BUSINESS (CPI, Inflation, TVM, Credit Ratings)

Question 1

what had driven inflation?

Answer 1

-COVID
-oil prices
-Ukraine war: Russia not exporting much oil (no one wants to buy it from them)
-Sada araba: put back production
*when energy goes up =forces everything else to go up (ex. need to transport things)

Question 2

Bank of Canada

Answer 2

-sets the ‘overnight rate’ = everyone bases their interest rates off it
-supposed to operate at arms length from government
-when economy too high=raise up interest rates=people realize they don’t have money/can’t afford it=cools down supply and demand
-if interest rates are too high for too long=recession

Question 3

inflation

Answer 3

-the increase in cost of living (COL) as the prices of goods and services rise

Question 4

consumer price index (CPI)

Answer 4

-stats Canada is responsible for measuing CPI
-generally a measure of the rate of inflation
-calculated by pricing a standardized ‘baset’ of goods and services (ex. groceries, electricity, gas, power, restaurants, etc.)
-quoted as a number or a year-to-year percentage change (*most commonly percent change)

Question 5

basket of items

Answer 5

-similar across countries
-we consume more gasoline than milk in a year, so gas has a higher rating
-Stats Canada send people into retail outlets to obtain prices on a monthly basis

Question 6

same basket of items each year

Answer 6

-stats Canada can measure whether the cost of all goods and services in the basket is going up (inflation) or down (deflation)

Question 7

CPI and inflation

Answer 7

-NOT synonymous
-CPI: change in price of the basket from one period to the next
-Inflation: an increase in the basket over time
-Deflation: a decrease in CPI

Question 8

common CPI (often referred to as CPI)

Answer 8

-measure of all goods and services in the basket

Question 9

core CPI

Answer 9

-measure of all goods and services minus energy and food prices

Question 10

why remove energy and food?

Answer 10

-the most volatile items in the basket
-if ever a weather crisis, the food prices may spike
-oil can also fluctuate dramatically (results in changes in gasoline prices)

Question 11

trimmed CPI

Answer 11

-CPI-trim excludes 20% of the weighted monthly price variations at both the bottom and top of the distribution of price changes
*always removes 40% of the total CPI basket

Question 12

median CPI

Answer 12

-similar to trimmed
-eliminates outliers on top and bottom of CPI distribution

Question 13

target range inflation

Answer 13

-2-3%
-where we tend to be
-bank of Canada has done a really good job until COVID came (11 increases in 18months)

Question 14

nominal returns

Answer 14

-what an investment (ex. savings account, stock divends) generates without adjusting for inflation
-almost always higher than real (except during the rare times of deflation)

Question 15

real returns

Answer 15

-what your investment earned after adjusting for inflation
-represents purchasing power

Question 16

purchasing power

Answer 16

-amount of goods and services that can be purchased with a unit of currency
Ex. if inflation goes up, purchasing power goes down b/c amount of currency is held constant

Question 17

increasing goods/services

Answer 17

-annual increases in vet products and services are essential
-what you buy increases, the same increases should be passed down to the owner and producers
-also need to increase everyone’s salary

Question 18

think about real returns when negotiating/discussing annual salary

Answer 18

-if offered an increase, it’s important to look at what the CPI did in your area

Question 19

time value of money (TVM)

Answer 19

-relates to concept that the money available in the present is worth more (greater purchasing power) than the exact same amount in the future

Question 20

present value of money (PV)

Answer 20

-earlier money on a time line

Question 21

future value of money (FV)

Answer 21

-later money on a time line

Question 22

interest rate/”exchange rate”

Answer 22

-difference between the earlier and later money

Question 23

investment/finance perspective (TVM)

Answer 23

-always better to receive money now versus in the future
-inflation erodes purchasing power but if you can invest it in something that earns more money than the rate of inflation, your money will be worth more in real terms in the future (inflation adjusted)

Question 24

TVM key points

Answer 24

-better to have money in the present vs. the future
-simple or compound interest
-can be calculated if you know the initial investment, the interest rate, time frame and number of time periods
-compounding periods is an important factor for determining the future value of your present investment

Question 25

simple interest

Answer 25

-based on principle amount of loan or deposit

Question 26

compound interest

Answer 26

-based on principle amount + the interest that accumulates (beware credit card debt)

Question 27

rule of 72

Answer 27

-simple trick to determining how long it takes for an investment or revenue to double based on a known interest rate
-divide the number 72 by the rate
-if you shoot for 7%/annum return, then your investments will double every 10 years