四Investment Tools Economics Macroeconomic Analysis.docx

四Investment Tools Economics Macroeconomic Analysis.docx

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四InvestmentToolsEconomicsMacroeconomicAnalysis

四、InvestmentTools:

Economics:

MacroeconomicAnalysis

1.A:

PreliminaryReading:

TakingtheNation'sEconomicPulse

a:

Explainthetwoapproachestomeasuringgrossdomesticproduct（GDP）andcalculateGDPusingeachapproach.

Theexpenditureapproachisademand-basedconceptmeasuredbysummingpersonalconsumption,grossprivateinvestment,governmentconsumptionandgrossinvestment,andnetexportsofgoodsandservices.

Resourcecost/incomeapproach:

Theresourcecost/incomeapproachisasupplyorproductionorientedapproachandmeasuresGDPbysummingthefollowingcomponentsemployeecompensation,proprietors'income,rents,corporateprofits,interestincome,indirectbusinesstaxes,depreciation,andnetincomeofforeigners.

b:

DistinguishbetweenGDPandgrossnationalproduct（GNP）.

GNPisthetotalmarketvalueofallfinalgoodsandservicesproducedbythecitizensofacountrynomatterwheretheyareresiding.Priorto1991GNPwasusedtomeasureUSproduction.

GNPandGDParecloselyrelatedconcepts.GDPisameasureoftheoutputthatisproduceddomestically,whileGNPisameasureoftheoutputproducedbythenationalsofacountryregardlessofwheretheylive.GNPisGDPPLUSincomeearnedbycitizensfromtheirworkandinvestmentsabroad,LESStheincomeearnedbyforeignersfromtheirworkandinvestmentswithinthecountry.

GDPmeasuresoutputwithinthebordersofacountryregardlessofthecitizenshipoftheproducer.GNPmeasurestheoutputofthecountry’snationalsregardlessofwheretheylive.

c:

ExplainthedifferencebetweenrealandnominalGDP.

AnimportantuseofGDPistocomparethelevelofproductionovertime. However,whennominalGDP（GDPmeasuredintermsofcurrentprices）changesfromoneperiodtothenext,itreflectsbothchangesinproductionandpricechanges. Therefore,economistsattempttofilterouttheimpactofGDPbycalculatingGDPmeasuredintermsofpricesfromsomebaseyear. ThismeasureiscalledrealGDP. ChangesinrealGDPcorrespondtorealoractualchangesinproduction.  

SincenominalGDPismeasuredwithcurrentpricesandrealGDPismeasuredrelativetothepricelevelinsomebaseyear,weneedapriceindextoindicatetherelativepricechangebetweenperiods.

d:

DistinguishbetweentheGDPdeflatorandtheconsumerpriceindex.

TheGDPDeflatorisageneralpriceindexthatcorrespondstothepricechangeexhibitedbyaverylargemarketbasket-allfinalgoodsandservicesproduced.Animportantpointtonoteisthatthemarketbasketofgoodschangeseveryyeardependingoncurrentproduction.Inotherwords,themarketbasketisnotfixed.TheGDPDeflatorisusefulformeasuringeconomy-wideinflation.Thecurrentbaseyearis1992.

TheConsumerPriceIndex（CPI）isdifferentthantheGDPdeflator.First,arelativelysmallmarketbasket（364items）isused.Second,themarketbasketisfixedfromyear-to-year.Finally,theCPImeasuresconsumerpricechangesanddoesnotdirectlymeasurethepricechangesofitemspurchasedbybusinessesandgovernment.

Thenetresultofallthesedifferencesisverysmall.However,theCPItendstooverstatetheinflationratebecauseitsmarketbasketisfixedanddoesnotconsiderthatconsumerswillsubstituteawayfromgoodsthathaverisendramaticallyinprice.However,theCPIisusefulformeasuringinflationintheconsumergoodssector.

e:

CalculaterealGDP,usingnominalGDPandtheGDPdeflator.

Example:

NominalGDPwas$2.5billionin1992and$3.5billionin1998.IftheGDPdeflatorwas100.0in1992and112.7in1998,whatisthechangeinrealGDPovertheperiodbothindollarsandinpercentageterms?

Answer:

1.NominalGDPin1992=$2.5billion.

2.1998GDPin1992dollars=$3.5（100.0/112.7）=$3.1billion.

3.Increaseindollars:

$3.1-2.5=$0.6billion.Increaseinpercent:

[（3.1-2.5）=.24or24%.AlthoughnominalGDProsebyover40%duringtheperiod,therealproductionoftheeconomyonlyroseby24%.

RealGDPcurrentperiod=nominalGDPcurrentperiodx（GDPdeflatorbaseyear/GDPdeflatorcurrentperiod）

f:

DiscussthemajorlimitationsofGDP.

LimitationswithusingGDPasameasureofeconomicactivity:

1.GDPdoesnotcountnon-marketproduction--specifically,homemakerservices.

2.GDPdoesnotcounttheundergroundeconomy--illegalactivitiesandtaxevasion.

3.GDPdoesnotmeasurethevalueofleisureactivities,thestandardoflivingaccountedforbyashorterworkweek,andchangingworkingconditions.

4.GDPdoesnotmeasurethechangingqualityofgoodsandservices.

