Unit 11 - Economic Indicators

Inflation

A general and progressive increase in prices

Gross Domestic Product (GDP) -Does it include activity from a foreign entity within the nation's boundary?

A nation's annual economic output - ALL the goods and services produced within the nation - -GDP counts ALL ACTIVITY that occurs within the CONFINES of the nation's boundaries, even if the activity is generated by a foreign entity. YES!!

Deflation

A situation in which prices are declining

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation.

The economic indicator that reflects activity of U.S. entities without regard to where the activity takes place is A) GNP. B) FUN. C) CPI. D) GDP.

A) GNP. Explanation This is a description of gross national product. GDP measures activity within the U.S., regardless if it is domestic entity or not. CPI is the primary inflation measure. FUN is just a word. Do not pick something you do not recognize just because it is unfamiliar.

Which of the following is a coincident indicator? A) Household income B) Housing starts C) Increase in the duration of unemployment D) S&P 500 Index

A) Household income Explanation Personal or household incomes are coincident indicators, moving up and down along with the overall economy. Equity prices and housing starts are both leading indicators. Changes in the duration of unemployment is a lagging indicator.

The U.S. gross domestic product is best described as A) all goods and services produced within the nation. B) all services produced in the nation only. C) all goods and services produced domestically but sold overseas. D) all goods produced in the nation minus the value of all services produced.

A) all goods and services produced within the nation. Explanation The U.S. gross domestic product is best described as all goods and services produced within the nation. Consumption or sales of the goods and services domestically or overseas is not a factor when calculating GDP.

The monthly unemployment figure is considered a A) coincident indicator. B) lagging indicator. C) dragging indicator. D) leading indicator.

A) coincident indicator. Explanation Unemployment is a coincident indicator. There is no dragging indicator.

A measure of a nation's citizen's economic activity is A) gross national product. B) Consumer Price Index. C) gross domestic product. D) S&P 500 Index.

A) gross national product. Explanation Gross national product (GNP) is a measure of only the economic output of a country's citizens and companies, regardless of location. The gross domestic product measures all the output from within a nation's borders, regardless of ownership.

An economic event where consumers experience an extreme increase in the cost of goods in a short period is A) hyperinflation. B) deflation. C) suprainflation. D) stagnation.

A) hyperinflation. Explanation This describes hyperinflation. This is most likely experienced in nations that have dramatically increased the money supply beyond what the economy can absorb.

When consumer prices are increasing at a steady but reasonable rate this is considered a healthy level of A) inflation. B) wage increases. C) stagnation. D) growth.

A) inflation. Explanation Some level of inflation is considered inevitable in a healthy economy. If inflation becomes extreme, and is out of line with economic growth, it becomes a concern.

The nation is experiencing a rapid increase in the cost of living, but wages are not keeping pace with the increase in cost. The nation is experiencing A) stagflation. B) stagnation. C) disinflation. D) inflation.

A) stagflation. Explanation When prices are increasing but the economy is not growing, it is stagflation.

An extended period of little or no growth in GDP, wages, and prices is a period of A) stagnation. B) stagflation. C) indignation. D) inflation.

A) stagnation. Explanation An extended period of little or no growth period is normally referred to as stagnation. Inflation simply refers to rising prices and normally accompanies an expanding economy. Stagflation occurs when prices are rising but the economy is not expanding. Indignation is an emotional state and has nothing to do with the topic.

Which of the following is a coincident indicator? A) Housing starts B) Increase in the duration of unemployment C) S&P 500 Index D) Household income

D) Household income Explanation Personal or household incomes are coincident indicators, moving up and down along with the overall economy. Equity prices and housing starts are both leading indicators. Changes in the duration of unemployment is a lagging indicator.

Which of the following is a lagging indicator? A) Increase in hours worked B) Raw materials orders C) Decrease in industrial production D) Increase in the consumer loans to personal income ratio

D) Increase in the consumer loans to personal income ratio Explanation Changes in the ratio of consumer installment credit to personal income is a lagging indicator. Changes in industrial production and hours worked are coincident indicators. Changes in raw materials orders is a leading indicator.

Deflation occurs during A) a depression, coinciding with an economic trough in the business cycle. B) a recession, coinciding with economic peaks. C) a recession, coinciding with an economic contraction. D) a depression, coinciding with economic expansion in the business cycle.

C) a recession, coinciding with an economic contraction. Explanation Deflationary periods in the economy are most associated with severe recessions. Recessions occur during periods of economic contraction in the business cycle.

All the following are coincident indicators except A) trade sales. B) personal income. C) changes in durable goods inventories. D) retail employment.

C) changes in durable goods inventories. Explanation Changes in durable goods inventories (whether an increase or decrease) is a leading economic indicator. Trade sales, retail employment, and personal income are all coincident indicators.

The most common way of measuring purchasing power risk is A) the GNP. B) the GDP. C) the CPI. D) the DND.

C) the CPI. Explanation The Consumer Price Index measures the increase or decrease in consumer prices. GDP and GNP are both measures of economic activity. DND is a fictional acronym, which has nothing to do with this test. Do not pick things you do not recognize just because it is unfamiliar to you.

The consumer price index is a measure of A) the change in economic output. B) the change in bond yields. C) the change in prices. D) the change in the value of equities.

C) the change in prices. Explanation The consumer price index is a measure of the prices of goods. When compared over time, if the prices are increasing, the economy is experiencing inflation. If the prices are decreasing, the economy is experiencing deflation.

