NATIONAL INCOME:

National income is defined as the value of all final goods and services produced by the
normal residents of a country, whether operating within the domestic territory of the
country or outside, in a year.
National income measures the monetary value of the flow of output of goods and
services produced in an economy over a period of time.
Measuring the level and rate of growth of national income (Y) is important for
seeing.
1. The rate of economic growth
2. Changes to average living standards
3. Changes to the distribution of income between
groups within the population
Needs for the study of National Income :
1. To measure the size of the economy and level of countrys economic performance
2. To trace the trend or speed of the economic growth in relation to previous year(s)
as well as to other countries
3. To know the structure and composition of the national income in terms of various
sectors and the periodical variations in them
4. To make projection about the future development trend of the economy
5. To help Govt. to formulate suitable development plans and policies to increase
growth rates.
6. To fix various development targets for different sectors of economy on the basis
of there performance.
7. To help business firms in forecasting future demand for there products
8. To make international comparison of peoples living standards.
National income accounting includes the following concepts:
Gross Domestic Product (GDP) and Gross National Product (GNP)
Net National Product or Net National Income (NNP)
GDP/GNP at market price and factor cost
Personal income (PI) and Personal Disposable income (PDI)
Personal Consumption Expenditure and Personal savings
Real and Nominal Income
Per capita income (PCI)
NATIONAL INCOME AGGREGATES
National Income at Current Price
Current Prices refer to the prices prevailing in the market during the year for
which estimates are made.
National Income at Constant Price
Constant Prices refer to the prices prevailing in the market in the base year.
National income is measured at both the levels in order to enable a comparison.

NOMINAL VERSUS REAL GDP

Nominal GDP (Poor index)
Definition: value of current output at current year prices
Real GDP (useful index)
Definition: value of current output at base year prices or Nominal GDP
adjusted the price changes.
Formula:

Real GDP = Nominal GDP / price index

GDP Deflator
Definition:
Measure of the price level calculated as the ratio of nominal GDP to real
GDP times 100.
It tells us what portion of the rise in nominal GDP that is attributable to a
rise in prices rather than a rise in the quantities produced.
Formula:

GDP Deflator = (Nominal GDP/Real

GDP) x 100
PER CAPITA INCOME
This refers to an individual's share of the national income. It is calculated to
understand the economic growth and development of a country.

India has one of the largest economies in the world in terms of its gross domestic
product (GDP).

However, India has such a large population that we have has an extremely low per
capita GDP.

This figure is determined by dividing a nation's GDP by its population.

As a result of its low per capita GDP, India is considered a developing country

MARKET PRICE V/S FACTOR COST

A commodity when goes to the market, indirect taxes are imposed on it. This is the
market price. When we deduct the net indirect taxes we get factor cost.

CIRCULAR FLOW OF
INCOME
(Rent,

real fow

money flow

Payment for Factor Services

Publ
ic
Households /
Consumers

Wages, Interest and Profit)

Supply of Factors of Production

(Land, Labour, Capital &
Organization)

Circular
Flow
of Income

Busin
ess
Firms /
Producers

(Goods &
Services)
Supply
of Commodities

(Commodity
PaymentPrice)
for Commodities

GDP and GNP

Gross Domestic Product (GDP):
An estimated value of the total worth of a countrys production and services,
within its boundary, by its nationals and foreigners, calculated over the course on
one year.
The total market value of all final goods and services produced by factors of
production in a country over a given period of time.

Final goods and services

Refers to goods & services produced for final use.
Final use means no more further processing. Thus, final goods/services
are generally goods/services that are readily be consumed by consumers.

Intermediate goods
Goods that produced by one firm for the usage in further processing by
another firm.

 The value of intermediate goods is not counted in GDP because to avoid

double counting.

Value Added
The difference between the value of goods as they leave a stage of
production and the cost of the goods as they entered that stage.
Double counting can also be avoided by counting only the value added to
a product by each firm in its production process.

Gross National Product (GNP)

An estimated value of the total worth of production and services, by
citizens of a country, on its land or on foreign land, calculated over the
course on one year.
Total market value of all final goods and services produced by a resident
of a country during a given period of time.

