*American economists continually attempt to gauge the health

[brij.jhu]

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

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

So the passage clearly says that 'mortgage applications and profit margins are examples of leading indicators, which have the greatest predictive power'. The correct answer is given as D, but it relies on prior knowledge of the fact that profit margin = revenue - cost. While this is pretty basic and most people would know this, isn't this relying on something not mentioned in the passage? "profit margin" is a finance/accounting term that someone from another field may not be totally familiar with.

[Ben Ku]

Please cite the source (author) of this problem. We cannot reply unless a source is cited (and, if no source is cited, we will have to delete the post!).

Also, please type out the entire text of the argument. It's hard for us to respond to a question without seeing the passage.

[akhp77]

Source: Manhattan GMAT CAT

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.

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

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

OA: D

[tim]

You haven't asked a question here. What did you do with this question, and where are you having trouble with the official explanation?

[akhp77]

I couldn't able to solve it.

Can you please explain that how to reach at OA?

What piece of info is required to answer?

[tim]

Every time you send us this question with no indication of what you did, we are going to throw it back and push it to the end of the queue. Have you read the solution? What part were you on when things stopped making sense? Without knowing this, i have to wonder what you're hoping for beyond me just copying and pasting the solution from our CAT bank. Help me help you.. :)

[jp.jprasanna]

Hi Tim - I got the below question in Manhattan CAT 2.

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

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

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

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

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

5/whether the government was justified in taking action to boost the economy

Answer given was B(2)

But the passage says "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"

So lagging indicators are used to determine whether the past assessment was right
But options B says, as given"whether companies ought to cut costs in order to avoid short-term losses", what companies should do. How can this be justified.

all other 4 options seems to evaluate the past predictions / recent trends / financial analysts's assessment / govt actions are right?

Please help. Thanks in advance.

Cheers

[tim]

B CAN'T be justified - that's why it's the answer! Read the question carefully and you'll see..

[pleaman]

[quote="akhp77"]Source: Manhattan GMAT CAT

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.

Hi, guys.
Could anyone comment whether there is a grammar mistake at the sentence (bold selection)? As I know from the MGMAT SC quide 5th (page 150), the correct idiom construction is "BOTH...AND" and the incorrect is "BOTH...AS WELL AS".
What do you think ?)

[jnelson0612]

Source: Manhattan GMAT CAT

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.

Hi, guys.
Could anyone comment whether there is a grammar mistake at the sentence (bold selection)? As I know from the MGMAT SC quide 5th (page 150), the correct idiom construction is "BOTH...AND" and the incorrect is "BOTH...AS WELL AS".
What do you think ?)

Good catch! I'll send that on to be corrected. Thank you!

[rfpchua]

I had a problem with this. I think (E) is also an acceptable answer. "A decrease in the number of corporate bankruptcies per month"

One would assume that bankruptcies have a pretty high correlation to profit and hence profit margins.

If corporate bankruptcies are diminishing, profitability is likely to be improving. Likewise, I think a large increase in corporate bankruptcy is likely to indicate impending doom. Does anyone remember Lehman brothers?

[RonPurewal]

I had a problem with this. I think (E) is also an acceptable answer. "A decrease in the number of corporate bankruptcies per month"

One would assume that bankruptcies have a pretty high correlation to profit and hence profit margins.

We're talking about indicators that pertain to the economy as a whole.
The correct answer talks about costs and revenues in general -- i.e., across the entire economy. Choice E is irrelevant to all but the firms that go bankrupt.

If corporate bankruptcies are diminishing, profitability is likely to be improving. Likewise, I think a large increase in corporate bankruptcy is likely to indicate impending doom. Does anyone remember Lehman brothers?

Yeah, fine, but choice D is explicitly describing a profit margin. ("Profit margin" is defined as the difference between cost and revenue.)
If there's a battle between "explicitly says xxxx" and "I think that's likely related to xxxxx", guess who wins that one.

[Meerak869]

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

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

The wording suggests that and question indicating an understanding of the info in between lines shows that this is indeed an inference question and not a special detail question as listed in CAT. Please clarify?

[Gmat Pro]

Hi Ron, thank you for the response. I have an additional q, option D indicates profit margins for only one type of consumer good, large home appliances. Can you please explain how a decline in profit margins in one type of manufactured good reflects a change in the overall business cycle? For e.g., a country could be experiencing declining profit margins for large home appliances, probably due to fierce competition in that market, but could have increasing profit margins in other products in manufacturing(from small home appliances to automotive parts) or even other industries, such as services, which could indicate overall improvements in business and economic health.

Thanks in advance!

[JoseM221]

B CAN'T be justified - that's why it's the answer! Read the question carefully and you'll see..

....super helpful. *eye roll* where is Mike from Magoosh when you need him?