Focus Question: How can we tell the present and future state of the economy?
Objectives
Students will be able to:
• Discuss the value of leading, coincident, and lagging indicators in determining the existing and future
state of the economy.
• Describe examples of leading, coincident, and lagging indicators.
• Evaluate the reliability of certain leading, coincident, and lagging indicators.
• Draw conclusions about the current economic situation after analyzing a sampling of indicators.
• Gather the kind of data used to put together the CPI, a major lagging indicator.
Standards
NES: 12, 15, 18, 19, 20
ELA: 1, 3
Time Frame/Notes to Teacher
One day, double period
Materials
Textbook chapter on: “Measuring the Economy’s Performance.”
Teaching Strategies
I. It’s the Economy:
Review homework given prior to this lesson, (Worksheet 9A, “It’s the Economy”). As part of the
introductory discussion to this lesson, have students explain their answers to the following:
— What were the answers you received to questions 1-6?
— What conclusions can we draw from the results of the survey you administered?
— What issues do the responses you received from this survey raise for discussion?
II. Economic Indicators:
• Divide the class into three groups. Distribute a different one of the following worksheets to each
group:
• Worksheet 9B, “Leading Indicators”; 9C, “Coincident Indicators”; and 9D, “Lagging Indicators.”
• Have students complete the exercises on the worksheets. Then have them explain their answers
to the following.
A. Leading Indicators:
For the group that studied leading indicators:
— What did you learn about leading indicators from the ones that you studied?
— Why are the indicators you studied considered leading indicators?
— Based on the current readings of the leading indicators you studied, in which direction is
the economy going in the near future?
B. Coincident Indicators:
For the group that studied coincident indicators:
— What did you learn about coincident indicators from the ones that you studied?
— Why are the indicators you studied considered coincident indicators?
— Based on the current readings of the coincident indicators you studied, how well is the
economy doing at the present time?
C. Lagging Indicators
For the group that studied lagging indicators:
— What did you learn about lagging indicators from the ones that you studied?
— Why are the indicators you studied considered lagging indicators?
— Why do we study indicators that really show us where the economy has been in the recent
past?
III. Whole-Class Discussion
As part of the whole-class discussion, have students explain their answers to the following:
— How reliable are these indicators as a whole?
— Give some reasons why sometimes the economy does not behave the way the indicators say it
should.
Summary/Assessment
Review Worksheet 9E, “Constructing a Market Basket,” which was distributed in Lesson 1 and due for
Lesson 9. Have students complete the exercise on the worksheet as a follow-up homework assignment.
After the assignment is completed, have students explain their answers to the following:
• What was the total amount of your market basket in your base “year”?
• By how much did your price index change from week one to week four?
• How can you explain the change?
• To what extent is the method you used a reliable method of calculating whether or not and by how
much prices have changed? What are some of the shortcomings of using this method to determine the
overall level of prices?
Homework
• Read materials in preparation for Lesson 10.
• Assign questions for homework.
• Complete Worksheet 10A before next lesson.
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Worksheet 9A
It’s the Economy
Exercise. Ask five adults to answer all of these questions:
1. How well would you say the U.S. economy is doing at the present time?
a) great
b) good
c) fair
d) poor
2. Give two examples that you can point to that would support the answer you gave in Question 1.
________________________________________________________________________
________________________________________________________________________
3. How important are each of the following in determining how well the economy is doing?
The direction in which the stock market is going.
a) very important
b) somewhat important
c) of little importance
d) not important
The number of people unemployed.
a) very important
b) somewhat important
c) of little importance
d) not important
The amount of goods and services produced in a given period of time.
a) very important
b) somewhat important
c) of little importance
d) not important
4. Of the three factors mentioned in Question 3 above, which is most important in determining how well
the economy is doing?
a) the Stock Market averages
b) the number of people unemployed
c) the amount of goods and services produced in a given period of time
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Worksheet 9B
Leading Indicators
Leading indicators measure aspects of the economy that tend to go up before expansions and down
before recessions.
Exercise. Read the worksheet below and access the listed links online. Then answer the following
questions in your notebook:
• What do the two indicators on this page measure?
• Why are these indicators considered important in judging the health of the economy?
• Do the most recent measures of these indicators tell us that the economy is healthy or unhealthy?
Explain.
Definition: One of several indices designed to measure changes in price of a broad array of stocks.
online market information sources.
often viewed as a barometer of business and consumer confidence regarding the future. A high and/or
rising stock market may signal robust growth of business investment and consumer spending in the
near future, while a low and/or falling stock market may signal sluggish spending. For this reason, the
S&P 500 is one component of the Index of Leading Indicators.
deposits, travelers' checks, and other checkable deposits) plus non-institutional money market funds and
small time and savings deposits.
Source: Board of Governors of the Federal Reserve System
Frequency: Weekly and monthly.
Availability: H.6 report. Weekly data released each Thursday afternoon after 4:30 p.m. Monthly data
released in either the second or third week of the month.