GNP = GDP + net factor income from

abroad
(or)
GNP= (GDP (+) factor income received from abroad () factor income
paid abroad)

GDP at Market price = GDP at factor cost + Indirect Taxes subsidies

9.2 CALCULATING GDP

There are three approaches available for measuring GDP.
They are;
(1) The expenditure Method
(2) The income Method
(3) Production Method

The expenditure Method

Expenditure or outlay on final products takes place in three ways
Expenditure by consumers on goods and services
Expenditure by entrepreneurs on capital or investment goods
Expenditure by government on consumption and capital goods

(1) The Expenditure Approach

Definition:
A method of computing GDP that measures the amount spent on all final goods during a
given period.
Formula:

GDP = C + I + G + NX
C: Household spending
I: Capital Investment spending
G: Government spending

NX=X-M
X: Exports of Goods and Services
M: Imports of Goods and Services

Personal consumption expenditures (C)

household spending on consumer goods.
Gross private domestic investment (I)
spending by firms & households on capital goods such as plant,
equipment, inventory & new residential structures.
Government consumption & gross investment (G)
expenditures by federal, state, and local governments for final goods and
services.
Net exports (X IM)
net spending by the rest of the world.
exports (EX) minus imports (IM)

Calculating GDP:
(1)The Expenditure Approach

GDP = C + I + G + NX
Durable good + Non-durable goods + Services (C)
(+) Residential Investment + Non-residential
Investment + Changes in inventories (I)
(+)
Federal gov. + State gov. + Local gov. (G)
(+) (Export Import) (NX)
Gross Domestic Product (GDP)
Personal consumption expenditures (C)
C = expenditures by consumers on the following:
Durable goods: Goods that last a relatively long time, eg. cars &
appliances.
Nondurable goods: Goods that are used up fairly quickly, eg. Food and
fuel.
Services: Things that do not involve the production of physical things, eg.
legal services, medical services, & education.
Gross private domestic investment (I)
I = the purchase of new capital goods or total investment by the private sector. It
includes the purchase of new housing, plants, equipment, & inventory by the
private sector.

 Nonresidential investment includes expenditures by firms for machines,

tools, plants.
Residential investment includes expenditures by households & firms on
new houses.
Change in inventories computes the amount by which firms inventories
change during a given period. Inventories are the goods that firms
produce now but intend to sell later.
Government Spending (G) &
Net Export (X-IM)
Government consumption & gross investment (G) counts expenditures by
federal, state & local governments for final goods & services.

Net exports (NX) is the difference between exports & imports; (Export Import)
Exports (X) are sales to foreigners of goods & services produced in India.
Imports (IM) are purchases of goods & services from abroad by Indian.

Precautions : While estimating national income through expenditure method, the

following -precautions should be taken.
(i)
The expenditure on second hand goods should not be included as they do
not contribute to the current years production of goods.
(ii) Similarly, expenditure on purchase of old shares and bonds is not included
as these also do not represent expenditure on currently produced goods and
services.
(iii)
Expenditure on transfer payments by government such as
unemployment benefit, old age pensions, interest on public debt should also not
be included because no productive service is rendered in exchange by recipients
of these payments.

(2) The Income Approach

NI is measured in terms of payments made to the primary factors of production
Definition:
The total income earned by the factors of production owned by a countrys
citizens.
Under this method, national income is measured as a flow of factor incomes.
There are generally four factors of production labour, capital, land and
entrepreneurship.
Labour gets wages and salaries, capital gets interest, land gets rent and
entrepreneurship gets profit as their remuneration.
Besides, there are some self-employed persons who employ their own labour and
capital such as doctors, advocates, CAs, etc. Their income is called mixed income.
The sum-total of all these factor incomes is called NDP at factor costs.
National Income= W + R + I + P

(W)Wages: It is the largest component of national income. It consists of wages

and salaries along with fringe benefits and unemployment insurance.
(R) Rents: Rents are the income from property received by households.
(I) Interest: Interest is the income private businesses pay to households who have
lent the business money.
(P) Profits: Profits are normally divided into two categories
o profits of incorporated businesses and
o profits of unincorporated businesses (sole proprietorship, partnerships
and producers cooperatives)
Precautions : While estimating national income through income method, the
following precautions should be undertaken.
Transfer payments such as gifts, donations, scholarships, indirect taxes should not
be included in the estimation of national income.
Illegal money earned through smuggling and gambling should not be included.
Windfall gains such as -prizes won, lotteries etc. is not be included in the
estimation of national income.
Receipts from the sale of financial assets such as shares, bonds should not be
included in measuring national income as they are not related to generation of
income in the current year production of goods.

Value Added Method or Production method:

This method is used to measure national income at the phases of production of
each enterprise and each industrial sector during a year.

