Economic Indicators, Their Uses and Limitations

Economic indicators are variables that give information about the condition of the economy. Generally, economic indicators are grouped according to whether they are leading (forward-looking), lagging (backward-looking), or coincident (simultaneous with the economy).

Leading Indicators

Leading indicators include share prices, average weekly hours worked in the manufacturing sector, or new orders for capital goods. The function of leading indicators is to predict the future movements of the economy.

Lagging Indicators

Lagging indicators only change when the economy has started following a certain pattern. Even though they are more precise than leading indicators, they can only be seen after a large economic shift has occurred. They include unemployment rates, interest rates, gross national product (GNP), the balance of trade, consumer price index (CPI), and gross debt.

Coincident Indicators

Coincident indicators constitute elements such as gross domestic product (GDP), retail sales, and employment levels. They can be seen simultaneously as the size of the economy either expands or contracts.

Uses of Economic Indicators

• They have a unique release schedule. As a result, investors can prepare and plan to access certain information at a specific time.
• They indicate the direction of the economy.
• Analysts use them to predict the possibility of investing in the future.

Limitations of Economic Indicators

• They need to be correctly interpreted.
• Most of the data is somewhat inaccurate.
• Measuring gross domestic product (GDP) is almost impossible.

Question

Which of the following is (are) most likely (a) lagging indicator(s)?

I. Consumer price index (CPI)

II. Average weekly hours worked in the manufacturing sector

III. Retail sales

A. I only

B. I and III

C. II only

Solution

The correct answer is A.

The consumer price index (CPI) is a lagging indicator.

Option II, average weekly hours worked in the manufacturing sector, is a leading indicator.

Option III, retail sales, is a coincident indicator.

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