Answer the following question. Please show all your work/explanation.
Leading and lagging. Statistically some variables lead, some are coincident and some lag GDP. But why? Put yourself in the mindset of a firm owner and reason through the following questions.
1) Suppose GDP growth has fallen and your trucking firm is deciding whether to layoff some workers. Your workers are reliable and have been with you for some time. What is the immediate benefit to a firm from laying off workers? And what is the immediate cost? What is the long term cost and, hence, why might you delay laying off workers? Hence, explain why layoff decisions are lagging indicators of economic growth. (Hint: For the immediate costs and benefits, think about our treatment of employment choices of the firm. For the longer term cost, think about the following: when orders pick up, then the firm will need to replace workers let go when times were bad. Why might this be costly? Why then might you want to be really certain that times are bad before you layoff workers?)
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