Here is a business cycle. The rate of growth in the economy, which is measured by GDP or output, is on the y-axis, and time is on the x-axis.
You can see that it is normal for the economy to go through periods of growth and contraction.
We measure growth by our economy's gross domestic product or our output.
While it rises, we are in a period of expansion, then we peak and enter a period of contraction. It this period of contraction lasts a long time, we typically call it a recession.
Then, we hit a trough and the cycle starts over again.
As we go through this periods of expansion and contraction, most people are concerned about things such as the unemployment rate and inflation.
Economists use many different kinds of data to help them do the following:
Economists study economic indicators, which give them an overall view of the economy at any given point in time.
The three different categories of indicators are:
Before we discuss each in further detail, let's briefly address whether this is micro or macro relevant.
Economic indicators are mostly studied in macroeconomics because they look at the economy overall as a whole. For instance, it will look at the overall unemployment rate or the overall inflation rate in the economy.
Microeconomics, though, is concerned with individuals--the individual consumer and the individual firm.
Some of these indicators are going to be studied in microeconomics because they can help to explain what is happening in individual markets or in certain industries. In addition, they can help to explain how a certain individual might be impacted by changes going on.
Leading indicators are trends, patterns or situations that assist in forecasting the economy. They help show us where we might be headed from here.
Here a several examples of leading indicators:
Lagging indicators are the opposite. These are trends, patterns, or situations that provide a clear indication of where the economy has been. These take a look back at where we have been and tend to happen after the fact.
Some lagging indicators are:
These are a few examples of indicators that reflect what has already happened in the economy.
A coincident index are indicators that provide a view of the current state of the economy. This will help explain, right now, what is going on.
One example of a coincident indicator is consumer confidence, which has a lot to do with our economy.
When consumers are confident about the economy, it is generally because it is doing well. Conversely, when consumers are fearful of the economy, it is generally because the economy is not doing so well.
Therefore, consumer confidence is a coincident indicator that is studied by many economists.
Source: Adapted from Sophia instructor Kate Eskra.