Module 2: Economic Principles and Market Theories

Question 1

• 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

Answer 1

Gross Domestic Product (GDP)

TIP: GDP = “Gawa dito sa Pilipinas”

Question 2

• 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

Answer 2

Gross National Product (GNP)

TIP: GNP = “Gawa ng Pinoy”

Question 3

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

Answer 3

Balance of Trade

Question 4

the amount by which the cost of a country’s imports exceeds the value of its exports

Answer 4

Trade Deficit

Question 5

the amount by which the value of a country’s exports exceeds the cost of its imports

Answer 5

Trade Surplus

Question 6

__________ monetary policy is when a central bank uses its tools to stimulate the economy. We want people to spend more.

1. Decrease in reserve requirement
2. Buy government security
3. Decrease in discount rates

Answer 6

Expansionary Monetary Policy

Question 7

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.

1. Increase reserve requirement
2. Sell government security
3. Increase in discount rates

Answer 7

Restrictive Monetary Policy

Question 8

The ________ is the interest rate at which a depository institution (generally banks) lends or borrow funds with another depository institution in the overnight market.

Answer 8

Overnight Rate

Question 9

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

Answer 9

Monetarist Economic Theory

Question 10

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)

Answer 10

M1 - Narrow Money

Question 11

Measures of Money Supply:

M1 + Savings accounts and time deposits

Answer 11

M2 - Broad Money

Question 12

Measures of Money Supply:

M2 + assets and liabilities of financial institutions

Answer 12

M3 - Domestic Liquidity

Question 13

• 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

Answer 13

Keynesian Theory

Question 14

• Economic growth by lowering barriers for people to produce goods and services
• Reduce taxes, reduce regulations

Answer 14

Supply Side Economic Theory

Question 15

• 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

Answer 15

Technical Analysis

Question 16

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.

Answer 16

Market Tops

Question 17

• 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

Answer 17

Efficient Market Hypothesis

Question 18

What type of market has the following?

1. Centralized
2. Double auction
3. New Issues

Answer 18

Primary Market or IPO

Question 19

What type of market has the following?

1. Centralized
2. Double auction
3. Outstanding Issues

Answer 19

Secondary Market

Question 20

What type of market has the following?

1. Decentralized
2. Negotiated
3. Exchange away from the exchange

Answer 20

Third Market or OTC

Question 21

What type of market has the following?

1. Decentralized
2. Negotiated
3. Without broker intermediation

Answer 21

Fourth Market

Question 22

• 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.

Answer 22

Balance Sheet

Question 23

• 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.

Answer 23

Current Assets

Question 24

tangible assets used in the business that are of a permanent or relatively fixed nature such as land, buildings, machinery and equipment

Answer 24

Fixed Assets

Question 25

• debts of the corporation that fall due within a year
• includes notes payable, accounts payable, commercial paper, and accrued expenses and taxes

Answer 25

Current Liabilities

Question 26

• 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.

Answer 26

Income Statement

Question 27

Reflects performance of the company represented by profit.

Answer 27

Profitable Ratio

Question 28

Measures how much a company earns on top of cost to produce goods

Answer 28

Gross Profit Margin (GPM)

Question 29

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)

Answer 29

Operating Profit Margin (OPM)

Question 30

Measures how much a company earns on top of ALL costs
Ex. Cost of ice cream, salary of vendor and interest cost

Answer 30

Net Profit Margin (NPM)

Question 31

Measures how much return the company generated on the capital of common shareholders

Answer 31

Return on Common Equity (RCE)

Question 32

Used to measure a business’ ability to convert its assets into cash.

Answer 32

Activity Ratio

Question 33

Measures the ability to meet short term obligations.

Answer 33

Liquidity Ratio

Question 34

Used to determine the current worth of an asset or a company

Answer 34

Valuation Measures

Question 35

Measure a company’s financial leverage and risk

Answer 35

Coverage Ratio

Question 36

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.

Answer 36

Earnings per Share (EPS)

Question 37

Arithmetic mean of current prices

Answer 37

Price-Weighted Averages

Question 38

Sum of the Market value of all stocks

Answer 38

Price-Weighted Averages

Question 39

Compute day-to-day percentage price change for each security in the index and then averaging the results

Answer 39

Equal Weighted Indexes

Question 40

measures a company’s ability to pay short-term obligations or those due within one year

Answer 40

Current Ratio