Module 2 Flashcards
The economy goes through an alternating periods (four phases) of ______________ and ___________.
prosperity; depression
social science that deals with the study of the allocation of scarce resources among unlimited and competing uses to satisfy human needs.
Economics
We never have enough of the resources we need to satisfy our wants completely
Scarcity
A given resource has several possible uses, and there is the constraint that we cannot possibly use one particular resource for all multiple uses all at the same time
Alternative Use
It’s either this use or the other use. In other words, there is a _______.
trade-off
loss of potential gain from other alternatives when one alternative is chosen.
opportunity cost
examines the factors that influence individual economic choices and behavior of individual households, of individual consumers, and of individual companies and markets. The study focuses on how individual markets behave in response to demand and supply of goods and services, and their prices.
Microeconomics
studies the behavior and performance of an economy as a whole. It looks at economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product and changes in unemployment.
Macroeconomics
Business Cycle
- Expansion
- Peak
- Contraction/Recession
- Trough
___________________, measured by GDP growth, is tracked by the different phases of the business cycle
Economic growth
____________________ growth is also influenced by economic growth
Corporate earnings
Characteristics of Different Phases of the Business Cycle
table page 158 (see photos)
there is an inverse relationship between the price of a good and quantity the buyers are willing to purchase such good.
law of demand
(⬆️ price, ⬇️ demand)
whose demand decreases with the rise in income, because the buyer tends to shift his consumption to a better or superior good which he can now better afford.
Inferior Goods
The inferior good is given up for the superior good, thus reducing the demand for the inferior good.
Goods which are perceived to be alternatives to a product are called ______________.
substitute goods.
The increase in price of a good will tend to reduce the demand for it as buyers switch to substitutes.
are goods which are used jointly or consumed together, e.g. tennis racket and tennis balls; golf clubs and golf balls. A decrease in the demand of one is followed by a decrease in the demand for the other
Complementary goods
states that there is a direct relationship between the price of a good and quantity of it offered for sale.
law of supply
(⬆️ price, ⬆️ supply)
state wherein the conflicting forces of supply and demand are in balance.
EQUILIBRIUM
is a measure of the responsiveness of quantity demanded due to a change either in the price of goods or in consumer income.
Elasticity
is the degree of responsiveness of quantity demanded with respect to the market price changes
Price elasticity of demand
PED =% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑/ % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
is the degree of responsiveness of the quantity demanded, with respect to
the change in consumer’s income.
Income elasticity of demand
is one where more of the good is demanded with an increase in income.
normal good’
There is only one producer/supplier of the good and therefore has control of supply and price. There is no close substitute to this one good, and no alternative for the buyer. There are heavy barriers to entry to the business so that there is no competition.
Monopoly
market where there is a small number of relatively large firms that produce similar, but slightly different products. But still there is very limited competition and it is because there are significant barriers to entry. It is a matter of imperfect competition.
Oligopoly
It measures the value of all goods and services by a country, regardless if it was produced within or outside the country.
Gross National Product
Measures the output generated by the labor and capital owned by the citizens of a country
Gross National Product
Measures the value of goods and services produced within a country regardless of the nationality of the persons producing such goods and services
Gross Domestic Product
Measures the output produced within the geographic borders of a country
Gross Domestic Product
2 ways to calculate GNP & GDP
- Expenditure Approach
- Income Approach
consumers who purchase final goods and services in the output market
Expenditure Approach
Expenditure Approach Formula
total expenditure ( Y )= C + I + G + X
Consumption ( C )
Investment ( I )
Government Purchases ( G )
Net Exports ( X )
Net Exports = Total Exports – Total Imports
the difference between the value of a country’s import and exports for a given period.
