The Economist's Toolbox
Virtually all aspects of economic activity can be measured, and most of them are. As you've seen, consumer spending, business investment, government expenditures, exports, and imports are all counted. So are the number of houses under construction, automobiles sold, people looking for work, and people who already have work. Economists monitor the levels of income, debt, and prices, and even the way consumers feel about the future of the economy.
All of this information helps people understand the economy, including people who are not economists and don't want to become one. For instance, say you want to buy a house and need a mortgage, but you would be happy to keep your present house for another six to twelve months if it would benefit you financially. If you have a good idea of the direction in which interest rates are moving, you can better decide whether to buy that house now or nine months from now. To have a good idea of interest rate movements, however, you must understand the current level of interest rates, recent levels of rates, and the forces that affect rates.
Even then, you might be wrong. Heaven knows the interest rate forecasts of highly paid economists are often incorrect. (In fairness, they are trying to be quite precise, and they usually do get the direction of interest rate movements right.) However, if you understand interest rates—or whatever economic activity might affect you or your business—you will be right more often than wrong.
This section introduces some concepts and tools that economists use to deal with the information involved in following economic developments. These concepts and tools will help you more easily understand the rest of this book, and more quickly grasp the economic and business news. That way, you will improve your ability to form sound opinions and use economic information in making decisions.
Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.