Economics Flashcards
What are some characteristics of contraction=s
rising number of bankruptcies and bond defaults
higher consumer debt
falling sto prices
rising inventories - bec of weaker demand in hard times)
decreasing GDP
What are signs of the trough
high unemployment
flat GDP
low inflation
low but stable consumer demand
What are signs of expansion
rising sto, RE, and GDP
increasing industrial production
increasing consumer demand
whats a recession and depression
6mo contraction vs 18mo contraction
What are signs of the peak
very low unemployment
slowdown in inflation
slowing GDP growth
steady consumer demand
What is used to compare GDP from different periods
real GDP which uses CPI to adjust for inflation or deflation
What is another term for CPI
constant dollar measurement
What is Gross National Product
measures the activities of citizens and US based entities not just everything that happens here
What is an example of GNP
comp based in Japan, builds factory here - Adds to GDP not GNP
comp based in US, builds factory in Japan - Adds to GNP not GDP
What are some leading indicators of economic conditions
money supply (M2)
building permits (housing starts)
average weekly initial claims for state unemployment compensation
average work week in manufacturing
new orders for consumer goods
machine tool orders
changes in inventory of durable goods
changes in sensitive materials prices
sto prices
changes in business and consumer borrowing
What are some coincident indicators of economic conditions
number of hours worked
unemployment rate
nonagricultural employment
personal income
industrial production
manufacturing and trade sales
GDP
What are some lagging indicators of economic conditions
corporate profits
average duration of unemployment
labor cost per unit of output
ratio of inventories to sales
commercial and industrial loans outstanding
ratio of consumer installment credit to personal income
What is stagflation
inflation and high unemployment
Consid for stagflation and inflation
inflation doesnt need to be high just present
4 broad categories of industries
cyclical
noncyclical
countercyclical
growth
What is a cyclical industry
highly sensitive to the business cycle and inflation trends
usu produce durable goods like heavy equipment or automobiles, and raw materials like steel and concrete
What are non cycylical industries
also known as defensives
decline less in contractions, rise less in expansions
food
clothes
tobacco
pharma
utilities
liquor
What are the two primary financial reports comps provide and when are they released
balance sheet
income statement
quarterly or annually
What does a balance sheet show
current assets like
cash/highly liquid assets like accounts receiveable
fixed assets like RE and equipment
other assets like trademarks or intellectual property
Liabilities like:
current liabilities like taxes, acrued wages, accs payable, and interest payments
longterm lias like debts
Networth:
pref sto
com sto par value
money in excess of par value of com sto
retained earnings (earnings set as
What are 4 ratios/numbers that can be used for analysis from a balance sheet
working capital
current ratio
acid test/quick ratio
debt ratio
What is the working cap number
amount comp can spend/lose and remain operational
current assets - current liabilities
What is the current ratio
used to find the liquidity of the company
cur ass / cur lias
expressed as a ratio
ex: 50/20 = 2.5:1
What is acid test / quick ratio
test companies liquidity in really bad times
cur ass - inventrory / curr lias
What is the debt ratio
test long term solvency, how much of the net worth is coming from debt
said to be highly leverage if debt ratio is higher than industry average
long term debt - (long term debt + net worth)
expressed as a percentage
What is the income statement
also known as profit and loss statement
shows revenue and expenses for fiscal period
What calculations are derived from the income statement
Earnings per share
P/E ratio
What is Earnings per share
earnings available to common sto / outstanding shares
What is P/E ratio
measure amount of earnings compared to the current market value
CMV / EPS
Operating income is sometimes referred to as
earnings before interest and taxes EBIT or as EBITDA (earnings before interest taxes depreciation and amortization)
What happens when our currency exchange rate decreases
dollar denominated products decrease in value compared to the other currency (1 unit of the other currency purchases more than it used to) because of that, the other currency my want to purchase more of our products bec they are now relatively cheaper causing us to export more and import less
What happens when our currency exchange rate increases
dollar denominated products increase in value compared to the other currency (1 dollar purchases more in the other currency) bec of that, the other currency may want to purchase less of our products bec they are now relatively more expensive, causing us to export less and import more
What is the flow between countries called
balance of payments
What is the largest part of the balance of payments
balance of trades
For balance of trades, exports are called/give the US
credit
For balance of trades, imports are called/give the US
debit
What is monetary and fiscal policy
monetary is done by the fed reserve board
fiscal is the gov
What does the FED control
money available for businesses and consumers to spend
What is the Feds dual mandate
promote max employment
keep prices stable
Who is Milton Friedman
founder of monetarism theory
What are the diagnostic tools used by the FED
the money supply
How does the money supply work
M1 = Cash and money in demand deposit accs such as checking accs
(the money most readily available to be spent)
M2 = M1 + consumer savings deposits (assets that can be easily moved into cash or DDAs
savings accs
money markets
retail CDs
overnight repos
M3 = M2 + large time deposits (assets that are harder to move to DDAs)
Jumbo CDs
multiday repos
What are some direct tools used by the Fed
Fed open market operations:
buying and selling secs to banks
Changing the discount rate
They COULD change Reg Ts minimum deposit amount for margin or change the reserve requirements for banks but unlikely
What happens during Fed open market operations
buying secs from banks (expanding the money supply) gives the banks more money to lend out and lowers interest rates
Selling secs to banks (contracting the money supply) end with banks having less money to lend out (bec they spent it on buying secs from the Fed) so they cant make as many new loans and interest rates rise
What is the rate that news is referring to when they say the Fed is raising rates
discount rate
What is the federal funds rate
rate that commercial money center banks charge each other for overnight loans of 1mil or more
What is the prime rate
rate that commercial money center banks charge their most creditworthy corporate borrowers for unsecured loans
When the Fed eases or tightens the money supply what rate do the banks adjust
prime rate
What is the broker call loan rate
rate that banks charge BDs for loans on margin accs
What BD call loans are callable when
24hr notice