Under this method, the economy is- generally divided into three industrial classes
namely
Primary sector (agriculture, fishing, forestry, mining, )
Industrial sector (manufacturing, construction, transport and communication,)
Service sector.(trade and commerce insurance, banking etc)
Precautions : There are certain precautions which are to be taken to avoid
miscalculation of national income using this method. These in brief are:
1 Problem of double counting: When we add up the value of output of various
sectors, we should be careful to avoid double counting.
Value addition in particular year: GDP thus includes only those goods and
services that are newly produced within the current period.
Stock appreciation: Stock appreciation, if any, must be deducted from value
added.
(iv) Production for self consumption. The production of goods for self
consumption should be counted While measuring national income.

GNP & PERSONAL INCOME

Gross National Product (GNP)

The total market value of all final goods and services produced within a
given period by factors of production owned by a countrys citizen,
regardless of where the output is produced.
Personal Income
The total income of households before paying personal income tax.

Problems In Calculating National Income

Black Money : It has created a parallel economy - unreported economy which is
equivalent to the size of officially estimated size of the economy
Non-Monetization : In most of the rural economy, considerable portion of transactions
occurs informally
Growing Service Sector : growing faster than Agricultural and Industrial sectors value
addition in legal consultancy, health service ,financial and business services is not based
on accurate reporting.
Problems
House Hold Services : It ignores domestic work and house keeping services
Social Services : It ignores volunteer and unpaid social services. (Mother Teresas social
service)
Environment Cost : It does not distinguish between environmental-friendly and
environmental-hazardous industries cost of polluting industries is not included in the
estimate.
DIFFICULTIES IN MEASUREMENT OF NATIONAL INCOME
IMPORTANCE OF NATIONAL INCOME

IMPORTANCE OF NATIONAL INCOME

Topics

Introduction
Definition
Types of Inflation
Causes of Inflation
Effects of Inflation
How is Inflation Measured
Consequences of Inflation
Measures Of Inflation

INTRODUCTION
In economics inflation means, a rise in general level of prices of goods and
services in a economy over a period of time.
When the general price level rises, each unit of currency buys fewer goods
and services. Thus, inflation results in loss of value of money.
Another popular way of looking at inflation is "too much money chasing
too few goods". The last definition attributes the cause of inflation to
monetary growth relative to the output / availability of goods and services
in the economy.
In case the price of say only one commodity rise sharply but prices of
other commodities fall, it will not be termed as inflation. Similarly, in case
due to rumours if the price of a commodity rise during the day itself, it
will not be termed as inflation.
DEFINITION
According to C.CROWTHER, Inflation is State in which the Value of Money is
Falling and the Prices are rising.

In Economics, the Word inflation Refers to

General rise in Prices Measured
against a Standard Level of Purchasing Power.

What is Stagflation :
Stagflation refers to economic condition where economic growth is very slow or
stagnant and prices are rising.
The term stagflation was coined by British politician Iain Macleod, who used the
phrase in his speech to parliament in 1965, when he said: We now have the worst

of both worlds - not just inflation on the one side or stagnation on the other. We
have a sort of stagflation situation.
The side effects of stagflation are increase in unemployment- accompanied by a
rise in prices, or inflation.
Stagflation occurs when the economy isn't growing but prices are going up. At
international level, this happened during mid 1970s, when world oil prices rose
dramatically, fuelling sharp inflation in developed countries.

What is Deflation ? :
Deflation is the opposite of inflation.
Deflation refers to situation, where there is decline in general price levels. Thus,
deflation occurs when the inflation rate falls below 0% (or it is negative inflation
rate).
A general decline in prices, often caused by a reduction in the supply of money or
credit.
Deflation can be caused also by a decrease in government, personal or investment
spending.
The opposite of inflation, deflation has the side effect of increased unemployment
since there is a lower level of demand in the economy, which can lead to an
economic depression.
What is Disinflation
Disinflation is commonly used by the Federal Reserve to describe situations of
slowing inflation. Instances of disinflation are not uncommon and are viewed as
normal during healthy economic times. Although sometimes confused with
deflation, disinflation is not considered to be as problematic because prices do not
actually drop and disinflation does not usually signal the onset of a slowing
economy.
TYPES OF INFLATION
(a) DEMAND - PULL INFLATION: In this type of inflation prices increase results
from an excess of demand over supply for the economy as a whole. Demand inflation
occurs when supply cannot expand any more to meet demand; that is, when critical
production factors are being fully utilized, also called Demand inflation.
(b) COST - PUSH INFLATION: This type of inflation occurs when general price levels
rise owing to rising input costs. In general, there are three factors that could contribute to
Cost-Push inflation: rising wages, increases in corporate taxes, and imported inflation.
[imported raw or partly-finished goods may become expensive due to rise in international
costs or as a result of depreciation of local currency ]
Demand Pull:

This type of inflation happens when the

more than
the
supply

aggregate demand increases

Demands pull inflation, wherein the economy demands more goods and
services
than what is produced.

