3. GDP : The back bone of the economy

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Do curso por Indian School of Business

Introduction to Financial Markets

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Indian School of Business

Introduction to Financial Markets

546 ratings

Curso 1 de 5 em Specialization Financial Markets and Investment Strategy

Learn the general concepts of financial markets and economy. You will see the difference between primary and secondary markets and learn about markets for different products. You will also look at various economic Indicators and their influence on the markets. After completing this course, you will have a much stronger background of financial markets and ready to go to the next stage in the Specialization. This course is designed to help students with very little or no finance background to learn the basics of investments.

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Macroeconomic Fundamentals

This module focuses on key economic indicators that are monitored closely by the finance community. You will learn to examine these economic indicators in the context of business cycles.

1. Jobs report : Country's fuel6:13

2. Consumer Confidence Index (CCI) : How confident are you?8:41

3. GDP : The back bone of the economy6:53

4. Industrial Production and Capacity Utilization7:57

5. Consumer Price Index (CPI) : Fixed income investor's enemy8:20

6. Producer Price Index (PPI) : A must know4:43

Conheça os instrutores

Vaidya Nathan
Lecturer
Finance

[MUSIC]

Learning goals, after watching this video you will be

able to explain GDP or the gross domestic product.

You will also be able to predict the response of the stock markets,

bond markets and currency markets to the GDP data.

GDP they're the best known any shows in economics and just in case you haven't

heard of it, it's stands for, guess what gross domestic product.

It's the mother of all economic indicators and

the most important status stake, it by the way, GDP comes out every quarter.

The GDP is a must to watch for all investors,

because it is the best overall barometer of the economies ups and downs.

Macro economists analyze it carefully for hints on where the economies heading.

CEO's use it to help compose business plans,

make hiring decisions, estimates sales growth.

Government officials view the GDP as a report card on how well or

how badly their own policies have been working.

For these and many other reasons, the GDP report is one of the most greatly

anticipated economic data, simply put, the GDP is the total price tag

in domestic currency of all goods and services made in the economy.

It's the sum value of all cars, new homes,

baby food, video games, medical fees, books, toothpaste,

sandwiches, hammers, haircuts, eyeglasses, yards, kites, computers.

I mean, you get the idea, right?

All the stuff that was sold in the economy,

are exported during a specific time period.

Even goods that are not sold but ended up on the stock room,

they are also included in the GDP, because these perhaps were still assembled,

even though they are still on the stock room shelves and not haven't been sold,

but this still are counted in the GDP data, because they were still assembled.

The GDP therefore, reflects the final value of all output in the economy

regardless of whether it was sold or placed in inventory.

When you look at GDP performance, across countries all over the globe, it

becomes quite evident that most economies have a natural tendencies to grow.

Business activity has expanded in far more years than it has contracted.

The faster and longer the economy grows, the higher the level of employment.

And when more people are working, total household income goes up,

this encourages them to spend more on stuff, on goods and services.

As consumer spending accelerates, companies are inclined to speed up

their own production, and hire additional workers.

That in turn, further increases household income, and

voila, you have a huge economic expansion.

Moreover the benefit of growth are not just felt inside the economy,

stronger economic growth stimulates foreign businesses as well, because people

will import more cars, will buy more clothing, will buy more jewelry, shoes,

home electronics from other countries and that helps revitalize the global economy.

So what effect does robust GDP number have on stocks, bonds and currencies?

First, the stock market, stocks, the equity markets reaction to the GDP report

depends on whether it's better than expected, or worse than expected a healthy

economy generates more business earnings while a sluggish economy

basically depresses sales and also has reduced income.

However, there is an important qualification there, if economic activity

has been racing ahead, for several quarters, even shareholders and

equity holders start to get a little nervous about rising prices.

Because high inflation can cause an erosion of household purchasing power, and

probably will force interest rates higher in future.

Therefore, the equity markets can be as uncomfortable

with an economy growing too quickly as it is when it is moving far too slow.

As regards bonds, and the actual GDP's release the first question that is there

on every bondholder's mind is how it compares with expectations.

If the economy is growing at below the pace predicted by economists,

the bull market is likely to react positively.

Especially if real final sales are anemic and unwanted inventories are ballooning.

Conversely if GDP growth numbers exceed expectations and the inflation embassies

are showing signs of accelerating it could be a nightmare for bond holders.

A strong GDP report combined with rising inflation pressures

will spread fears that the Central Bank will sooner or later intervene and

raise short term rates to cool down the economy.

And unless investors are confident that the Central Bank will not raise interest

rates chances are that bond prices will plummet and because yields to spike.

What happens to currencies?

To foreign investors a strong economy is viewed more favorably than a weak one.

So robust economic activity spurs corporate profits and

firms up into straights.

Therefore foreign investors see opportunities to make money in the stock

market and from high yielding bonds.

All this increases a demand for domestic currency if the Central Bank

moves quickly to preempt inflation by driving up short term interest rates.

Odds are that this would also lead to a depreciation off the domestic currency,

because of the perception that the Central Bank is ahead of the curve in containing

price ratios.

However, if inflation accelerates and stays at a very high level,

meaning prices are increasing quite a lot, it would lower competitiveness

of the country and the world and worsen the country's foreign trade deficit,

a scenario that can make the domestic currency far less appealing.

[MUSIC]

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