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

Needs
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.
GDP Deflator = (Nominal GDP/Real GDP) x 100
Formula:
7

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,

Public

real flow

money flow

Payment for Factor Services

Households /
Consumers

Wages, Interest and Profit)

Supply of Factors of Production

(Land, Labour, Capital & Organization)

Business

Circular Flow
of Income
(Goods & Services)

Supply of Commodities
(Commodity Price)

Payment for Commodities

Firms /
Producers

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.

11

 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

MEASUREMENT OF NATIONAL
INCOME
INCOME

PRODUCTI
ON

EXPENDITU
RE

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

16

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
17

(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
18

 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)

20

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, &
21
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.
22

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.
23

 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.

25

 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
(i) (W)Wages: It is the largest component of
national income. It consists of wages and salaries
along with fringe benefits and unemployment
insurance.
(ii)(R) Rents: Rents are the income from property
received by households.
(iii) (I) Interest: Interest is the income private
businesses pay to households who have lent the
business money.
(iv)(P) Profits: Profits are normally divided into
two categories
(a) profits of incorporated businesses and
(b) profits of unincorporated businesses (sole
proprietorship, partnerships and producers cooperatives)

 Precautions : While estimating national income

through income method, the following precautions
should be undertaken.
(i) Transfer payments such as gifts, donations,
scholarships, indirect taxes should not be included in
the estimation of national income.
(ii) Illegal money earned through smuggling and
gambling should not be included.
(iii) Windfall gains such as -prizes won, lotteries
etc. is not be included in the estimation of national
income.
(iv) 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
(a) Primary sector (agriculture, fishing, forestry,
mining, )
(b) Industrial sector (manufacturing,
construction, transport and communication,)
(c) 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.
(ii) Value addition in particular year: GDP
thus includes only those goods and services that
are newly produced within the current period.
(iii) 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.
31

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
Conceptual

Practical

Inclusion of Services
Indentifying
intermediate goods
Identifying factor
incomes
Valuation of inventory
changes
Income of foreign
companies

Lack of occupational
specialization
Non-monetized sector
Unreported illegal
income
Non-availability of
reliable statistical
data

IMPORTANCE OF NATIONAL
INCOME
Measures inflationary or deflationary
pressure
Contribution of various sectors
Distribution of national income in an
economy
Shapes the Budgetary policy of the
Government
Planning of an Economy

INFLATION

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 partlyfinished 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 aggregate demand increases more
than
the supply
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:
Y
AS
1

Price Level

Wage push inflation

Profit push inflation
Supply shock inflation

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-

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:
o Growth of population
o Rise in employment and income
o Increasing pace of urbanization

FACTORS ON SUPPLY SIDE

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

Contd
Monetary and Fiscal factors:
o Rising levels of government
expenditure
o 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

(Cont.)

 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 economywide fluctuations in production or
economic activity over several months or
years.
These fluctuations occur around a longterm growth trend, and typically involve
shifts over time between periods of
relatively rapid economic growth ( boom),

 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:
Recession
Depression
Recovery
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

 Cyclical nature:

Bo
o

GDP
Peak
Do

wn

tu

n
ur
t
Up

rn

Trough
time

growth
trend

Business Cycle
Boom

Recovery

Recession

Depressio
n

en d
r
T
wth
o
r
G

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

Increases

Rapid
increase
High demand
for advances
high

Inventory
stocks
Business
failures
Business
expectations

Fall

Zero

Rare

Zero

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
Industrial production
Commodity prices
Cost of production
Profits
Investment
Wages
Bank loans

Countercyclical
Unemployment
Inventory stocks
Business failures