Question

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

(a) An ongoing expansion is a time of economic prosperity. This can be tracked through an increase in the rates of economic growth and also an increase in the inflation rates. An expansion is also shown through a fall in the unemployment rates as more and more people get employed during times of growth. The consumer price index and also the wholesale price index will experience growth during times of economic expansion. Also the consumer confidence index will improve during times of economic growth and will indicate that the economy is at the top of the business cycle.

(b) An upcoming recession can be predicted firstly through a slowdown in the quarterly growth rates which shows that the economy is slowing down. The consumer confidence index will start to sag as the consumers worry about where the economy is headed. This wlll mean that a recession is looming. The inflation indices will also slow down at this time and also the IIP or the industrial production index slows down. These are all signs that the economy is slowing down and headed towards a recession