The world has become fast-paced and economies are also growing in a speedy way, at least until the last few years. How do we know whether an economy is growing, shrinking, or is remaining stagnant? The most important and widely recognized indicator for that is GDP (Gross Domestic Product). But what if someone wants to predict a pattern, or confirm a pattern? Can there be indicators based on various timeframes? The answer to that is yes and allow me to tell you about it.
The indicators based on timeframe are divided into three categories, Leading indicators, Co-incidental indicators, and Lagging indicators.
Leading indicators are those which predict and anticipate a pattern towards which an economy is heading. In real-time, the change has not yet taken place, but these indicators give a hint of what may happen if the economy continues to follow this pattern. We can consider implied volatility which means a sudden change in prices of stocks or the market as a whole without anything major undergoing.
Leading indicators are important as they predict the course an economy is heading and what can be done to ensure the least negative impact on the economy.
Second is the coincidental indicators which suggest that the change is taking place at the time when these indicators witness a change. They move alongside the economy and experience a similar change. The GDP of a country, interest rates followed in a country are some of the best examples of the aforementioned indicator.
Coincidental indicators help the government, businesses to make decisions in real-time. Decision making is important as these are the decision which will determine the future state of an economy or a certain business.
Lastly, there is the lagging indicator. As the name suggests, the lagging indicator works on confirming a pattern and hence lags behind the economy i.e. changes in the economy happens first then these indicators confirm the changes. These are important as they are produced after analyzing a situation so trusting this is more of a sure shot. Rating agencies can be used as an example of lagging indicators as these agencies analyze a situation, interpret it, and make the required changes. A microeconomic example of these will be a company changing wage rates based on the profit they incur. If there is enough profit and potential to maximize it further, the company may increase the wage rate or employ more people. Whereas, if the company is incurring losses it may have to cut costs and cut some slack leading to a fall in the wage rate.
These indicators provide to people what needs to be done? As a report is ready bearing the sectors lacking attention and sectors performing well.