American economists continually attempt to gauge the health of the eco

American economists continually attempt to gauge the
health of the economy, both for the gain of the private
sector as well as for the global standing of the United
States. Different elements of the economy react differently
to changes in prosperity. Some elements rise and fall as
the economy waxes and wanes. These are known as
coincident indicators. Other elements are known as
leading indicators and usually show a downturn before
the economy does. A third group of elements are known
as lagging indicators and lose vigor only after the economy
has already begun to slow. Economists can predict the
direction of the economy by monitoring these indicators.

Coincident indicators, such as manufacturing and
employment rates, are the best gauge of the current state
of the economy. A continued shift in these indicators allows
economists to determine whether the economy itself is in
the process of an upturn or a downturn. These indicators
coincide with shifts in the economy because they are
dependent on sustained prosperity. But since coincident
indicators reflect only the current state of the economy,
they are not especially useful in predicting how the
economy will perform in the near future. Economists must
look to other indicators for that.

The indicators with the greatest predictive power are
leading indicators, such as mortgage applications and
profit margins. When these indicators rise or fall,
economists can often foretell similar changes in the
country’s economic health. These indicators do not cause
changes in the economy. Rather, they often signal changes
in economic behavior that lead to shifts in the economic
cycle. By contrast, the third type of indicator – lagging
indicators – is useless as a harbinger of change. But these
indicators can be helpful in confirming the assessments
of economists.

Determining which elements of the economy fall into which
category of indicator requires analysis of copious data
and an understanding of the factors that propel the
economy. One must determine which events surrounding
a turn in the business cycle actually contributed to the
change. Establishing a solid framework for understanding
the behavior of these indicators helps economists to avoid
miscalculations and to guide the country through periods
of slow or negative economic growth.

1. The primary purpose of the passage is to

· compare the utility of various economic indicators
· explain the process by which economists draw
conclusions about key factors of economic change
· present a conceptual framework used by economists
to prescribe economic goals
· trace the development of a set of economic devices
· argue for the continued evaluation of economic factors
affecting the business cycle

2. The information in the passage suggests that which
of the following would most strongly indicate an
imminent change in the business cycle?

· a decrease in the employment rate
· a decrease in the number of new homes built per
month
· an increase in the number of new automobiles
produced each month
· an increase in the difference between manufacturing
costs and retail revenues for large home appliances
· a decrease in the number of corporate bankruptcies
per month

3. According to the passage, the main purpose of
economic indicators is which of the following?

· to facilitate the analysis necessary to maintain forward
economic momentum
· to allow investors to time their investments in sync
with economic cycles
· to foster healthy economic competition among various
commercial sectors
· to bring to light several key factors in economic
downturns
· to promote widespread understanding of economic
principles

4. The passage suggests that lagging indicators would
be least helpful in determining which of the following?

· whether predictions based on the behavior of the
mortgage market were accurate
· whether companies ought to cut costs in order to
avoid short-term losses
· whether recent trends in the employment rate were
consistent with the overall economic picture
· whether financial analysts are correct in their
assessment of recent economic developments
· whether the government was justified in taking action
to boost the economy

Hi Gomze..

My reasoning:

4. The passage suggests that lagging indicators would be least helpful in determining which of the following?
· whether predictions based on the behavior of the mortgage market were accurate---lagging indicators are used to confirm whether economist envisaged correctly about economy..here a prediction is being "assessed"..so a property of lagging indicator
· whether companies ought to cut costs in order to avoid short-term losses--Here we are determining future(a prediction) , not a property of lagging indicators.

4. The passage suggests that lagging indicators would be least helpful in determining which of the following?
· whether predictions based on the behavior of the mortgage market were accurate
· whether companies ought to cut costs in order to avoid short-term losses
· whether recent trends in the employment rate were consistent with the overall economic picture
· whether financial analysts are correct in their assessment of recent economic developments
· whether the government was justified in taking action to boost the economy

According to the passage Lagging indicators cannot predict the way economy id heading , but it can only confirm if earlier predictions were correct. So it would be least helpful in making decisions related to the actions that should be taken in order to better the economy . Hence lagging indicators cannot help make the decision echoed in option B.

Actually A can be confirmed by using lagging indicators! Reread the passage , you will be clear on that.

Explanation for Q2:

The third paragraph states that mortgage applications and profit margins are examples of leading indicators, which have the greatest predictive power. Therefore, we need to find an answer choice that relates to either mortgage applications or profit margins.

(D) Imminent changes in the economic cycle are indicated by leading indicators, of which profit margins are an example (paragraph 3). The increase described in this choice is indeed a profit margin (revenue minus cost).

(E) This choice focuses on bankruptcies, which are not mentioned in the passage.

Official Solution (Credit: Manhattan Prep)

The primary purpose of the passage is to


compare the utility of various economic indicators


explain the process by which economists draw conclusions about key factors of economic change


present a conceptual framework used by economists to prescribe economic goals


trace the development of a set of economic devices


argue for the continued evaluation of economic factors affecting the business cycle
Questions that ask about "primary purpose" must take into account the passage in its entirety. Overall, this passage is about the differing predictive uses of the various economic indicators.

(A) CORRECT. The passage does indeed focus on the utility of "various economic indicators."

(B) This choice mistakenly focuses on a process that is not discussed in the passage.

(C) This choice focuses only on a few sentences in the last paragraph of the passage.

(D) This choice mischaracterizes the intent of the passage in using the verb "trace", which implies a chronology.

(E) This choice is incorrect in describing the author's purpose with the verb "to argue." The author does not present an argument in the passage, but rather an objective comparison.

