Economics — Topic 5 (Financial Markets)

securities

Financial instruments bought or sold in the financial markets

• Can be an acknowledgement of indebtedness 

• Created in the primary market and are freely exchangeable or saleable in the secondary marketplace (thus highly liquid)

• Certificate of ownership of portion of a form

• You make money if the company does well — right to portion of profit (dividend income)

• Can be traded (bought and sold easily on a stock exchange (ASX — Australian Securities Exchange)

  • Investors gain liquidity

Capital gains

When the stock price of the share goes up, which is only achieved when you sell the share

Dividends

When the business gives you part of a profit because you own a share

ASX

Electronic market for buying/selling shares in publicly listed companies on the Australian Securities Exchange 

• Trading is conducted using the SEATS (Stock Trading Exchange Automated Trading System)

• Buyers and sellers can be located anywhere in the country

• Operated nationally by the Australian Securities Exchange scheme (a listed company itself) → they are responsible for the day to day trading

bonds

Promise to pay back a loan under specified terms and a given period of time

• Debt asset

Bond markets

Market for sale and purchase of major corporate and government short and long debt instruments

Primary market

the marketplace where corporations and governments offer their bonds to investors.

yield

commodities

Investing in raw materials, buying in the hope that prices will rise due to increased demand

microeconomic reform

Economies increase supply via increasing use of resources/labour (but constrained factor endowments) or via increased productivity

Potential Output

Long term expected growth of output due to increases in population, productivity and participation rates of labour

inflation

sustained increase in the general level of prices over time

Reduces the purchasing power of money over medium term

Causes of inflation

• Demand pull, inc in ad, inc in prices
  Imported inflation

• Cost push (passing the cost onto us), decrease in supply

• Expectations lead to cost push and demand pull

• If you expect inflation you will buy more stuff at the cheaper price

  • THE RBA targets EXPECTATIONS

• Measured by the Consumer Price Index, which measures the change in prices of a selection of G and S over time

• Growth of the CPI

primary market

where companies or governments initially sell stocks, bonds, or other securities to raise capital.

secondary market

where investors trade securities with each other after the initial issuance in the primary market.

consumer credit

the ability of consumers to borrow money or incur debt to purchase goods and services, deferring repayment over time.

• enables individuals to make purchases without needing to pay in cash immediately.

interest

• factor income for the factor of production called capital

• Cost of borrowing and the reward for postponing consumption

• Annual percentage return paid by borrowers and recieved by lenders

interest rate

price of money, cost to borrow money (cost of CREDIT)

• Changes to money supply impacts interest rates

• Lenders want something in return for handing over money to borrowers (needs to pay interest!) more money in economy means interest rates will be lower

cash rate

the rate at which banks lend cash to each other in the ESA over night

monetary policy

Managing inflation through the preemptive decision

Four types of securities

Equities, debt/fixed income, derivatives, foreign exchange

shares

• certificate of ownership of portion of a firm

• you make money if the company does well

• can be traded easily on a stock exchange (ASX)

• investors gain liquidity

• hopefully sell for higher price than pruchase price — capital gains income

• have voting rights at shareholder meetings

• medium level of risk

Six main roles of the Reserve Bank Australia (five administrative)

The banker to the commercial banks via Exchange Settlement Accounts (ESA)

The banker and adviser to the Government

Control & distribution of Aus currency

Custodian of Aus reserves of gold and foreign currencies

Supervision of the Payments system, ensuring the stability and liquidity of Australian financial system

Stabilising economic activity through inflation targeting (through RBA’s Market Operations)

Key objectives of the RBA

• Economic prosperity (Economic Growth) and welfare of the people of Australia (3-4%)

  • Long term sustainable growth in the economy → everyone is happy 

• Price stability (2-3%)

Maintenance of “full” employment (4-4.5%)

macroeconomic impacts of inflation

• Loss of purchasing power of consumers

• Households real value of savings/assets fall

• Households real income falls

• Higher costs for firms

• Firms exports less competitive

  • Uncontrolled inflation can seriously damage an economy (aggregate demand and output)