Which of the following is a leading indicator? A) Gross domestic product B) Corporate profits C) Wages D) New orders for consumer goods

D) New orders for consumer goods Explanation New orders for consumer goods is a leading indicator, foretelling future economic activity (the actual purchase of those goods). Wages and gross domestic product are coincident indicators. Corporate profits are lagging indicators.

All of these are leading economic indicators except A) building permits. B) the stock market as measured by the S&P 500. C) manufacturer's new orders. D) duration of unemployment.

D) duration of unemployment. Explanation Duration of unemployment (i.e., how long unemployed people stay unemployed) is a lagging indicator. All of the others tend to change direction before the economy changes direction.

An economic indicator that tends to change direction following a change in the direction of GDP is a A) coincident indicator. B) leading indicator. C) flagging indicator. D) lagging indicator.

D) lagging indicator. Explanation Lagging indicators tend to change direction after a change in the overall economy. GDP is the most common indicator for economic activity. When you have studied for eight hours straight and can not keep your eyes open; that is a flagging indicator. Take a break, flagging indicator is not on the exam.

All the following are lagging indicators except A) outstanding commercial loans. B) labor cost per unit of output. C) corporate profits. D) personal income.

D) personal income. Explanation Personal income is a coincident indicator. Corporate profits, labor cost per unit of output, and outstanding commercial loans are lagging indicators.

The economy is showing that employment is low, there is little consumer demand, and loans for expansion and retooling are way down, showing a lack of business activity. Yet prices for consumer goods are still rising. Economists would call this a period of A) deflation. B) stagnation. C) inflation. D) stagflation.

D) stagflation. Explanation Inflation is characterized by a rise in prices for goods and services. Stagnation is characterized by high unemployment and lack of growth and business activity. When these occur simultaneously, economists refer to these times as periods of stagflation.

Economic growth has slowed to a halt with little consumer demand, but prices for goods and services are still rising. This is known as economic A) deflation. B) contraction. C) stagnation. D) stagflation.

D) stagflation. Explanation When prices for goods and services are rising (inflation) during times when the economy isn't growing (stagnation), the economy is known to be in a period of stagflation.

An analyst is trying to determine upcoming economic activity to better determine her recommended investment strategy. She would be most interested in A) coincident indicators. B) leading indicators. C) lagging indicators. D) coterminous indicators.

B) leading indicators. Explanation When someone wants to know what future economic activity may be, she would be most interested in leading indicators. These indicators move in advance of economic activity. Coincident indicators move along with economic activity, and lagging indicators follow economic activity. There is no such thing as a coterminous indicator.

Consumer Price Index (CPI) -Measures what?

Measures the rate of increase/decrease in a broad range of consumer prices (Food, housing, transportation, medical care, etc.) -Used to measure inflation as well

Stagnation

Slow/little economic growth, accompanied by high unemployment

Gross National Product (GNP) -Based on what?

The total value of goods and services produced by the residents/entities of a country within a specific time period, usually one year. -Citizens can be located ANYWHERE; doesn't matter on the location of citizens.

Stagflation

a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

Leading economic factors

Indicators that predict the status of the economy 3-12 months into the future

Coincident Economic Indicators

Indicators which change as the economy changes

The most commonly referenced indicator of economic activity is A) CPI. B) GDP. C) GNP. D) Dow.

B) GDP. Explanation The most commonly referenced economic indicator that measures overall economic activity is gross domestic product. Gross national product is not covered with anywhere near the frequency of GDP. CPI is a measure of inflation, not activity. Dow is a company or a set of indices, but not a measure of economic activity.

A measure of a nation's citizen's economic activity is A) Consumer Price Index. B) gross national product. C) S&P 500 Index. D) gross domestic product. Explanation Gross national product (GNP) is a measure of only the economic output of a country's citizens and companies, regardless of location. The gross domestic product measures all the output from within a nation's borders, regardless of ownership.

B) gross national product. Explanation Gross national product (GNP) is a measure of only the economic output of a country's citizens and companies, regardless of location. The gross domestic product measures all the output from within a nation's borders, regardless of ownership.

The economy is showing that employment is low, there is little consumer demand, and loans for expansion and retooling are way down, showing a lack of business activity. Yet prices for consumer goods are still rising. Economists would call this a period of A) inflation. B) stagflation. C) stagnation. D) deflation. Explanation Inflation is characterized by a rise in prices for goods and services. Stagnation is characterized by high unemployment and lack of growth and business activity. When these occur simultaneously, economists refer to these times as periods of stagflation.

B) stagflation. Explanation Inflation is characterized by a rise in prices for goods and services. Stagnation is characterized by high unemployment and lack of growth and business activity. When these occur simultaneously, economists refer to these times as periods of stagflation.

Increasing cost of goods and services and high unemployment are characteristics of A) stagnation. B) stagflation. C) inflation. D) deflation.

B) stagflation. Explanation Stagflation is the rare occurrence where the economy is contracting and income is dropping but prices are still rising.

The measure of the inflation rate is A) the S&P 500 Index. B) the Consumer Price Index. C) the business cycle. D) the EAFE Index.

B) the Consumer Price Index. Explanation Inflation is an increase in prices over time. The consumer price index measures the price of a basket of goods. When comparing the value of this basket of goods, we can identify whether there's inflation or deflation occurring.

Lagging Indicators

Indicators that change AFTER the economy has begun a new trend, but serve as confirmation of the new trend.