Analysis of the Economy and the Stock Market

Flashcards about the economy and the stock market

What approach should be taken to analyze the stock market and interconnected economy?

A Top-Down Approach: Analyze economy, then stock market, then industries, then individual companies.

What is the economic (business) cycle?

Recurring pattern of economic expansion (growing) and contraction (shrinking).

What are the stages of the Economic (Business) Cycle?

Expansion, Peak, Contraction, Trough, Recovery

What are characteristics of the expansion stage of the economic cycle?

Stable inflation, increased corporate profits and job starts.

What are characteristics of the peak stage of the economic cycle?

Demand exceeds economic activity, rising interest rates, falling bond prices.

What are characteristics of the contraction stage of the economic cycle?

Significant decline, lasting longer than two months, and spread throughout entire economy.

What are characteristics of the trough stage of the economic cycle?

Falling demand and excess capital; drop in prices and wages.

What are characteristics of the recovery stage of the economic cycle?

GDP increased; return to purchasing items such as houses and cars.

What is GDP?

The value of all goods & services produced in a country within a given time period.

What is the formula for GDP using the expenditure approach?

GDP = G + C + I + (X - M)

What does 'C' represent in the GDP formula?

Household consumption, money spent of goods and services by individuals and families.

What does 'G' represent in the GDP formula?

Government spending (healthcare, education, roads, wages etc.).

What does 'I' represent in the GDP formula?

Investment, spending to increase future production (factories, machines etc.).

What does 'X' represent in the GDP formula?

Exports, products built in Canada, but sold in other countries.

What does 'M' represent in the GDP formula?

Imports, products built in other countries but sold within Canada (they do not represent Canadian production).

what is Real GDP?

GDP measured in “constant dollars” or “chained dollars adjusted for inflation.

What is Nominal GDP?

The GDP number not adjusted for inflation.

What does GDP per capita indicate?

The average income for each person in that country and generally indicates a higher standard of living.

How is economic growth measured?

By comparing real GDP over two years

What is the formula for growth rate?

Growth = (real GDP this year – real GDP last year) / real GDP last year

What is the Composite Leading Indicator?

Index that combines ten leading indicators of economic activity in order to assess the status of the business cycle and try to predict future economic conditions.

What are leading indicators?

Indicators that tend to change prior to changes in economic activity, such as housing starts, manufacturers’ new orders, and stock prices.

What are coincident indicators?

Indicators that change at the same time as changes in economic activity, e.g., GDP, industrial production, and retail sales.

What are lagging indicators?

Indicators that follow economic changes, e.g., unemployment rate, labor costs, and inflation.

What relationship exists between stock prices and the economy?

Stock prices lead the economy and are historically the most sensitive indicator of future economic performance.

What is the Circular Flow Model?

An economic model that shows the flow of money through the economy, illustrating the relationships between households, businesses, financial, government, and international sectors.

What is the Consumer Price Index (CPI)?

A broad measure of the cost of living in Canada, tracking the retail price of a representative shopping basket of goods and services.

What is the CPIX?

A core inflation measure that excludes eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco products).

What are the requirements to be considered employed?

Work for 1+ hours as a paid employee during the survey month, be self-employed, or be temporarily absent from a job due to strike, illness, etc.

What are the requirements to be considered unemployed?

Not employed, able to work, and actively looking for work.

What is the Labour Force Participation Rate (LFPR)?

The percentage of the population that is considered part of the Labour Force.

What is the formula for Labour Force Participation Rate (LFPR)?

LFPR = (Labour Force / Population) x 100

What is the Unemployment rate (UR)?

The number of people who are unemployed as a percentage of the Labour Force.

What is the formula for Unemployment rate (UR)?

UR = (# of unemployed / Labour Force) x 100

What is Frictional Unemployment?

Occurs when people voluntarily leave jobs in search of something better, usually when the economy is strong.

What is Seasonal Unemployment?

Fluctuations in employment due to seasonal changes, common in Canada due to climate and reliance on natural resources.

What is Structural Unemployment?

A structural change in an industry causes jobs to disappear, e.g., mergers or technology advancements.

What is Inadequate Demand Unemployment?

Lack of spending in the economy, leading to decreased production levels and employment.

What is Aggregate Demand (AD)?

The sum of consumption (C), investment (I), government expenditures (G), and net exports (Xn or X-M).

What factors can cause shifts in the Aggregate Demand (AD) curve?

Changes in consumption, investment, government spending, and export demand.

What is Aggregate Supply (AS)?

The relationship between the price level and the total quantity of output that firms are willing and able to produce for the economy.

What factors can cause changes in Aggregate Supply (AS)?

Changes in the price of inputs, changes in the amount of inputs available, and changes in efficiency.

What is Fiscal policy?

When a government uses its spending and taxing powers to have an impact on the economy.

What is Monetary Policy?

Central banks meddling with the supply and demand for money through interest rates and the money supply.

What is a Bull Market?

A period of optimism where prices are generally going up.

What is a Bear Market?

A period of pessimism where prices are generally going down.