LEADING ECONOMIC INDICATOR: One of eleven economic statistics that tend to move up or down a few months before the expansions and contractions of the business cycle. These leading indicators are -- manufacturers new orders, an index of vendor performance, orders for plant and equipment, Standard & Poor's 500 index of stock prices, new building permits, durable goods manufacturers unfilled orders, the money supply, change in materials prices, average workweek in manufacturing, changes in business and consumer credit, a consumer confidence index, and initial claims for unemployment insurance. Leading indicators indicate what the aggregate economy is likely to do, business-cycle-wise, 3 to 12 months down the road. When leading indicators rise today, then the rest of the economy is likely to rise in the coming year. And when leading indicators decline, then the economy is likely to decline in 3 to 12 months.
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A quantification of the satisfaction of wants and needs achieved through the consumption of goods and services. In principle, utility measurement can take one of two forms: (1) cardinal, which is based on numerical values (1, 2, 3, etc.) and (2) ordinal which is based on rankings (first, second, third, etc.). While the hypothetical instructional analysis of utility relies on cardinal utility, ordinal utility is a more realistic way to measure satisfaction. Utility measurement provides a basis for discussing the satisfaction of wants and needs derived from consumption, which then enables an understanding of the role utility plays in market demand. When economists began looking into the influence utility has on price in the 1800s, they presumed that utility was a characteristic, like height and weight, that could be measured in a cardinal manner.
However, as the study of consumer demand theory progressed, economists realized that cardinal utility was both unlikely and unneeded. Ordinal utility, the ranking or preferences, was not only more realistic, it also provided a sufficient theoretical basis for analyzing the connection between utility and market demand.
Cardinal UtilityCardinal utility is the measurement of satisfaction using numerical values (1, 2, 3, etc.) that are comparable and based on a benchmark or scale. Height and weight are common cardinal measures.Herein lies the benefit of cardinal utility. It is (or would be) based on a fixed scale that allows for comparisons among consumers.
Unfortunately such cardinal measurement does not presently exist for utility. The theoretical prospects of generating such a measurement are also slight. Although early economists worked from the presumption that utility could be quantified with a cardinal measure similar that used for height and weight, the subjective nature of utility makes cardinal measurement unlikely.
Utility is inherently subjective. The satisfaction Pollyanna Pumpernickel obtains from eating a hot fudge sundae is based on her own personal wants and needs, her likes and dislikes. There is no way to compare her satisfaction with that received from an identical hot fudge sundae consumed by Winston Smythe Kennsington III or Barton Broadway.
There is no way to measure how much more or less satisfaction each person receives. Does Barton receive 12.5 percent more utility than Winston? Does Winston receive 12.5 percent more than Paula? Who can say?
Moreover, there also is no way to compare the satisfaction Paula receives from a hot fudge sundae versus watching Barton Broadway participate in his professional sporting pursuit. Does Paula receive 80 percent more utility from a hot fudge sundae than from watching Barton? Who can say?
Ordinal UtilityOrdinal utility is the ranking of preferences (first, second, third, etc.) that are only comparable on a relative basis. Sporting events are commonly subject to ordinal measures.
Suppose, for example, Pollyanna Pumpernickel, Winston Smythe Kennsington III, and Barton Broadway engage in a friendly footrace. Being a highly trained, well-conditioned athlete, Barton finishes first. The petite, but tenacious, Paula comes in second. Winston, hobbled by an old knee injury comes in third.
The ranking achieved by these three runners depends only on the order of their finish. It matters not how swiftly each one covers the distance.
The absolute difference between each runner is irrelevant to the order of finish. Barton is awarded the gold medal for first. Paula receives the silver medal for second. And Winston has the bronze medal for third.
- Suppose that Barton edges out Paula by the slimmest of margins for first place, while Winston finishes well behind.
- Or alternatively, suppose that Barton finishes well in front, while Paula edges Winston by the slimmest of margins for second place.
- Or lastly, suppose that each finishes the race at almost the same time, with Barton coming in just ahead of Paula, who is slightly in front of Winston.
Ordinal utility applies this ranking to preferences. In the modern analysis of consumer demand, the actual level of utility generated from the consumption of a good is irrelevant. Only the ranking of preferences is important.
Does Paula like hot fudge sundaes 80 percent more than watching Barton perform athletic activities? It matters not. It only matters that she likes hot fudge sundaes more than Barton's endeavors.
UTILITY MEASUREMENT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 1, 2024].
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