Balance of Trade
Balance of Trades Formula
BOT= Total value of Imports – Total value of Exports
Trade Deficit - the amount by which the cost of a country’s imports exceeds the value of its exports (IM > EX)
Trade Surplus - the amount by which the value of a country’s exports exceeds the cost of its imports (IM < EX)
focuses on payments to factors of production in the input market
Income Approach
known as the Gross National Income (GNI)
Income Approach Formula
Y = ERCIDI
Employee Compensation (E),
Retail Income (R),
Corporate Profits (C),
Interest Payment (I),
Depreciation (D),
Indirect Business (I)
NOMINAL GNP/GDP
• expressed in current pesos
• nominal return = stated interest rate
REAL GNP/GDP
- adjusted for the effects of inflation
- real return = [(1 + nominal rate)/ (1 + inflation rate)] − 1
⬆️ GNP/GDP – economy is ___________
⬇️ GNP/GDP – economy __________________
• doing well
• is not doing well
The GDP Growth Rate is at the center of economic indicators. The other major economic indicators useful to accompany GDP are (selected):
- Unemployment Rate
- Interest Rate
- The Balance of Payments
- Government Debt
- Inflation Rate
is the fraction of the labor force that cannot find jobs. These include individuals who are employable and are seeking a job but are unable to find a job.
unemployment rate
But in a macroeconomic sense, unemployment means that the full potential of labor to contribute to the economy’s production output is curtailed. It represents the inefficient use of resources. Also, the unemployed are deprived of their purchasing power, which brings about lower spending and lower output. Unemployment means a loss of human capital. And also, means less tax revenues
represents both a cost of money (to the borrower) and earnings from money (to the lender).
Interest
In a macroeconomic sense, interest rates are a significant determinant of aggregate spending in that a reduction in the interest rate raises aggregate demand.
The effect of higher interest rates may be summarized as:
- Reduced Consumption
- Reduced Investment
- Appreciation in the exchange rate; and the ultimate twin effect is
- lower economic growth
- lower inflation
economic indicator that is watched closely for various reasons. Debt is a burden because interest must be paid on the debt. A higher debt level crowds out payments for social and other services from the government’s national budget.
government debt level
The balance of payments is the record of the transactions of the residents of a country with the rest of the world. There are two main accounts in the balance of payments: the ___________ and the _____________.
current account; capital account
Consumer Price Index is an indicator of the general level of prices by measuring:
1) changes in the prices of a fixed basket of consumer goods and services; and
2) purchasing power of money.
f&b, transportation, housing, entertainment
Effects of Inflation and Deflation on Consumer Price Index
Inflation
• continuing rise in the prices of goods and services (⬆️Price, ⬇️ Purchasing Power)
• Ex: Php 1,000 today at 6% inflation rate Php 1,060 next year
Deflation
• declining prices of goods and services
• Ex: Php 1,000 today at 6% deflation rate Php 940 next year
refers to the rate of changes in the Consumer Price Index (CPI) that measures the average price of a standard basket of goods and services consumed by a typical family
Headline inflation
when the inflation rate shoots up so high to impose literally economic disaster to the population.
hyperinflation
which occurs when inflation rises while output is either falling or at least not rising.
stagflation
MONETARIST ECONOMIC THEORY
• ______________ or _________ is the major determinant of price levels
• Well-controlled, slowly increasing money supply will have the most __________ impact on the health of the economy.
• MV = PQ
• Quantity of money; money supply
• positive
M – total pesos in the nation’s money supply
V – velocity or number of times per year each dollar is different
P – average price of all the goods and services paid
Q – quantity of assets, goods, and services sold
Role of Central Bank
- Maintain economic stability by controlling money supply
- Avoid overheating and depression
This is the amount of money that exist in the economy at a given time.