Reason: While the strength of the relationship has weakened over time, many people believe there is a
link
between growth of the supply of money and growth of nominal GDP.
View Chart: http://www.newyorkfed.org/rmaghome/dirchrts/pi_1.pdf
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Worksheet 9C
Coincident Indicators
Coincident indicators measure how well the economy is doing at the present time. Economists use these
indicators to help determine us to determine the phase of the business cycle we are in.
Exercise. Read the worksheet below and access the listed links online. Then answer the following
questions in your notebook:
• What do the two indicators on this page measure?
• Why are these indicators considered important in judging the health of the economy?
• Do the most recent measures of these indicators tell us that the economy is healthy or unhealthy?
Explain.
government agencies. Information is also provided on the average number of hours worked per week
and average hourly and weekly earnings.
Source: U.S. Department of Labor; Bureau of Labor Statistics
Frequency: Monthly
Availability: Usually the first Friday of the month for the immediately preceding month;
occasionally released on the second Friday.
Reason: Growth of employment and hours worked provide important information about the current
and likely future pace of overall economic growth. Trends in average hourly earnings provide
information about supply and demand conditions in labor markets, which may provide signals about
the overall level of resource utilization in the economy.
View chart: http://www.newyorkfed.org/rmaghome/dirchrts/pi_8.pdf
Definition: An index designed to measure changes in the level of output in the industrial sector of
the economy. The index is grouped by both products (consumer goods, business equipment,intermediate goods, and materials) and industry (manufacturing, mining, and utilities).
Source: Board of Governors of the Federal Reserve System
preceding month.
because changes in GDP are heavily concentrated in the industrial sector changes in this index
provide useful information on the current growth of GDP. The level of capacity utilization in the
industrial sector provides information on the overall level of resource utilization in the economy,
which may in turn provide information on the likely future course of inflation.
View chart: http://www.newyorkfed.org/rmaghome/dirchrts/pi_3.pdf
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Worksheet 9D
Lagging Indicators
These measures of the economy are among the last to turn upward in a business expansion and the last to turn downward during a recession.
Exercise: Read the worksheet below and access the listed links online. Then answer the following questions in your notebook:
• What do the two indicators on this page measure?
• Why are these indicators considered important in judging the health of the economy?
• Do the most recent measures of these indicators tell us that the economy is healthy or unhealthy? Explain
Definition: The inventory to sales ratio looks at business investment in inventory in relation to monthly
sales. The inventory to sales ratio is calculated by dividing inventory balances at the end of any month by total sales for the same month.mid-August.
inventory levels, since it uses monthly sales and inventory information. This ratio will help predict early
cash flow problems related to a business's inventory. When the ratio begins to get lower after a recession it is generally good news for the economy because it means that items are being sold almost as soon as they are on the shelves. In an economic down turn items stay on the shelf (in inventory), rather than being] sold, for a relatively longer period of time. Very often the economy turns up before the inventory to sales ratio starts going down and the economy turns down before the ratio begins to go up. Thus, it is called a lagging indicator.
Definition: The inventory to sales ratio looks at business investment in inventory in relation to monthly
sales. The inventory to sales ratio is calculated by dividing inventory balances at the end of any month by total sales for the same month.Source: U.S. Department of Commerce; Bureau of the Census
inventory levels, since it uses monthly sales and inventory information. This ratio will help predict early
cash flow problems related to a business's inventory. When the ratio begins to get lower after a recession it is generally good news for the economy because it means that items are being sold almost as soon as they are on the shelves. In an economic down turn items stay on the shelf (in inventory), rather than being sold, for a relatively longer period of time. Very often the economy turns up before the inventory to sales ratio starts going down and the economy turns down before the ratio begins to go up. Thus, it is called a lagging indicator.
Definition: An index designed to measure the change in price of a fixed market basket of goods and
services. The market basket of goods and services is representative of the purchases of a typicalurban consumer. The index is intended to measure pure price change only; attempts are made to
remove changes in price resulting from changes in quality.
for which data is being released; always released after the Producer Price Index.
economy. Acceleration or deceleration of inflation may signal that a change in monetary policy may
be appropriate.
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Worksheet 9E
Exercise. In this exercise you will learn about how one of the most important indicators, the
Consumer Price Index is compiled. For this exercise you will need the following tools:
• notebook
• pencil
• calculator
purchased most often.
• Price each specific item on a per week basis for one month. You must price the same products in the
• After the first week add up the total amount in prices of the 15 items in your market basket. Use this
number to serve as your base “year.”
market basket again, and compare the totals to that of your base “year.”
— List your market basket content. (Include brand names and quantities.)
— Give week one, your base “year,” a value of 100.
— Calculate index numbers for weeks 2, 3, and 4 by dividing the total amount for the 15 items for
each week by the total of the 15 items for the first week.
each week. For example, if the total amount of the 15 items for the first week totaled $75 and the total
for the second week was $90, then the index number for the second week was $90/$75 = 1.2 x 100 =
120. The percentage change in prices from week one to week two is 120 (index number for the
second week) – 100 (index number from the first week) = 20%
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