lesson

Business cycle indicators

After you have worked through this section of the learning unit, you should be able to:

describe how business cycle indicators are identified
describe and distinguish between coincident, leading and lagging indicators
describe composite business cycle indicators

Start Activities

Print Page

Study Instructions

Study chapter 4.2 of the textbook.

Do the activities.

Introduction

Concepts

Coincident indicator

An individual time series whose specific turning points tend to coincide with the reference turning points.
Leading indicator

An individual time series whose specific turning points tend to precede the reference turning points.
Lagging indicator

An individual time series whose specific turning points tend to precede the reference turning points.
Production Possibilities Curve And Choice
After you have worked through this section of the learning unit, you should be able to:

use the PPC to illustrate what happens to the allocation of resources and technical efficiency along a production possibilities curve

distinguish between technical efficiency and allocative efficiency and explain why the PPC curve can be used to explain technical efficiency but not allocative efficiency
[siteorigin_widget class="SiteOrigin_Widget_Image_Widget"][/siteorigin_widget]
Choice is illustrated by the available combinations along the production possibilities curve. For instance, in Zanadu, society must choose which combination of laptops and mobile phones to produce to ensure the maximum satisfaction to the citizens of Zanadu.

[siteorigin_widget class="WP_Widget_Custom_HTML"][/siteorigin_widget]
[siteorigin_widget class="SiteOrigin_Widget_Image_Widget"][/siteorigin_widget]

Some of you may have chosen B, some C, some D and others E. Well, you might all be right.

The production possibilities curve provides information on technical efficiency – that is, the maximum number of goods and services that can be produced with the given resources. It does not tell us which of these possible combinations present allocative efficiency – that is, the optimal (best) combination of goods and services desired by consumers.

Allocative efficiency is achieved when the economy is doing the best possible job of satisfying unlimited wants and needs with limited resources. To achieve this however, the market must first achieve technical efficiency. And this technical efficiency must be useful or valued by people.

For example, an industry might achieve technical efficiency for the production of 10cm pieces of yellow cotton string, but if nobody in the market actually wants these, they will pile up in a room somewhere, and allocative efficiency has not been achieved.

Allocative efficiency occurs when an economy provides the greatest amount of consumer satisfaction that is possible given the available resources. So markets have a role to play in determining not only the point of technical efficiency for the production of a good or service, but also the point of allocative efficiency.

The production possibilities curve provides information on technical efficiency – that is, the maximum number of goods and services that can be produced with the given resources. It does not tell us which of these possible combinations present allocative efficiency – that is, the optimal (best) combination of goods and services desired by consumers.

Production possibilities for Zanadu

Combination Laptops Mobile Phones

A 5 000 0

B 4 000 10 000

C 3 000 18 000

D 2 000 24 000

E 1 000 28 000

F 0 30 000

[siteorigin_widget class="SiteOrigin_Widget_Image_Widget"][/siteorigin_widget]

Which combination (A, B, C, D, E or F) consumers desire is an important issue in economics, and something we will return to later in the course.

What is the difference between points D and C? If we examine the table and the diagram, we see that at point D, 2 000 laptops and 24 000 mobile phones are produced, while at point C, 3 000 laptops and 18 000 mobile phones are produced. Because more laptops are produced, fewer mobile phones are produced. The people of Zanadu are facing a trade-off – to have more laptops they must give up some mobile phones. As they move from point D to point C, they are allocating more resources to the production of laptops and fewer to the production of mobile phones.

From this one can also conclude that the question of what to produce is in fact a decision about how resources should be allocated among their competing uses. Competing uses suggests that the same resources could be used to produce different things. A decision to produce at a point such as D indicates that a decision has been made to allocate resources in such a way that this specific combination is produced.

[siteorigin_widget class="WP_Widget_Custom_HTML"][/siteorigin_widget]

Activity

Do the following activity to make sure you understand the concepts technical efficiency and allocative afficiency:

Paradiso is currently producing a combination of food and guns as indicated by point D on the production possibilities curve. The decision to produce this combination was taken by the president of Paradiso without any consultation with the parliament or the people of Paradiso. In a survey it was found that the people of Paradiso would prefer a combination such as that represented by C.

Indicate which of the following statements are true or false?