Official Solution (Credit: Manhattan Prep)

The information in the passage suggests that which of the following would most strongly indicate an imminent change in the business cycle?


a decrease in the employment rate


a decrease in the number of new homes built per month


an increase in the number of new automobiles produced each month


an increase in the difference between manufacturing costs and retail revenues for large home appliances


a decrease in the number of corporate bankruptcies per month
The third paragraph states that mortgage applications and profit margins are examples of leading indicators, which have the greatest predictive power. Therefore, we need to find an answer choice that relates to either mortgage applications or profit margins.

(A) This choice focuses on the employment rate, which is a coincident indicator (paragraph 2).

(B) This choice focuses on the number of new homes being built, which is not discussed in the passage. Do not assume that the number of new homes being built can be correlated with mortgage applications, which are indeed a leading indicator (paragraph 3).

(C) This choice focuses on manufacturing, which is a coincident indicator (paragraph 2).

(D) CORRECT. Imminent changes in the economic cycle are indicated by leading indicators, of which profit margins are an example (paragraph 3). The increase described in this choice is indeed a profit margin (revenue minus cost).

(E) This choice focuses on bankruptcies, which are not mentioned in the passage.

Official Solution (Credit: Manhattan Prep)

The passage suggests that lagging indicators would be least helpful in determining which of the following?

whether predictions based on the behavior of the mortgage market were accurate


whether companies ought to cut costs in order to avoid short-term losses

whether recent trends in the employment rate were consistent with the overall economic picture

whether financial analysts are correct in their assessment of recent economic developments


whether the government was justified in taking action to boost the economy
Lagging indicators have no predictive power. They serve simply as confirmation of the recent state of the economy. Therefore, lagging indicators would not be helpful in determining future courses of action.

(A) This does not require predictive power.

(B) CORRECT. This choice – cutting costs to avoid short-term losses – requires predictive power. And so lagging indicators would not be helpful in determining whether companies should follow this course of action.

(C) This does not require predictive power.

(D) This does not require predictive power.

(E) This does not require predictive power.

1. The primary purpose of the passage is to

(A) compare the utility of various economic indicators
(B) explain the process by which economists draw conclusions about key factors of economic change
(C) present a conceptual framework used by economists to prescribe economic goals
(D) trace the development of a set of economic devices
(E) argue for the continued evaluation of economic factors affecting the business cycle

I narrowed this down to (A) or (B), and ended up going with (B).

I don't think the main purpose of this passage is to compare the utility of the 3 indicators.

I would instead say that the main purpose is to explain how, why, and when economists use the 3 indicators.

I miss primary purpose questions a lot. I think it may be because I put a lot of focus on the first word of the answer choice (explain, compare, etc).

If someone could clear up for me how (B) is incorrect and (A) is correct, I would appreciate it. Manhattan's explanation is lazy for this question.

Here I am a month later. And I made the exact same mistake

I can see how (A) is better because the purpose is to explain the utility of these indicators, why they exist, and who uses them. But I wouldn't say the primary purpose of this entire passage is to compare the utilities of the different indicators.

Further, I was also torn on #3

3. According to the passage, the main purpose of economic indicators is which of the following?
(A) to facilitate the analysis necessary to maintain forward economic momentum
(B) to allow investors to time their investments in sync with economic cycles
(C) to foster healthy economic competition among various commercial sectors
(D) to bring to light several key factors in economic downturns
(E) to promote widespread understanding of economic principles

Between (A) and (E), I don't love either of them.

I eliminated (A) because "Maintain forward economic momentum" seemed way out of scope. Where in the passage does it say anything about forward momentum? All we know is that economists use these indicators "to guide the country through periods of slow or negative economic growth."

Any help is appreciated.

in question 2 what is the meaning of imminent . i think imminent means the immediate. that's why i marked the sentence wrong. please clarify.

In Q3, I am stuck between option A and option D. Why is the answer option A.

Hi 12AG,

Let me know if this helps.

Please refer the link : https://gmatclub.com/forum/american-eco ... l#p1233095

Thanks.

Hello guys,

D. an increase in the difference between manufacturing costs and retail revenues for large home appliances

How do we translate this mathematically? I know that profit=R-C , but I thought that in that case the correct order would be what is the difference between revenues for large home appliances and manufacturing costs and not the other way around
The way it is written it looks like Profit=Cost-Revenue , is my reasoning incorrect?

I don't particularly agree on the OA for question 3. I understand that many have referred to the line "Establishing a solid framework... slow or negative economic growth" in the last paragraph to justify the purpose of economic indicators. However, I'm not so sure if I can see the link or the ability to make this connection based on what is stated in this line.

Sure, I agree that based on conventional thinking, economic indicators is used to maintain forward economic momentum. However, in my opinion, the last paragraph's tone and content seem to point towards avoiding/minimising negative effects on the economy rather than maintaining economic growth. Please help!

Hi UNSTOPPABLE12,

True that Profit = Revenue - Cost, but the above mentioned option, doesn't necessarily imply profit. An increase in the difference between manufacturing costs and retail revenues could also mean excessive manufacturing costs and every less revenues and thus leading to loss. Increase in difference, whether profit or loss, is an important factor in gauging a change in the business cycle. The option is not wrong, it's generalized for both profit and loss. An increase in difference either way would be important for measuring the change in business cycle.


Hope This Helps.
Thanks.

Hi Commendlionel,

I think you answered your own doubt. Wouldn't avoiding/minimising negative effects on the economy help maintain the economic growth or prevent it from falling further.


Thanks.

Hi, GMATNinja. Can you explain the solution for Question 1? The official explanations are too vague.

Thanking you in advance!