Question

Applications: Explain how to use the indexes of leading, coincident, and lagging economic indicators of business cycle fluctuations to predict the occurrence of: (a) an ongoing expansion; and (b) an upcoming recession.

Answer 1

Before Answering the question

If wish to explain Indicators

1. leading Indicator - projects toward future events (that are going to occur).

eg: Bond Yields are thought to be a indicator for stock market, etc

2. coincident indicators -which occur in present and helps in clarify current situation of the economy.

eg: GDP at current level, Personal Income At current ...

3. Lagging indicators - denotes a event after its occurrence.

eg: Inflation Rate, Unemployment Rate

It also help in Finding the re-occurrence of a pattern.

A. an ongoing expansion

Lets say, If an Economy is going to grow in near future

Previous data on GDP which is an (coincident indicator) can be compared to the bond yield (leading Indicator)

with an ongoing data on Personal Income.

If Last year GDP Is less than present Levels, with Higher speculation of returns in share market and present Income level is high, We can say Economy is going to expand.

(b) an upcoming recession

Lets say, If an Economy is going into recession

Previous data on GDP which is an (coincident indicator) can be compared to the bond yield (leading Indicator)

with an ongoing data on Personal Income.

If Last year GDP Is greater than present Levels, with less speculation of returns in share market and present Income level low, unemployment is high. We can say Economy is going into a recession path.

Also note, Leading indicator may Project towards Positive or may reverse to negative trends which is difficult to forecast.