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Every quarter, the Central Bank of Barbados publishes a review of how Barbados’ economy has performed so far for the year (or in the case of January’s review, how it performed during the entirety of the previous year). The report contains information on several key macroeconomic indicators – metrics – that paint a picture of how the economy is doing. But if you’re not an economist, how do you know which ones to pay closest attention to? And once you know that, what do they really tell you?
According to Dr. Justin Robinson, Professor of Finance and Dean of the Faculty of Social Sciences at the University of the West Indies, Cave Hill Campus, there are four main indicators that are used universally to assess the health of any economy: nominal GDP (gross domestic product), real GDP growth, inflation, and unemployment.
Nominal GDP is the size of the economy in dollars and cents. And while this is important to know, it is perhaps the least useful of the big four indicators Professor Robinson identified. In fact, there’s another one that better captures the direction an economy is going in…
As the name suggests, real GDP growth tells you whether the economy is growing and by how much, and it does so in percentage terms. It’s important to note, however, that real GDP and nominal GDP are not the same. Professor Robinson explains:
“Let’s say the economy was $10.1 billion last year, and it’s $15 billion this year. Should we be excited that the economy has had such a big growth? With real [GDP], what economists are trying to factor in is that the economy is bigger because we are producing more, and not just that the prices have gone up, because nominal GDP could increase just because the cost of things has gone up…”
For him, real GDP growth is the single most important indicator, because, he says, the goal of any country is to produce and sell more goods and services. This makes it something people should pay close attention to.
While Real GDP growth is a metric we should all watch, one that most of us already pay close attention to is inflation. Inflation is defined as the rate at which prices are increasing, and the inflation rate is used to measure changes in the cost of living.
And then there is the unemployment rate, and this has a very specific definition. While it might seem straightforward – if someone isn’t working, they’re unemployed – that’s not automatically the case. Children and retirees aren’t classified as unemployed – that’s a given, but neither are people who for one reason or another have chosen not to work.
The unemployment rate is the percentage of people who are actively looking for work, but can’t find it.
These four indicators are the ones all countries watch when assessing the health of their economies, with the last three in particular being so vital that Professor Robinson compares them to “your blood pressure, your heart rate, and your blood sugar.”
But there are others that economists in Barbados, because of our specific circumstances, pay close attention to… and we should, too.
International or foreign currency reserves are critical for a country like Barbados that imports so much of what we consume. But Professor Robinson stresses it isn’t only the dollar value we should consider, but also what economists call import cover:
“Reserves are there to ensure that you can import what you need. So, we then try to measure the amount of weeks cover. That is to say, if we didn’t earn another dime in foreign exchange reserves, when you look at the amount of goods and services that Barbados normally imports, and their current prices, from the reserves we have, how many weeks of imports could we cover.”
Another measure that Barbadians should watch closely is gross public sector debt as compared to GDP, which is more commonly known as the debt-to-GDP ratio. “We developed a debt problem and we still have a debt problem, so how big is what we owe relative to the size of the economy.”
The professor notes that there are two types of debt: foreign (or external) debt and domestic debt, with the former being riskier. “We can pay domestic debt in Barbados dollars. Foreign debt, we have to pay in foreign currency, so we’re always checking if we are earning enough to service the external debt.”
And finally, there’s the fiscal balance, which compares Government’s revenue to its expenditure and is an indication of how well Government is managing its finances. When that revenue is higher than its expenses, that’s referred to as a fiscal surplus, and when the reverse is the case – when Government is spending more than it is earning – that is called a fiscal deficit. More often than not, the fiscal balance is given as a percentage of GDP as this provides more information than a straight dollar value.
So, there’s an explanation of some of the key metrics – macroeconomic indicators – that provide insight into how Barbados’ economy is performing. Now that you understand what they are and why they matter, you’ll be in a position to do your own analysis when the Bank publishes its next quarterly economic review.