Other than the variables suggested, could you come up with other indicators that also help identify the phases of business cycle? How? briefly Explain.

In practice, real GDP growth rate, unemployment rate, change in general price level and consumption and investment level are often measured at the end of a month or a quarter. Therefore, due to the time lag of the data, they may not be useful in identifying the phase of business cycle of an economy within the short-run (say monthly) in practice.

Instead, we may try to look at:

1. the stock market.

The picture below shows the trend of S&P 500 index, which is regarded as representative of the whole US stock market by all investors since it comprises a variety of companies from various industries. When the index goes up, it means that the overall stock prices increase. When the index goes down, it means the overall stock prices decrease.

When investors believe the economy is performing well, people are more willing to consume and invest. The consumer confidence and investor confidence will increase. Therefore, the demand for a company's stocks increases and thus the price of the company's stocks increases. So, the market index will also increase. When investors believe the economy is underperforming, people are less willing to consume and invest. The consumer confidence and investor confidence will decrease. Therefore, the demand for a company's stocks decreases and thus the price of the company's stocks decreases. So, the market index will also decrease.

Hence, the direction of market index reflects the strength of an economy.

2. yield curve

The pictures below show the yield curve of a bond at different maturity dates.

A normal yield curve (green line) is upward sloping. This is because when the economy is performing well, the default risk (debtors fail to repay the loan) borne by the creditors in the short run is lower. Therefore, the creditors will receive lower interest rates (yield rate) as compensation. In the long run, since creditors face more uncertainty, one would require more compensation for the risk borne, and thus the interest rates is higher.

However, when the economy is performing badly, the default risk borne by the creditors is higher in the short run. Therefore, to compensate for the risk, creditors will ask for higher interest rates. The short-run interest rate will be higher than the long-run interest rate, forming an inverted yield (red line).

Hence, the shape of the yield curve reflects the performance of a economy at present.