of Economic Vitality Another lagging indicator of economic health is the Consumer Price Index (CPI). CPI measures median price fluctuation for a base volume of goods that a typical consumer purchases in a year (4). The CPI is a reliable measurement with a low sampling error of .03% and includes approaches to combat bias (5). The CPI is an excellent comprehensive indicator of economic vitality because a multitude of other factors