Chapter 11 (1Q) Basic Economics Flashcards
Economics
Social science chiefly concerned with analysis of production, distribution and consumption of good and services
Micro- Household or business firm level
Macro- GDP, inflation, unemployment
Business cycles
Expansion-GDP and productive move towards a peak
Inflation increases during an expansion and so does industrial production
Peak Top level of economic activity
Contraction- Enter after reaching a peak in the cycle
Recession- Short-term contraction, 2 or more quarters of lowering GDP
Depression- 6 Quarters of declining business activity
Trough- low point of cycle
Cyclical industries
Usually produce durable goods and are highly sensitive to business cycles
Growth industries
Out growing the economy as a whole
Currently includes social media and bioengineering
Pay little to no dividends
Defensive industries
Produce nondurable consumer goods such as foo
Special Situation Stocks
Have unusual profit potential from non recurring circumstances
Consumer Price Index
Reflects the average cost of goods and services vs the same goods in a prior period
Inflation pushes interest rates higher and yields higher
Interest rates
Long term= Investor expectations
Short term= Reflect the FRB implementing monetary policy
Cost of borrowing money
Nominal rate of interest- actual amount borrows pay for loanable funds
Real rate of interest- Nominal minus expected rise in inflation
8% and rate of inflation expected is 2%
Real rate if 6%
Yield curve analysis
Normally upward sloping due to long term rates being normally higher than short term
Inverted slope- Short term lending is in higher demand or there’s a sharp increase in short term rates
If corporate and government yield curves are tightening then entering an expansion
Usually use one firms bonds to show a yield curve and US Treasuries
GDP
All final goods and services produced in the US
If imports exceed exports, the value is subtracted from GDP
Measures countries output regardless of who produced it
Based on constant dollar
Core Inflation
Excludes food and energy prices, due to high volatility
Balance Sheet
Snapshot of a company’s financial position at a specific time
Does not indicate improving or deteriorating value
Capital structure
Long term debt and equity securities
Working capital
Measure of firms liquidity
CA-CL=WC
Quick Asset Ratio- CA-inventory/CL
Other Ratios
Debt to equity= TL/Total Capitalization
Book Value Per share=
Tangible Asset - Liabilities - par of Preferred Stock
/
Share of common stock outstanding
EPS= NI / Shares outstanding
Preferred stock has no claim on earnings outside of the dividend
Current Yield= Annual dividend/Market Price
