Are Inflation and Unemployment Adequate Indicators of the Health of the Nation?

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There are a large number of variables or characteristics used to gauge the health of an economy, with four of them usually referred to as the key macroeconomic variables: Aggregate output or income, the unemployment rate, the inflation rate, and the interest rate. There are, however, numerous additional measures or variables that are collected and used to understand the behavior of an economy. In the United States, for example, additional measures include: the index of leading economic indicators (which gives an idea where the economy is headed in the near future); retail sales (which indicate the strength of consumer demand in the economy); factory orders, especially for big ticket items (which indicate the future growth in output, since the orders will have to be filled); housing starts (robust increase in housing starts are usually taken as a sign of good growth in the future); the consumer confidence index (which indicates how likely consumers are to make favorable decisions to buy both durable and nondurable goods, services, and homes). Economic indicators are among the most closely watched pieces of news in the investment world. Practically every week there is some announcement that affects investors' predictions about the future of the economy. Leading indicators are those which are believed to change in advance of changes in the economy, giving you a preview of what is going to happen before the change actually occurs. (There are also coincident indicators, which change about the same time as the overall economy, and lagging indicators, which change after the overall economy, but these are of minimal use as predictive tools.) In addition, the Fed watches many of these indicators as it decides what to do about interest rates. For these reasons, these indicators are important to investors. The unemployment rate and inflation indicators are important

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