Economic Principles Flashcards
What does GDP measure?
The value of goods and services produced within a country regardless of the nationality of the persons producing such goods and services.
What does GNP measure?
The value of goods and services produced by a country in a given year, regardless of whether such goods and services are produced within or outside the country.
What is the difference between GDP and GNP?
GDP measures the output produced within the geographic borders of a country, while GNP measures the output generated by the labor and capital owned by the citizens of a country.
What is the formula for GDP computation?
Consumption (C) + Government Expenditures (G) + Investments (I) + Exports (+) - Imports (X)
What is the Balance of Trade (BOT)?
The difference between the value of a country’s imports and exports for a given period.
What is a trade deficit?
The amount by which the cost of a country’s imports exceeds the value of its exports.
What is a trade surplus?
The amount by which the value of a country’s exports exceeds the cost of its imports.
What are the four phases of the business cycle?
Peak, trough, expansion, contraction
What happens during the peak phase of the business cycle?
Economic activity is at its highest, and there is rapid growth in GDP, employment, and inflation.
What happens during the trough phase of the business cycle?
Economic activity is at its lowest, and there is a decline in GDP, employment, and inflation.
What happens during the expansion phase of the business cycle?
Economic activity is increasing, and there is a rise in GDP, employment, and inflation.
What happens during the contraction phase of the business cycle?
Economic activity is decreasing, and there is a fall in GDP, employment, and inflation.
What are monetary policies?
Actions taken by a central bank to influence the availability and cost of money and credit in the economy.
What are the tools of monetary policy?
Open market operations, discount rate, reserve requirements
What are open market operations?
The buying and selling of government securities by the central bank in the open market.
What is the discount rate?
The interest rate charged by the central bank to commercial banks on loans.
What are reserve requirements?
The amount of funds that banks must hold in reserve against deposits.
What is expansionary monetary policy?
A policy that increases the money supply and lowers interest rates to stimulate economic growth.
What is contractionary monetary policy?
A policy that decreases the money supply and raises interest rates to slow down economic growth.
What is the monetarist economic theory?
The theory that the quantity of money or money supply is the major determinant of price levels.
What are the measures of money supply?
M1, M2, M3
What is M1?
Currency in circulation and demand deposits.
What is M2?
M1 + savings accounts and time deposits.
What is M3?
M2 plus assets and liabilities of financial institutions.
What is the Keynesian economic theory?
The theory that the economy can sometimes operate below potential output and that government policies could be used to increase demand.
What is the supply-side economic theory?
The theory that economic growth can be achieved by lowering barriers for people to produce goods and services.
What is the efficient market hypothesis?
The theory that the market is information efficient and that no one can consistently achieve excess returns above market average.
What is technical analysis?
The analysis of past market data to estimate future price.
What are the characteristics of a bullish market?
Rising volumes, more advancers than decliners, shares are trending higher (above the moving averages).
What are the characteristics of a bearish market?
Falling volumes, more decliners than advancers, shares are trending lower (below the moving averages).
What is a financial index?
A numeric score based on inputs such as a variety of asset prices. It can be used to track the performance of a group of assets in a standardized way.
What are the types of indexes?
Price-weighted averages, market-value weighted indexes, equal weighted indexes
What is portfolio management?
The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.
What are the rules for managing a portfolio?
Establish an investment plan, select purchases methodically and professionally, invest as funds become available, hold until a definite reason for selling appears, keep accurate and complete records, monitor holdings regularly, diversify securities holding.
What is diversification?
The process of spreading investments across different asset classes, industries, tenors, and geographies to reduce risk.
What are the types of markets?
Money market, capital market, primary market, secondary market, third market, fourth market
What is the money market?
The market for short-term debt instruments.
What is the capital market?
The market for long-term debt and equity instruments.
What is the primary market?
The market where new issues of bonds, preferred stock or common stock are sold by government, municipalities and companies to acquire new capital.
What is the secondary market?
The market that permits trading in outstanding issues and provides liquidity for securities issued in the primary market.
What is the third market?
The market that involves dealers and brokers who trade shares that are listed on an exchange away from the exchange.
What is the fourth market?
The market that involves direct trading of securities without broker intermediation.
What are the market participants?
Broker, dealer, market maker, trader
What is a broker?
Buys and sells securities for the account of others.
What is a dealer?
Buys and sells securities for his own account.
What is a market maker?
Provides liquidity to the market by posting both bid and ask prices for certain issues.
What is a trader?
Acts as both broker and dealer.
What are the types of financial statements?
Balance sheet, income statement, statement of cash flows, statement of stockholders’ equity
What is a balance sheet?
A financial statement that reflects the financial condition of a corporation as of a specified date.
What is an income statement?
A financial statement that summarizes the results of the corporation’s operations for a given period of time.
What is a statement of cash flows?
A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities.
What is a statement of stockholders’ equity?
A financial statement that shows changes in the equity accounts of a company during a reporting period.
What is financial ratio analysis?
The use of financial ratios to assess a company’s financial performance and condition.
What are the types of financial ratios?
Profitability ratios, activity ratios, liquidity ratios, coverage ratios, valuation measures
What are profitability ratios?
Ratios that reflect the performance of the company represented by profit.
What are activity ratios?
Ratios that are used to measure a business’ ability to convert its assets into cash.
What are liquidity ratios?
Ratios that measure the ability to meet short-term obligations.
What are coverage ratios?
Ratios that measure a company’s financial leverage and risk.
What are valuation measures?
Measures used to determine the current worth of an asset or a company.
