1: The economic environment Flashcards
What is the ‘dependancy ratio’
ONS
The ratio of peope of pension age to those of working age.
- This may have implications for pensions, state benefits and care provision
One significant factor that had an impact on the increase in equity values in the late 1990s. How will this change in the future?
Increased saving by those aged 55 and over
- As this generation enters retirement, they will be drawing on their investments to supplement their retirement.
- Subsequent generations may not be able to maintain investment pace, though are more like to inherit more than previous generations due to their parent’s increasing wealth.
- Ageing population = companies that provide goods and services for the elderly are likely to benefit from increased profits. This may lead to a shift in the relative value of some sectors of the equity market.
Social factors that affect both the economy and the financial markets
Please list 5
Pg 126
- Aging population
- Living standards/expectations
- Change to from manufactoring to a service-based economy - reduction in the industrial sectior and cheap imports
- ‘Social engineering’ - governments redistributing wealth through social policies, taxation, and benefits.
- Employment and productivity
The global perspective - which country’s economy tends to influence or effect others the most?
- USA
- *‘When Wall Street sneezes, London catches a cold’ *
Affect of aging population on global economy?
Studies have suggested that the demographic changes will drive a decline in the global growth of net financial wealth in the next few decades.
Other studies have shown that the projected population gain in the next few decades will
mainly take place in Africa and Asia, with the majority of the world’s population living
in cities.
PwC study ‘The World in 2050’ - Top 10 economic powers then
Ignoring the effects of Covid-19 and the invasion of Ukraine
in 2050:
1. China
2. India
3. USA
4. Indonesia
5. Brazil
6. Russia
7. Mexico
8. Japan
9. Germany
10. UK
Previously, in 2016
1. China
2. USA
3. India
4. Japan
5. German
6. Russia
7. Brazil
8. Indonesia
9. UK
10. France
Changes largely based on remaining proportion of working population
What is the ‘purchasing power’ of a currency?
Definition: Measures the value of a currency based on the goods or services that can be bought with one unit of that currency.
Key Points:
* Inflation decreases purchasing power.
* Deflation increases purchasing power.
* Severe inflation (e.g., hyperinflation) can result from economic or political shocks.
What is ‘Purchaing Power Parity’?
Definition: Adjusts exchange rates to reflect price level and income differences across countries.
Key Points:
* Provides a more accurate comparison of countries’ GDP.
* Narrows the gap between richer and poorer nations’ GDP by accounting for local cost differences.
* Example: A pair of shoes in India and Britain should cost the same, relative to incomes and economies.
The Big Mac Index - created as a light-hearted way of showing PPP
Name and describe the 4 common phases in the business cycle
1.2 Business (economic) cycles
- Boom - Strong economy, low unemployment, Suppliers increase prices to max profits, inflation rise
- Recession - Cautious consumers, less spending, demand falls, less investment, Unemployment rise, stock falls. Small fall in economy - two or more quarters of falling GDP
- Depression - Big decline, high levels of business failure, high unemployment, little money circulating in economy
- Recovery - More spending, more production, increase in production
What is a ‘bear market’?
1.2 Business (economic) cycles
A bear market is used to describe a pessimistic feeling in the market, with investors
looking to sell stocks in the short term
What is a ‘bull market’?
1.2 Business (economic) cycles
A bull market is the term used to describe a period when investors are confident
that prices will rise and adopt a ‘bullish’ approach to the market, by buying stocks
to hold long term.
Relationship can be seen between the economic cycle and share markets - Share prices in a boom?
1.2 Business (economic) cycles
Like to falter - interest rates are increase to control expansion
Relationship can be seen between the economic cycle and share markets - Share prices at the start of recession?
Suffer at the start of a recession but begin to recover if the market senses the economy is starting to recover.
Relationship can be seen between the economic cycle and share markets - During a depression?
1.2 Business (economic) cycles
Share prices fall during a depression as interest rates increase and corporate earnings
decline.
Relationship can be seen between the economic cycle and share markets - Start of business cycle??
1.2 Business (economic) cycles
Share prices are sensitive to the way the market sees the current state of the business cycle – sometimes a share will be driven down as a result of perception rather than fact
Relationship can be seen between the economic cycle and share markets - Share prices in a recovery?
1.2 Business (economic) cycles
Share prices are strong during a recovery because interest rates stay low and corporate earnings improve.
Stock market cycle theory - what is it?
1.2 Business (economic) cycles
Cycle theory contends that share prices also move in response to cyclical
forces over periods of time.
There are two main elements of the cycle –peak and trough
Peak - when share price is at the top and is unlikely to increase in the short term.
The trough (orbottom) is when the share reaches its lowest price.
Cycle theorists believe they are able to predict peaks and troughs over defined time
periods – typically 39 and 78 weeks.
Cycle theory - over what period do theorists believe the cycle runs through?
1.2 Business (economic) cycles
39 to 78 weeks
Microeconomics - what is it? List example of effects
1.2 Business (economic) cycles
‘local level’ view of the economy:
* Individual econimic units - businesses and families
* E.g. the amount of money a family spends on goods and services
Example:
1. Fewer first‑time buyers able to buy
2. Increased borrowing against equity, leading to worryingly high levels of personal
debt and the potential for negative equity if the market were to crash.
3. Increases in consumer spending based on borrowing rather than earnings. This
might result in an increase in inflation.
Macroeconomics - what is it? Examples of…
1.2 Business (economic) cycles
The bigger picture - considers the impact of microeconomics, what will affect the economy, and what the government can do to change:
- Stimulating or calming the economy;
- Controlling inflation;
- Controlling unemployment;
- Influencing exchange rates through government intervention
At the macroeconomic level, measures can be taken to slow the market down and reduce
the risk. These might include:
* Raising interest rates;
* Enforcing borrowing limits (last used in the 1970s).