Money Supply
Measures of Money Supply:
M1 =
M2 =
M3 =
M1 – money in circulation + demand deposits + travelers’ check
M2 – M1 + savings account and time deposits
M3 – M2 + deposit substitutes [assets and liabilities of financial institutions]
M1: Narrow Money
M2: Broad Money
M3: Domestic Liquidity
Money Supply: Monetary Policy
- Expansionary Monetary Policy
- Restrictive Monetary Policy
Expansionary Monetary Policy vs. Restrictive Monetary Policy
Expansionary Monetary Policy
• increase money supply
• reduce reserve requirements
• buy government securities
• lower interest rates
Restrictive Monetary Policy
• decrease money supply
• increase reserve requirements
• sell government securities
• increase interest rates
Review of Business Cycle Phases: Peaks
- Overheating of ___________ and __________
- Very low _____________
- _________________ and _____________, funded by debts
- investments; production
- unemployment
- Overexpansion; overproduction
Review of Business Cycle Phases: Trough
- Investments and production ______
- _____ unemployment
- Minimal _____
- flatten
- High
- debts
Monetarist Response to Phases of the Business Cycle
Cycle Phase: Manifestation
A. Peak
— Rapid M3 growth
— High demand driven inflation
B. Trough
— Slow M3 growth
— Low inflation, threat of deflation
Cycle Phase: Response of Central Bank
A. Peak
— Restrictive monetary policy
* ⬆️ interest rates
* ⬆️ banks’ reserve requirements
* Sell more government securities
B. Trough
—Expansionary monetary policy
* ⬇️interest rates
* ⬇️banks’ reserve requirements
* Buy more government securities
KEYNESIAN THEORY
* Economy can sometimes operate below __________
* Takes place when demand for goods is __________
* No strong automatic mechanism moves output and employment towards __________________
* Policies could be used to increase _________ (by ___________, _______________, _____________)
* Allow economy to avoid __________
* Examples: World War 2 , US response to global financial crisis
- potential output
- insufficient
- full employment levels
- demand; cutting interest rates; pump priming of the economy; investment in infrastructure
- depression
SUPPLY SIDE ECONOMIC THEORY
• Economic growth by __________ for people to produce goods and services
• Examples: Reduce taxes, reduce regulations
• lowering barriers
Evaluate internal factors by reviewing the _______________
Financial Statements
are written records that convey the financial activities and conditions of a business or entity.
Financial statements
Market Theories:
- Monetarist Economic Theory
- Keynesian Theory
- Supply Side Economic Theory
T or F. Financial Statements are the main source of financial information for major investment decisions and an indicator of how financially healthy a corporation is.
T
Financial Statements
- Balance Sheet
- Income Statement
- Accumulated Retained Earnings
- Statement of Cashflow
Review of Accounting: The Balance Sheet
• also called ________________
• reflects the _________________ of a corporation as of a specified date
• shows what the corporation owns (______), what it owes (__________), and what its net worth is (_____________).
• A corporation’s Total Assets is always equal to its _____________ and __________.
• Statement of Assets and Liabilities
• financial condition
• Assets; Liabilities, Stockholders’ Equity
• Total Liabilities and Stockholders’ Equity.
anything of monetary value that the corporation owns
Assets
Asset Category
- Current Assets
- Fixed Assets
• assets that can be converted into cash, sold, or consumed within a reasonable period of time, typically a year
• includes cash, marketable securities, inventory, accounts receivables, and supplies.
Current Assets
tangible assets used in the business that are of a permanent or relatively fixed nature such as land, buildings, machinery and equipment
Fixed Assets
financial obligations (debt) of corporation
liabilities
Liabilities Category
- Current Liabilities
- Long-Term Liabilities
• debts of the corporation that fall due within a year
• includes notes payable, accounts payable, commercial paper, and accrued expenses and taxes
Current Liabilities
• debts that are due in over a year such as bonds payable and bank loans payable.
Long-term liabilities
• residual interest in the assets of the corporation after deducting its liabilities
• Also referred to as ________ or ________.
Stockholders’ Equity
• Net Assets or Net Worth
Categories of Stockholders’ Equity
- Initial Capital
- Accumulated Profits
represents shares issued by the corporation at their par value
Capital Stock
the amount paid by stockholders in excess of the par value of each share.
Capital Surplus
the accumulated profits of the company after payment of cash dividends.
Retained Earnings
CAPITAL STOCK vs. CAPITAL SURPLUS
CAPITAL STOCK
Issued and outstanding shares x par value
CAPITAL SURPLUS
Amount paid by stockholders in excess of capital stock
Income Statement
• Also called _______________ or ______________
• summarizes the results of the corporation’s _________ for a given period of time (usually ______)
• Shows the __________ generated, _________ incurred and __________ earned by the company during such period.
Income Statement
• Statement of Operations or Profit and Loss Statement
• operations; a year
• revenues; expense; and net profits
includes return and discounts
Total Sales
Summary of cost that apply directly to the merchandise sold during the period.
Cost of Goods Sold
Reflects the basic cost structure of the product.
(Net sales - COGS)
gross profit
Salaries, advertising, communications, utilities, insurance, etc.
selling and administrative expense
Net income of the company from its main line of business.
