RC 1

American economists continually attempt to gauge the health of the economy, both for the gain of the private sector as well as for the global standing of the United States. Different elements of the economy react differently to changes in prosperity. Some elements rise and fall as the economy waxes and wanes. These are known as coincident indicators. Other elements are known as leading indicators and usually show a downturn before the economy does. A third group of elements are known as lagging indicators and lose vigor only after the economy has already begun to slow. Economists can predict the direction of the economy by monitoring these indicators.

Coincident indicators, such as manufacturing and employment rates, are the best gauge of the current state of the economy. A continued shift in these indicators allows economists to determine whether the economy itself is in the process of an upturn or a downturn. These indicators coincide with shifts in the economy because they are dependent on sustained prosperity. But since coincident indicators reflect only the current state of the economy, they are not especially useful in predicting how the economy will perform in the near future. Economists must look to other indicators for that.

The indicators with the greatest predictive power are leading indicators, such as mortgage applications and profit margins. When these indicators rise or fall, economists can often foretell similar changes in the country's economic health. These indicators do not cause changes in the economy. Rather, they often signal changes in economic behavior that lead to shifts in the economic cycle. By contrast, the third type of indicator – lagging indicators – is useless as a harbinger of change. But these indicators can be helpful in confirming the assessments of economists.

Determining which elements of the economy fall into which category of indicator requires analysis of copious data and an understanding of the factors that propel the economy. One must determine which events surrounding a turn in the business cycle actually contributed to the change. Establishing a solid framework for understanding the behavior of these indicators helps economists to avoid miscalculations and to guide the country through periods of slow or negative economic growth.

1. The primary purpose of the passage is to
· compare the utility of various economic indicators
· explain the process by which economists draw conclusions about key factors of economic change
· present a conceptual framework used by economists to prescribe economic goals
· trace the development of a set of economic devices
· argue for the continued evaluation of economic factors affecting the business cycle

2. The information in the passage suggests that which of the following would most strongly indicate an imminent change in the business cycle?
· a decrease in the employment rate
· a decrease in the number of new homes built per month
· an increase in the number of new automobiles produced each month
· an increase in the difference between manufacturing costs and retail revenues for large home appliances
· a decrease in the number of corporate bankruptcies per month

3. According to the passage, the main purpose of economic indicators is which of the following?
· to facilitate the analysis necessary to maintain forward economic momentum
· to allow investors to time their investments in sync with economic cycles
· to foster healthy economic competition among various commercial sectors
· to bring to light several key factors in economic downturns
· to promote widespread understanding of economic principles

4. The passage suggests that lagging indicators would be least helpful in determining which of the following?
· whether predictions based on the behavior of the mortgage market were accurate
· whether companies ought to cut costs in order to avoid short-term losses
· whether recent trends in the employment rate were consistent with the overall economic picture
· whether financial analysts are correct in their assessment of recent economic developments
· whether the government was justified in taking action to boost the economy

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