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