Measures:
(1) ability to market goods and services; and
(2) ability to control expenses
Operating Income
Revenues from sources other than its main line of business
Other Income
Interest incurred from bank loans and debt securities issued
Interest Expense
Residual profit from revenues after deducting all taxes and expenses.
Net Income
It shows how the company used its profits.
Accumulated Retained Earnings
Add: Net Income —> principal addition
Less: Cash Dividends —> principal reduction
It is the summary of the cash provided and used by operating, investing, and financing activities and the aggregate effect of these activities on the cash balance during a period of time.
Statement of CF
Accounts Receivables and Loans Payable
Accounts Receivables
company was able to collect
Loans Payable
company paid off some of its debt
2 Methods of Investment Analysis
- Fundamental Analysis
- Technical Analysis
Investment Analysis Framework
p. 183 of SL (see photos)
It involves the use of traditional economic and business concepts in the examination of economic and company variables that lead to an estimate of the value of an investment, which can then be compared to the current market price of the investment.
Fundamental Analysis
Fundamental Analysis Approach
- Top-down approach
- Bottom-up approach
Top-down approach vs. Bottom-up approach
Top-down approach
Economy —> Industry —> Company
Bottom-up approach
Economy <— Industry <— Company
Fundamental Analysis: COMPANY ANALYSIS
- Qualitative
- Quantitative
Qualitative vs. Quantitative
Qualitative
— examines factors that may affect the valuation of the company
— e.g. change management, mergers & acquisitions, expansions
Quantitative
— study of the company’s financial performance & health
Quantitative Analysis
- Financial Statements
- Financial Ratios
study of the past and current financial data to estimate future risk and potential
Financial Statements
study of the relationship between items appearing on financial statements
Financial Ratios
FINANCIAL RATIOS
- LIQUIDITY RATIO
- ACTIVITY RATIO
- COVERAGE RATIO
- PROFITABILTY RATIO
It measures solvency or the ability to pay its short-term debt as they mature.
Liquidity Ratios
Liquidity Ratio
• current ratio
• quick ratio
• cash ratio
most commonly used and measures ability to cover its short-term debts
Current Ratio
= Current Assets / Current Liabilities
It is a stringer measure of solvency and includes only the company’s more liquid current assets.
Quick Ratio or Acid Test
Quick Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities
It is the most severe test of a company’s short-term debt paying ability and only includes cash and marketable securities.
Cash Ratio
Cash Ratio = (Cash + Marketable Securities) / Current Liabilities
Problem #2:
ASSETS
Cash (& Equivalents) - 1,000
Receivable - 612
Inventory - 1,000
Fixed Asset - 3,000
Total: 5,612
LIABILITIES & EQUITY
Current Liability - 1,000
Long Term Liability - 1,000
Stock Holder’s Equity - 3,612
Total: 5,612
What’s the Net Working Capital, Current Ratio, Quick Ratio, Cash Ratio?
-
Net Working Capital = Current Assets – Current Liabilities
= (1,000 + 612 + 1,000) – (1,000)
= 1,612 -
Current Ratio = Current Assets/Current Liabilities
= (1,000 + 612 + 1,000)/ (1,000)
= 2,612/1,000
= 2.6X -
Quick Ratio = (Cash & equivalents + Receivables)/
Current Liabilities
= (1,000 + 612)/1,000
= 1,612/1,000
= 1.6X
Also called acid test ratio -
Cash Ratio = Cash & equivalents/Current Liabilities
= 1,000/1,000
=1.0X
Problem #3: Given that a company has Php 2,500,000 in cash, Php 8,000,000 in inventories, Php 100,000 in marketable securities, Php 1,400,000 in accounts receivable and Php 3,000,000 in current liabilities. Compute for the current, quick, and cash ratio.
-
Current Ratio
= 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠/𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 12,000,000/ 3,000,000
= 4 -
Quick Ratio
= (𝐶𝑎𝑠ℎ + 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝐴𝑅) / 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 4,000,000 / 3,000,000
= 1.33 -
Cash Ratio
= 𝐶𝑎𝑠ℎ / 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 2,600,000 / 3,000,000
= 0.87