5.GDPdoesnotmeasurethecostofpollutionanddamagetotheecology.

g:

Describealternativemeasuresofdomesticoutputandincome,includingGDP,GNP,nationalincome,personalincome,anddisposableincome.

∙Grossdomesticproduct=thetotalmarketvalueofallfinalgoodsproducedwithinacountry.

∙Grossnationalproduct=thetotalmarketvalueofallfinalgoodsproducedbythecitizensofacountry.

∙Nationalincome=thetotalincomepaymentstolaborandcapitalduringtheyear.Itincludestotalearnings（domesticandforeign）ofanation’scitizens.

∙Personalincome=thetotalincomereceivedbyindividuals.Notethattransferpaymentssuchassocialsecurityareincludedhere.

∙DisposableIncome=personalincome-personaltaxes.

1.B:

PreliminaryReading:

EconomicFluctuations,Unemployment,andInflation

a:

Explainthephasesofthebusinesscycle.

Thebusinesscycleischaracterizedbyfluctuationsineconomicactivity.RealGDPandtherateofunemploymentarekeyvariablesusedwhendeterminingthecurrentphaseofthecycle.

Thefourphasesofthebusinesscycleare:

1.Peak,

2.Contraction,

3.RecessionaryTrough,and

4.Expansion.Astothelengthofeachphase,recentexperiencehasshownthatthecontractionaryperiodsarebecomingshorter,andtheexpansionaryperiodsarebecominglongerinduration.

ArecessionisdefinedasaperiodduringwhichrealGNPdeclinesfortwoormoresuccessivequarters.Boththecontractionandrecessionarytroughcomprisearecession.Adepressionisaprolongedandverysevererecession.

b:

Describeunemploymentstatisticsanddiscusstheproblemsinmeasuringunemployment.

Thelaborforceisdefinedasthosepeopleofworkingage（+16）whoareeitheremployedorseekingemployment. Thelaborforceparticipationrateisthenumberofpersons16orolderwhoareeitheremployedoractivelyseekingemploymentasapercentageofthecivilianpopulation16orolder. Therateofunemploymentisthepercentofpeopleinthecivilianlaborforcewhoareunemployed Itisimportanttonotethatifapersonisnotworking,he/sheisnotnecessarilyclassifiedasunemployed. Anindividualmustbeactivelyseekingemploymentorwaitingforanotherjobtobeconsideredunemployed. Householdworkers,students,andretireesareexamplesofindividualswhohavechosentoexitthelaborforce.

Workerswhohavebeenlaidoffbutarewaitingforrecalltotheiroldjobsarecountedasunemployed. Anindividualissaidtobeunemployedifhe/sheisactivelyseekingemploymentorwaitingtobeginorreturntoajob.

Workerswhohavebecomediscouragedandhavegivenuplookingforemploymentarenotcountedasunemployed. Thisproblemaccountsfortheanomalythatoccurswhentheeconomyturnsupandtheunemploymentratejumps.

Workerslookingforfull-timeemploymentbutsettlingforpart-timeworkareconsideredasbeingemployed. Becauseofthesemeasurementproblems,someeconomistsfeelthepropermeasureofemploymentwouldbetheemployment/populationratioratherthantherateofunemployment.

c:

Describethethreetypesofunemployment.

Frictionalunemploymentisunemploymentduetoconstantchangesintheeconomythatpreventqualifiedworkersfrombeingimmediatelymatchedwithexistingjobopenings.Therearetwocausesoffrictionalunemployment:

1.Imperfectinformation.

2.Thejobsearchconductedbybothemployeesandemployers.

Structuralunemploymentisunemploymentduetostructuralchangesintheeconomythateliminatesomejobswhilegeneratingjobopeningsforwhichunemployedworkersarenotqualified.Structuralunemploymentdiffersfromfrictionalunemploymentinthatworkersdonotcurrentlyhavetheskillsneededtoperformthenewlycreatedjobs.

Cyclicalunemploymentisunemploymentcausedbyachangeinthegenerallevelofeconomicproductivity.Whentheeconomyisoperatingatlessthanfullcapacity,positivelevelsofcyclicalunemploymentwillbepresent.Atlevelsabovefullcapacity,negativecyclicalunemploymentwillexist.

d:

Definefullemployment.

Whencyclicalunemploymentiszero,theeconomyissaidtobeoperatingatfullemployment.However,atfullemployment,bothstructuralandfrictionalunemploymentstillexist. Therefore,thereissomelevelofunemployment,whichisexpectedwhentheeconomyisatfullemployment.

Thenaturalrateofunemploymentisthatrateofunemploymentpresentwhentheeconomyisatitsfullemploymentrateofproductionoroutput. Intherecentpast,thenaturalratehasrisenduetochangesinthecompositionofthelaborforce,namely,andincreaseinyoungworkersenteringthelaborforce.

Thisrateofunemploymentcanpersistforanindefiniteperiodoftimeandistypicallyassociatedwiththeeconomy'smaximumlong-rateofoutput.

e:

Defineinflationandcalculatetheinflationrate.

Inflationisaprotractedperiodofrisingprices.Asinflationrises,thepurchasingpowerofeachdollarhelddeclines.Inflation=（thisyear'spriceindex-lastyear'spriceindex）/（lastyear'spriceindex）.

Example:

Apriceindexis113.5for2000and119.9attheendof2001.Whatwastheinflationrat