Module 2: Economic Principles and Market Theories Flashcards
- Measures the value of goods and services produced within a country regardless of the nationality of the persons producing such goods and services
- Measures the output produced within the geographic borders of a country
Gross Domestic Product (GDP)
TIP: GDP = “Gawa dito sa Pilipinas”
- Measures 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
- Measures the output generated by the labor and capital owned by the citizens of a country
Gross National Product (GNP)
TIP: GNP = “Gawa ng Pinoy”
is the difference between the value of a country’s import and exports for a given period.
BOT= Total value of Imports – Total value of Exports
Balance of Trade
the amount by which the cost of a country’s imports exceeds the value of its exports
Trade Deficit
the amount by which the value of a country’s exports exceeds the cost of its imports
Trade Surplus
__________ monetary policy is when a central bank uses its tools to stimulate the economy. We want people to spend more.
- Decrease in reserve requirement
- Buy government security
- Decrease in discount rates
Expansionary Monetary Policy
is how central banks slow economic growth. It’s called ________ because the banks restrict liquidity. It reduces the amount of money and credit that banks can lend. It lowers the money supply by making loans, credit cards, and mortgages more expensive. It restricts the consumers spending and will push down overall demand for goods and services.
- Increase reserve requirement
- Sell government security
- Increase in discount rates
Restrictive Monetary Policy
The ________ is the interest rate at which a depository institution (generally banks) lends or borrow funds with another depository institution in the overnight market.
Overnight Rate
What economic theory involves the following:
- Quantity of money or money supply is the major determinant of price levels.
- Well-controlled, slowly increasing money supply, will have the most positive impact on the health of the economy
Monetarist Economic Theory
Measures of Money Supply:
It is the supply that is currency in circulation and demand deposits (i.e., coins, currency, manager’s check, traveler’s check)
M1 - Narrow Money
Measures of Money Supply:
M1 + Savings accounts and time deposits
M2 - Broad Money
Measures of Money Supply:
M2 + assets and liabilities of financial institutions
M3 - Domestic Liquidity
- Economy can sometimes operate below potential output
- Takes place when demand for goods is insufficient
- Sometimes, no strong automatic mechanism moves output and employment towards full employment levels
- Government policies could be used to increase demand
- cut interest rates
- pump priming of the economy
- investment in infrastructure
- Allow economy to avoid depression
Keynesian Theory
- Economic growth by lowering barriers for people to produce goods and services
- Reduce taxes, reduce regulations
Supply Side Economic Theory
- Analysis of past market data to estimate future price
- Believes that prices are affected by numerous factors
- Aside from fundamental factors, prices are affected by psychology and sentiment of investors
Technical Analysis
The highest price of a security or index over a given period of time. For example, if stock A has been on a bullish trend for a long time and later begins to decline, the _________ is the high price during its bull market.
Market Tops
- Market is information efficient
- Market reflects all available information
- No one can consistently achieve excess returns above market average
- Study of past price action (technical analysis) is useless
Efficient Market Hypothesis
What type of market has the following?
- Centralized
- Double auction
- New Issues
Primary Market or IPO
What type of market has the following?
- Centralized
- Double auction
- Outstanding Issues
Secondary Market
What type of market has the following?
- Decentralized
- Negotiated
- Exchange away from the exchange
Third Market or OTC
What type of market has the following?
- Decentralized
- Negotiated
- Without broker intermediation
Fourth Market
- Also called Statement of Assets and Liabilities
- reflects the financial condition of a corporation as of a specified date
- shows what the corporation owns (Assets), what it owes (Liabilities), and what its net worth is (Stockholders’ Equity).
- A corporation’s Total Assets is always equal to its Total Liabilities and Stockholders’ Equity.
Balance Sheet
- 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
- debts of the corporation that fall due within a year
- includes notes payable, accounts payable, commercial paper, and accrued expenses and taxes
Current Liabilities
- Also called Statement of Operations or Profit and Loss Statement
- Summarizes the results of the corporation’s operations for a given period of time (usually a year)
- Shows the revenues generated, expenses incurred and net profits earned by the company during such period.
Income Statement
Reflects performance of the company represented by profit.
Profitable Ratio
Measures how much a company earns on top of cost to produce goods
Gross Profit Margin (GPM)
Measures how much a company earns on top of cost to produce goods, and costs to conduct day to day operations (selling, general and administrative expenses)
Operating Profit Margin (OPM)
Measures how much a company earns on top of ALL costs
Ex. Cost of ice cream, salary of vendor and interest cost
Net Profit Margin (NPM)
Measures how much return the company generated on the capital of common shareholders
Return on Common Equity (RCE)
Used to measure a business’ ability to convert its assets into cash.
Activity Ratio
Measures the ability to meet short term obligations.
Liquidity Ratio
Used to determine the current worth of an asset or a company
Valuation Measures
Measure a company’s financial leverage and risk
Coverage Ratio
Indicates how much money a company makes for each share of its stock, and is a widely used metric to estimate corporate value. “Earnings” are the company’s net income, which is what’s left after administrative expenses and costs associated with sales are deducted.
Earnings per Share (EPS)
Arithmetic mean of current prices
Price-Weighted Averages
Sum of the Market value of all stocks
Price-Weighted Averages
Compute day-to-day percentage price change for each security in the index and then averaging the results
Equal Weighted Indexes
measures a company’s ability to pay short-term obligations or those due within one year
Current Ratio
