The following terms pertaining to the economy they must always be considered when analyzing markets and investments.
Business Cycle:
The business cycle has four phases:
Expansion, Peak, Recession and Trough:
These cycles create price changes, which lead to changes in total spending in relation to the amount of goods and services being produced.
Inflation:
Inflation is a gradual rise in prices and resulting decreasing in purchasing power. It is normally associated with economic expansion and a low unemployment figure.
Deflation:
Deflation is a decline in prices, where production exceeds demand. Deflation normally occurs during recessions and leads to a rise in unemployment.
Stagflation
Gross National Product (GNP) or Gross Domestic Product (GDP):
This statistic measures all goods and services produced in a country in a full year. GNP can be expressed in the following ways:
A. Money GNP, using inflated currencies,
B. Real GNP, measured in adjusted for inflation currencies. Real GNP is considered a more realistic measure, as it is adjusted for the effects of inflation.
Recession is a 6 months of declining GNP.
Depression is a 6 quarters of declining GNP.
Consumer Price Index (CPI):
This is the indicator of the change in prices of goods and services. Included in the index are food, transportation, medical care, entertainment and other items purchased by households and individuals.
Balance of Payments:
This is a summary of money flowing in and out of a country. If a country is spending more for imported goods and services than it receives for goods it exports, a deficit results. If the country received more money by selling goods in foreign markets than it spent on imports, the deficit would decrease. A decrease in the balance of payments raises the deficit; an increase in the balance of payments would reduce the deficit.
Money Supply:
This is the total amount of available money and credit in a country. The Central Bank attempts to control money and credit to create a stable, growing economy. The following are the most significant components of the money supply for the purposes of analyzing investment markets:
M-1:
Includes all currency in circulation plus demand deposits. Demand deposits are those which depositors may withdraw at any time (on demand) without prior notice, such as business and personal checking accounts at commercial banks.
M-2:
Includes M-1 plus overnight currencies trading overseas, overnight repurchase agreements, money market shares, savings deposits held by thrift institutions and time deposits in commercial banks. A time deposit is one that the depositor agrees to leave in the bank for a set period of time. Time deposits earn a specific amount of interest; if funds are withdrawn sooner than agreed, interest is forfeited.
Prime Rate:
This is the rate of interest banks charge their best customers, usually well established companies, to borrow money.
