CH 4 Overview of the Economics Flashcards
What are the 2 categories of economics?
Microeconomics and macroeconomics
Define “microeconomics”.
The study of behaviours of individuals/individual companies affecting what specific industries and individual companies produce and what individuals buy.
Define “macroeconomics”.
Focuses on the broader economy as a whole.
The primary users and/or suppliers of capital. (3)
- Consumers
- Businesses
- Governments
How is a “market” defined?
Any arrangement that allows buyers and sellers to enter into transactions (can be physical location or electronic platform)
What are the laws of supply and demand (all else being equal)?
High price, lower demand
Low price, higher demand
Higher price, higher supply
Lower price, lower supply
Market equilibrium shortage
Low price = higher demand = lower supply
Market equilibrium excess
High price = lower demand = higher supply
What is market equilibrium price?
Price point where supply = demand
How is Canada’s GDP measured?
The value of all of the final goods and services produced in Canada
What are the 2 ways GDP can be calculated?
- Expenditure approach: total of all the money spent on final goods and services
- Income approach: total of all the income earned producing these goods and services
2 mains reasons for increase in nominal GDP.
- Economy expansion
2. Prices increased
How is “real GDP” calculated?
Real GDP = Nominal GDP - Inflation
What contributes to the growth in GDP?
- Advances in technology to produce more
- Increase in population and in turn the workforce
- An improved workforce (more training, education)
The phases of business cycle.
Expansion, peak, contraction, trough, recovery
What happens in expansion phase?
- Economy is expanding and corporate profits rise
- Inflation is stable
- Businesses are increasing inventory to meet demand
- Business startups outnumber business closures
- Unemployment rate is low
- Stock market activity is strong
What to buy/sell in expansion phase?
Buy common shares
What happens in the peak phase?
- Demand exceeds supply
- Labour and product shortages cause wages and inflation to increase
- Interest rates begin to rise/bond prices fall
- Business sales decline
- Corporate profits fall causing stock prices to fall
What to buy/sell in peak phase?
Sell common shares and buy short term bonds
What happens in the contraction phase?
- Economic activity declines
- Growth of real GDP slows or turns negative
- Supply exceeds demand and unemployment rises
- Business failures outnumber start-ups
- Stock market activity is low
- Interest rates hit the highest level
What to buy/sell in contraction phase?
When interest rates hit the highest level, sell short-term bonds and buy long-term bonds
What happens in the trough phase?
- Inflation falls followed by interest rate fall, causing a bond rally
- Lower interest rates ignite the economy
What to buy/sell in the trough phase?
When interest rates hit their lowest, sell bonds and buy common shares
In what phase is interest rate at the highest vs. lowest?
Highest in contraction phase
Lowest in trough phase
What happens in the recovery phase?
- GDP returns to previous peak
- Cycle is followed by expansion and starts over again
What to buy/sell in recovery phase?
Continue to own common shares (the cyclical stock)
What are the 3 categories of economic indicators?
- Leading
- Coincident
- Lagging