Demand Pull Inflation in AD-AS Graph

The reasons for the shift in AD curve can be either real or monetary factors.
It is due to:
The real factors
The monetary factors

Price Level

AS

P1
P0

Y Y

A
D0

A
D1
X

Real Factors: The real factors can be increase or decrease in the tax receipts and
corresponding increase or decrease in government expenditure. Other factors are
investment function, consumption function and export function.
The monetary Factors: Monetary factors can be increase or decrease in the money
supply.
Example: In 1990s when Russian government financed its budget deficit by printing
rubbles, the inflation rate per month increased to 25 percent per month and the annual
inflation rate was 1355 percent.

Cost Push Inflation

When cost of production increases the price level automatically increases.
Cost push inflation or supply shock inflation, wherein non availability of a
commodity would lead to increase in prices

Cost Push Inflation in AD-AS Graph

Cost push theory of inflation explains the causes of inflation origination from the supply
side.
Cost push inflation depends on:
Wage push inflation
Profit push inflation
Supply shock inflation

AS

Price Level

AS
0

P1
P0

AD
O

0
Quantity
1

Demand pull vs Cost Push Inflation

If demand pull inflation is correct the government must bear the cost of excessive
spending and monetary authorities are to be blamed for cheap money policy
On the contrary, if cost push is the real cause for inflation then the trade union are
to blamed for excessive wage claim, industries for acceding them and business
firms for marking-up profits aggressively.
OTHER TYPES OF INFLATION

Open Inflation : When government does not attempt to restrict inflation, it is

known as Open Inflation. In a free market economy, where prices are allowed to
take its own course, open inflation occurs.
Suppressed Inflation : When government prevents price rise through price
controls, rationing, etc., it is known as Suppressed Inflation. It is also referred as
Repressed Inflation. However, when government controls are removed,
Suppressed inflation becomes Open Inflation. Suppressed Inflation leads to
corruption, black marketing, artificial scarcity, etc.

Creeping Inflation -: Creeping or mild inflation is when prices rise 3% a year or

less. According to the U.S. Federal Reserve, when prices rise 2% or less, it's
actually beneficial to economic growth. That's because this mild inflation sets
expectations that prices will continue to rise. As a result, it sparks increased
demand as consumers decide to buy now before prices rise in the future. By
increasing demand, mild inflation drives economic expansion.

Galloping Inflation -: Very Rapid Inflation which is almost impossible to reduce.

When inflation rises to ten percent or greater, it wreaks absolute havoc on the
economy.

Money loses value so fast that business and employee income can't keep up with
costs and prices. Foreign investors avoid the country, depriving it of needed
capital.
The economy becomes unstable, and government leaders lose credibility.
Galloping inflation must be prevented.
Hyper Inflation -: Hyperinflation is when the prices skyrocket more than 50% -- a
month.
It is fortunately very rare. In fact, most examples of hyperinflation have occurred
when the government printed money recklessly to pay for war. Examples of
hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and during
the American Civil War.

CAUSES OF INFLATION
FACTORS ON DEMAND SIDE:
Growth of population
Rise in employment and income
Increasing pace of urbanization

FACTORS ON SUPPLY SIDE

Irregular Agricultural supply
Hoarding of essential goods
Rise in administered prices
Agricultural price policy
Inadequate industrial growth
Rising prices of Imports

Monetary and Fiscal factors:

Rising levels of government expenditure
Deficit financing
EFFECTS OF INFLATION
Effect on Economic Development : Rapid rise in prices is detrimental to the
process of growth and development as, it adversely impacts the rate of saving and
investment.
Effect on Foreign Investment : Price rise has an adverse effect on the foreign
investment in the country. Foreign investors do not invest in those countries
where the value of money tends to constantly eroding.
Adverse Effect on the People with Fixed Income : Price rise has an adverse effect
on the people with fixed income. On account of rise in price level, the real value
of their monetary income goes down. They can buy less goods than before.

