CA Foundation · Business Economics · Business Cycles
Which of the following is best classified as a cyclical indicator that LEADS the business cycle, meaning it usually changes direction before overall economic activity does?
New housing construction permits is the leading indicator. Permits are granted before building work and spending occur, so they change direction ahead of overall activity. Unemployment rate, outstanding bank credit and unemployment duration are lagging indicators, which move only after the cycle has already turned.
- AUnemployment rate
- BNumber of new housing construction permits issuedCorrect
- COutstanding bank credit to industry
- DAverage duration of unemployment
Explanation
Building permits are issued before construction happens, so they signal future activity and turn before the economy does. Unemployment rate, outstanding credit and duration of unemployment typically lag, changing only after output has already turned. Hence permits is the leading indicator.
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