Economic Analysis Flashcards
What is the Three-Step Selection Process of the EIC Approach?
Step 1: Analyse the influence of the aggragate economy on all firms and the security markets
Step 2: Analyse the outlook for various global industries
Step 3: Analyse the companies in the favorable industries and their share values
What are the two critical influences an Analyst must focus on?
1.Economic conditions will affect the environment for corporate profit, investor attitudes and expectations, and ultimately stock prices
2.Industry outlook will determine how an industry can out-perform the economy
What is GDP?
GDP is a measurement of the total market value of all final goods and services produced within a given period by factors of production located within a country. In other words, Singapore GDP measures the value of all the output produced by factors of production in Singapore.
The formula for GDP is GDP = C + I + G + (X-M)
What are the 4 major categories that make up GDP?
- Private Consumption Spending (C)
- Private Investment Spending (I)
- Government Expenditure (G)
- Net Exports (X-M)
What is the objective of Economic Analysis?
The objective is to decide how to allocate investment funds:
1. Among countries and within countries, to the various investment instruments such as bonds, stocks and others.
2. To industries which are expected to prosper on a global basis in the predicted economic environment and sell out of industries which are not expected to do well.
3. To companies within the prospering industries which are expected to perform well and whose stocks are undervalued and to sell overvalued stocks.
What is Private Consumption Spending?
These are mainly expenditure by individuals and families on goods and services including:
1. Consumer durables such as household appliances which is sensitive to personal income and consumer expectations/confidence
2. Consumer non-durables such as food; usually necessities which are less sensitive to income or confidence levels.
What is Private Investment Spending?
These are basically purchase of new capital goods such as:
1.new residential housing by individuals and families
2. new plant & equipment mainly by businesses and
3. building up of inventory levels of finished goods by the private, non-government sector such as manufacturers
Therefore, Investment spending is mainly affected by expectations of future sales (which affect whether businesses are willing to invest in expansion plans) and interest rates as investment spending is usually financed with loans.
What is Government Expenditures?
This refers to expenditure by the government on final goods and services of a short-term (consumption) or long-term (investment) nature and include
1. spending on defence, education, health and manpower development
Government expenditure is a major part of the government’s fiscal policy.
In Singapore, this component of GDP tends to be employed as a counter-cyclical force. When the other GDP components are depressing GDP growth, the Singapore government tends to increase government spending on infrastructure construction to shore up the economy.
What are Net Exports??
This refers to the difference between exports and imports and factors affecting net exports include:
1. foreign exchange rates which affect prices of imports and exports, and
2. the current level of both the local and foreign economies which affects demand for imported/exported goods and services.
What is the Monetary Policy?
Monetary policy is the control of money supply to affect the overall price level, interest rates, exchange rates and output level. Monetary policy thus affects the level of economic activity. The tools of monetary policy include:
1. Open Market Operations
2. Reserve Requirement
3. Discount Rates/ Other Interest Rates
4. Exchange Rates
What is Open Market Operations and how does the Government utilise it to reduce economic activities?
It is the buying and selling of government securities to change the level of money supply and interest rate level.
The Government will issue/sell new government securities (i.e. bonds) if the objective of the government is to mop up excess liquidity in the economic system (i.e. too much money chasing too few goods which would be inflationary). The money paid by investors for the new government securities are removed from circulating in the economy and this will have a contractionary effect on the economy.
This will reduce the economic activity.
What is Reserve Requirement and how does the Government utilise it to increase economic activities?
It is setting the percentage of total deposits that banks have to hold as cash or liquid assets. A change in the reserve requirement will lead to a change in the amount of loans that banks can lend out and affect money supply and interest rate levels.
It increases economic activities by lowering the level of reserves required to be kept by banks in the country so that more of deposited funds can be lent out to borrowers. This leads to an increase in money supply and lower interest rates. The lower cost of borrowings will help to encourage capital spending and lead to increased economic activities.
What is Discount Rate/Other Interest Rate and how does the Government utilise it to decrease economic activities?
Discount rate is the interest rate at which a country’s central bank will lend money to other banks in the country. It therefore reflects a cost of funds for the banks and is the benchmark for other interest rates in the country.
It helps to decrease economic activities as by increasing the discount rate, other banks will follow suit and raise the interest rates it charges for its commercial loans. Therefore the cost of borrowing increases, which will discourage capital spending and lead to a lower level of economic activities.
What is Fiscal Policy and how does the Government use it to adjust economic activities?
Fiscal policy is the use of taxes and government expenditure to affect the country’s level of economic activity. Changes to the tax structure and level of government spending will affect disposable income of individuals and companies. This in turns affects the aggregate demand in the economy.
How can governments try to increase economic activities using fiscal tools?
- Lower the level of taxation to make it more attractive for businesses to invest in new capital spending which leads to increased economic activities.
- Increase the level of government spending to directly create demand for goods and services in the economy.
What affects Short-Term and Long-Term economic conditions?
Short-Term Economic conditions are affected by Demand Factors.
In the short-term, these supply factors are relatively fixed. Thus, it is fluctuations in demand relative to potential supply that create variations in real GDP, resulting in business cycles.
Long-Term Economic conditions are affected by Supply Factors
Long-term average GDP growth will be constrained by
1. Availability of technology (which affects labour productivity)
2. The supply of resources including land, labour and capital
3. The size and quality of the labour force which is affected by population growth, education and skills upgrading
4. Positively impacted by incentives such as low tax rates.