Disrupts execution of projects and Increase in Cost : Cost of projects (both

private & public sector) tends to ramp up due to rise in prices. As a result, plan
layouts had to frequently revised to achieve the stipulated targets. However, when
the planners fail to find additional resources, plan targets are to be sacrificed.
Adverse Impact on Balance of Payments : Owing to inflation, exports become
expensive. Domestic goods lose their competitiveness in the international market.
Exports, therefore, tend to fall. On the other hand, imports tend to become
relatively cheaper. Accordingly, balance of trade, and therefore, balance of
payments tend to become unfavorable .
Rise in black money
Rise in inequalities of income and wealth

MEASURES OF INFLATION
Monetary measures to control Inflation:
1. Quantitative Instruments
1. Raise Bank Rate
2. Open market operation
3. Variable reserve ratio1) Raise CRR
2) Raise SLR
2. Grant loans for essential purpose only

Fiscal Measures or reduced budget deficit:

Revenue policy
Expenditure Policy

Other measures:
Control prices
Wages Freeze
Dividend freeze
Population control measures
Increase in supply of goods
Public distribution of essential goods

POLICY OF GOVERNMENT TO CHECK INFLATION

Monetary Policy
Fiscal Policy
Price Policy
MONETARY POLICY
Monetary policy refers to that policy through which the government or Reserve Bank
of India controls the supply of money , availability of money and the rate of
interest in order to attain a set of objectives focusing on the price stability and
economic growth of the country. Monetary measures focuses on controlling the supply
of money as the most patent means of checking inflation.

Instrument of Monetary Policy

Bank Rate
Open Market Operation
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Bank Rate
The interest rate at which a nation's central bank lends money to domestic banks.
Often these loans are very short in duration. Managing the bank rate is a preferred
method by which central banks can regulate the level of economic activity.
Lower bank rates can help to expand the economy, when unemployment is high, by
lowering the cost of funds for borrowers. Conversely, higher bank rates help to reign in
the economy, when inflation is higher than desired.
The bank rate can also refer to the interest rate which banks charge customers on loans.
Open Market Operations
Open market operations is yet another technique adopted by the Reserve Bank for
quantitative credit control. This means that the bank controls the flow of credit
through the sale and purchase of government securities in the open market.
Cash Reserve Ratio
The Cash Reserve Ratio (CRR) refers to this liquid cash that banks have to maintain
with the Reserve Bank of India (RBI) as a certain percentage of their demand and
time liabilities.
Statutory Liquidity Ratio
Statutory Liquidity Ratio (SLR) is a term used in the regulation of banking in India. It
is the amount which a bank has to maintain in the form of cash , gold or approved
securities.
Repo rate and reverse Repo rate
Reverse repo is the rate at which when banks have excess funds they can park that money
with the Reserve Bank of India and the interest rates that the Reserve Bank of India pays
to the banks for parking their excess money is the reverse repo rate.
The opposite of reverse repo is really the repo rate. When banks do not have excess
money supply then can borrow money from Reserve Bank of India under the repo rate.
This borrowing is not free. Banks have to pledge their holding of government bonds as
collateral and in turn borrow from the Reserve Bank of India.
FISCAL POLICY
The policy of Govt. related to the Revenue and Expenditure is known as Fiscal Policy.
Fiscal policy is the means by which a government adjusts its levels of
spending in order to monitor and influence a nation's economy.

Instrument of Fiscal Policy

Taxation Policy
Government Expenditure Policy
Deficit Financing
Taxation Policy
Taxation forces the people to save for the government. The government uses taxation as
a powerful instrument to increase or decrease the real purchasing power of the
people.
Government Expenditure Policy
Aggregate demand is influenced by government expenditure. On account of increase
in public ( government ) expenditure there is increase in aggregate demand and vice
versa. Public expenditure can be of two types:
Public expenditure incurred to buy goods & services
Public expenditure incurred on transfer payments
Deficit Financing
deficit financing, It is a practice in which a government spends more money than it
receives as revenue, the difference being made up by borrowing or minting new funds.
Although budget deficits may occur for numerous reasons, the term usually refers to a
conscious attempt to stimulate the economy by lowering tax rates or increasing
government expenditures.
PRICE POLICY
Price policy refers to the policy of directing, regulating and controlling the
relative price structure of the economy in such a manner that it favorably
impacts the macro economic parameters like ; consumption , saving, investment,
production, etc.
BUSINESS CYCLES

The business cycle is the upward and downward movement of economic activity
or real GDP that occurs around the growth trend.

The term business cycle refers to economy-wide fluctuations in production or

economic activity over several months or years.

