Question

In: Economics

Why is the index of leading economic indicators useful for forecasting GDP? Which indicators can be...

Why is the index of leading economic indicators useful for forecasting GDP? Which indicators can be used as leading economic indicators and why?

Solutions

Expert Solution

Why is the index of leading economic indicators useful for forecasting GDP?

The Index of leading economic indicators is an effective tool, used at most times by the Government of United States and other private players in predicting the direction in which the country is headed. The gross domestic product of any nation is the final value of the goods and services that are produced in the economy.

The First Index was published in the year 1996 and is announced once a month in the United States, to review where the economy is headed and the growth trend helps companies and people analyze and take corrective measures if any respectively.

It is a valuable option for the economy since it has all the measures to analyze where the country is headed as explained below respectively.

Why is the index of leading economic indicators useful for forecasting GDP?

The following are some of the key indicators which are used and can be used, to forecast the Gross Domestic Product of a nation respectively.

These are:-

  • "Average Manufacturing Work-Week"

This is one of the key aspects used in measurement of the Index. It reflects the average weekly work hours of the people working in the manufacturing sector respectively. It indicates the health of the manufacturing industry by providing details on how people are fairing and the level of actual employment.

Thus, the tool is seen as a key effective measure of the index to measure the Gross Domestic Product respectively.

  • "Average number of weekly claims for unemployment insurance”  

This is an equally important part of the overall index. This indicator is used to assess the total number of people leaving the formal employment sector and registering themselves as unemployed. These projections can be extended to months and years and are reflective of the total activity in the economy and the level of unemployed clearly indicates a positive or negative trend which helps in forecasting the GDP respectively.

  • Manufacturers’ new orders for consumer goods and materials”

This is reflective of the overall spending by people in the economy and is analysed by looking at the supplies requested by wholesalers over a period of time usually weeks or months respectively to draw conclusions about spending of people which reflects the level of demand which in itself will translate into the Gross Domestic Product of the nations respectively.

  • "Average price of 500 Companies"

This is used as a common measure across economies to measure how the gross domestic product is headed. The prices of stock indicates the level of activity and investor confidence in the same. While market changes are normal part and fluctuations cannot be seen as a trend, a rapid increase or a decrease is reflective of the same in terms of GDP also and is therefore widely used as an index tool respectively.

  • "Index of Consumer Expectation"

This looks at the market from the eyes of the consumer these use surveys to assess where the country is headed. These could also include those by market leaders respectively and is seen as an effective measure to view the direction in which the country is moving respectively.

Conclusion:-

These indexes are not exhaustive and many others are used simultaneously by most economies to assess where the country is headed. While each one uses its own measures the above listed are common to most countries respectively.

Please feel free to ask your doubts in the comments section.


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