[siteorigin_widget class="SiteOrigin_Widget_Image_Widget"][/siteorigin_widget]

a. At point D, Paradiso is not technically efficient because the people of Paradiso prefer combination C.

[siteorigin_widget class="WP_Widget_Custom_HTML"][/siteorigin_widget]

Think again. The statement is false. Any point on the production possibilities curve represents technical efficiency. At point D, there is therefore technical efficiency but not allocative efficiency since society prefer point C.

The statement is indeed false.

Any point on the production possibilities curve represents technical efficiency. At point D, there is therefore technical efficiency but not allocative efficiency since society prefer point C.

b. At point C, technical efficiency occurs.

[siteorigin_widget class="WP_Widget_Custom_HTML"][/siteorigin_widget]

The statement is indeed true.

Any point on the PPC indicate technical efficiency.

Think again. The statement is true.

Any point on the PPC indicate technical efficiency.

c. At point C, allocative efficiency occurs.

[siteorigin_widget class="WP_Widget_Custom_HTML"][/siteorigin_widget]

The statement is indeed true.

Point C is indicated as allocative efficiency.

Think again. The statement is indeed true.

Point C is indicated as allocative efficiency.

d. At point C, the satisfaction the people of Paradiso derive from food and guns is greater than the satisfaction at point D.

[siteorigin_widget class="WP_Widget_Custom_HTML"][/siteorigin_widget]

The statement is indeed true.

This is the point of allocative efficiency meaning the satisfaction the people of Paradiso derive from this combination food and guns is greater than the satisfaction at a combination such as point D.

Think again. The statement is true.

This is the point of allocative efficiency meaning the satisfaction the people of Paradiso derive from this combination food and guns is greater than the satisfaction at a combination such as point D.

A movement from point C to point B implies that:

[siteorigin_widget class="SiteOrigin_Widget_Image_Widget"][/siteorigin_widget]
[siteorigin_widget class="WP_Widget_Custom_HTML"][/siteorigin_widget]

Think again. The statement is incorrect.

The scarcity problem is still with us.

The statement is indeed correct.

A movement from point C to point B indicates that fewer resources are allocated to the production of guns and more to the production of food.

Think again. The statement is incorrect.

A movement from point C to point B indicates that fewer not more resources are allocated to the production of guns and more to the production of food.

Think again. The statement is incorrect.

Technical efficiency is the same at points B and C. Any point on the PPC represents technical efficiency but not necessarily allocative efficiency.

Glossary

lesson

Business cycle indicators

Study Instructions

Introduction

Business cycle indicators: Activities

1. Business cycle indicators are identified by comparing the turning points of composite time series with the reference turning points.

2. If the specific turning points of an individual time series tend to coincide with the reference turning points, the relevant variable is regarded as a …

3. If the specific turning points of an individual time series tend to precede the reference turning points, the relevant variable is regarded as a …

4. If the specific turning points of an individual time series tend to occur after the reference turning points, the relevant variable is regarded as a …

5. A time series such as the value of non-residential building completed is regarded as a (leading indicator, coincident indicator, lagging indicator) since the peak of the time series is reached (before, after, at the same time as) the peak of the reference cycle.

6. A time series such as total formal non-agricultural employment is regarded as a (leading indicator, coincident indicator, lagging indicator) since the peak of the time series is reached (before, after, at the same time as) the peak of the reference cycle.

7. A time series such as number of residential business plans passed is regarded as a (leading indicator, coincident indicator, lagging indicator) since the peak of the time series is reached (before, after, at the same time as) the peak of the reference cycle.

8. A composite leading indicator is compiled by combining the cyclical components of indicators for all the groups.

9.a By how much did the composite leading business cycle indicator decrease?

9.b All the different leading business cycle indicators made a negative contribution to the composite leading business cycle indicator.

9.c Which one of the following leading indicators made the largest negative contribution to the composite leading business cycle indicator?

Production possibilities for Zanadu

Activity

Indicate which of the following statements are true or false?

A movement from point C to point B implies that:

Combination	Laptops	Mobile Phones
A	5 000	0
B	4 000	10 000
C	3 000	18 000
D	2 000	24 000
E	1 000	28 000
F	0	30 000