These fluctuations occur around a long-term growth trend, and typically involve
shifts over time between periods of relatively rapid economic growth ( boom),
and periods of relative stagnation or decline (recession).

Business cycles are usually measured by considering the growth rate of real gross
domestic product.

Despite being termed cycles, these fluctuations in economic activity do not follow
a mechanical or predictable periodic pattern.
A cycle consists of general expansions, followed by general recessions,
contractions & revivals which merge with the expansion phase of the next cycle.
This sequence of change is recurrent but not periodic

The Phases of the Business Cycle

Hence the four main phases are:
o Recession
o Depression
o Recovery
o Boom
Recession occurs faster while recovery is a slower process.
The Phases of the Business Cycle
A peak is the top of the business cycle.
A trough is the bottom of the business cycle.
A boom is a very high peak.
A downturn is when economic activity starts to fall from a peak.
A upturn is when economic activity starts to rise from a trough.
Duration of Business Cycle
Minor cycle 1 to 3 years
Major Cycle 8 to 10 years
Very Long Cycle 50 60 years

B
m oo

Cyclical nature:
GDP

Pea
kD
n own
tu
r

r
tu
p
U
n

Troug
h
time

growth
trend

Business Cycle
Boom

Recovery

Recession

Depressio
n

RECOVERY:
Business confidence returns
Production, sales and profits increase
Employment increases
Price levels start increasing
New technology is adopted

wth
Gro

d
Tren

BOOM:
Output levels increase to go beyond the trend to a boom.
RECESSION:
Consumer demand falls
Investment already undertaken appears unprofitable
New investment is unlikely
Production and employment fall
General price level likely to fall
DEPRESSION:
In the absence of any stimulus, to aggregate demand, depression sets in.
Full utilization of capacity
High investment expenditure
High profits
High business expectations
New investment is profitable
Detail view of business cycle on next slide

Three Attributes of Economic Indicators

Procyclic: A procyclic (or procyclical) economic indicator is one that moves in
the same direction as the economy.
So if the economy is doing well, this number is usually increasing, whereas if
we're in a recession this indicator is decreasing. The Gross Domestic Product
(GDP) is an example of a procyclic economic indicator.
Countercyclic: A countercyclic (or countercyclical) economic indicator is one that
moves in the opposite direction as the economy.
The unemployment rate gets larger as the economy gets worse so it is a
countercyclic economic indicator.

Acyclic: An acyclic economic indicator is one that has no relation to the health of
the economy and is generally of little use.
The number of home runs the Montreal Expos hit in a year generally has no
relationship to the health of the economy, so we could say it is an acyclic
economic indicator.

Economic Indicators can be leading, lagging, or coincident which indicates the

timing of their changes relative to how the economy as a whole changes.
Three Timing Types of Economic Indicators
Leading: Leading economic indicators are indicators which change before the
economy changes.
Stock market returns are a leading indicator, as the stock market usually begins to
decline before the economy declines and they improve before the economy begins
to pull out of a recession.
Leading economic indicators are the most important type for investors as they
help predict what the economy will be like in the future.
Lagged: A lagged economic indicator is one that does not change direction until a
few quarters after the economy does.
The unemployment rate is a lagged economic indicator as unemployment tends to
increase for 2 or 3 quarters after the economy starts to improve.
Coincident: A coincident economic indicator is one that simply moves at the same
time the economy does. The Gross Domestic Product is a coincident indicator.
Indicators:

Indicators:
indicator

recovery

boom

Industrial production.

Gradual increase

high

Commodity prices

-do-

-do-

Cost of production

Increases but slower than

commodity prices

Increase faster than

recovery

profits

satisfactory

high

Investment

Replacement

High

Employment

Gradual increase

Rapid increase

Bank loans

Liberal

High demand for

advances

Speculation

Increases

high

Inventory stocks

Fall

Zero

Business failures

Rare

Zero

Business expectations

Cautious but
optimistic

optimistic

Indicators:
Leading indicators include the following:
Average workweek for production workers in manufacturing.
Unemployment claims.
New orders for consumer goods and materials.
Stock prices
Residential construction
Capacity utilization
Interest rate spread.
Changes in the money supply.
Procyclical vs countercyclical
Variables which move in the same direction as the GDP over the business cycles
are procyclical.
E.g consumption
Variables which move in the opposite direction to GDP are countercyclical
E.g unemployment
Variables:

Pro-cyclical

Countercyclical

Industrial production

Unemployment

Commodity prices

Inventory stocks

Cost of production

Business failures

Profits
Investment
Wages
Bank loans