Economics Overview: GDP and Economic Policies

Economic Cycle

• Recurring periods of economic expansion (recovery) and contraction (recession).
• Impacts inflation, growth, and employment.

GDP (Gross Domestic Product)

• Measures a country's economic output in a year.
• Represents the market value of final goods and services produced within a country's borders.
• Measured monthly, quarterly, or annually.
• Calculated using three methods:
  • Product (output) approach.
  • Income approach.
  • Expenditure approach.
• Example of the expenditure approach: GDP = Private consumption + Gross investment + Government spending + (Exports - Imports).

Economic Policies

• Fiscal Policy: Government's taxation and expenditure policy.
  • Key measure is the budget deficit/surplus.
    • Government expenditure: Education, healthcare, social services, policing, defense, foreign aid, etc.
    • Government revenues: Taxation, asset sales (privatization), borrowing.
• Monetary Policy: Controlling the amount and cost of money in the economy.
  • Key measures include:
    • Interest rates.
    • Money supply.
    • Exchange rate control.
    • Bank reserves.

Inflation

• The general rise in prices over a period of time (usually one year - annual inflation rate).
• Measured using the cost of a standard basket of goods.
• Various indices used to calculate inflation:
  • Retail Price Index (RPI).
  • Consumer Price Index (CPI).
  • Producer Price Index (PPI).
  • Personal Consumption Expenditure (PCE).
  • GDP deflator.
  • Employment Cost Index (ECI).
  • Average hourly earnings.

Unemployment

• Unemployed individuals are those of working age who are out of work but available for work at current wage levels.
• The labor force includes both employed and unemployed workers.
• Types of unemployment:
  • Cyclical.
  • Frictional.
  • Seasonal.
  • Structural.

Economic Data

• Impacts markets.
• Influences asset classes.
• Important for understanding the impact of economic data on various asset classes.
• Sources of Information:
  • The Financial Times.
  • The Wall Street Journal.
  • The Economist.
  • Research reports.
• Considerations:
  • Be aware of changes to economic definitions and index construction.
  • Account for later revisions to numbers.
  • Make your own adjustments.

Economic Indicators Analysis

• Can influence future economic policy, economic activity, and investor actions.
• Important to consider the effects of actual economic data vs. market expectations.
• Market expectations can limit changes in asset prices if they are already priced in.
• Unexpected economic data can cause significant fluctuations in asset prices.

Retail Mortgage Loans

• A mortgage is a loan secured by real estate.
• It is a long-term loan commonly used to finance the purchase of a property.
• Borrowers make regular payments over a set period, ultimately repaying the loan principal and accrued interest.

Property

• Land, including inherent natural attributes and permanent man-made improvements.
• Types of property:
  • Residential.
  • Commercial.
  • Agricultural.

APR (Annual Percentage Rate)

• Represents the total cost of borrowing, including interest rate, fees, and charges.
• It is regulated and must be disclosed on loan documents and advertising.

Car Loans

• A type of loan specifically used to finance the purchase of a vehicle.
• Typically have a fixed interest rate and a set repayment period.
• Loan terms vary based on factors such as the loan amount, interest rate, and repayment period.

Credit Card Services

• Credit card providers offer different cards with varying benefits and fees to cater to different customer needs.
• Credit card programs typically include features like rewards programs, balance transfers, and travel insurance.

Credit Card Mechanics

• Credit cards operate on a revolving credit system, meaning that the cardholder is responsible for paying back a balance each month.
• Interest and fees are charged if the full balance is not paid off on time.

Credit Card Risks

• Credit card usage carries the risk of overspending and accumulating debt.
• It is crucial for cardholders to manage their spending and pay back balances responsibly to avoid incurring high interest and potential financial hardship.