ASB-­‐3215-­‐  Advanced  Investment    

Theory  and  Practice  Lecture  8-­‐  Part  II    Macroeconomic  and  Industry  Analysis  

   

 Dilek  Ulu  

 Bangor  Business  School  

2013/2014  

   

Key  Economic  Statistics  

Ê  GDP,  is  the  measure  of  the  economy’s  total  production  of  goods  and  services.    

Ê  Unemployment  rate,  is  the  percentage  of  total  labor  force  yet  to  find  work.    

Ê  Inflation,  is  the  rate  at  which  the  general  level  of  prices  rise.    

Ê  Budget  deficit,  is  the  difference  between  government  spending  and  revenues.    

Ê  Interest  rate,  is  the  price  of  money.    

Fiscal  and  Monetary  Policy  

Ê  Fiscal   Policy   refers   to   the   government’s   spending   and   tax  actions  to  stimulate  or  slow  the  economy.    

Ê  Monetary   Policy   refers   to   the   manipulation   of   the   money  supply  to  affect  the  macroeconomy  through  money  supply’s  impacts  on  interest  rates.    

Ê  Monetary  Policy  Tools  Ê  Open  Market  Operations  (OMO)  

Ê  Discount  Rate  Ê  Required  Reserves      

Monetary  Policy  Tools  

Ê  Open  Market  Operations:  Central  bank  changes  the  money  supply  by  buying  or  selling  securities  for  its  own  account.    

Ê   Discount  rate:  is  the  interest  rate  Central  Bank  charges  banks  on  short  term  loans.  Reduction  in  the  discount  rate  signals  a  more  expansionary  policy.    

Ê  Required  Reserves:  Central  Bank  can  change  the  effective  money  supply  by  changing  the  reserve  requirements  of  the  banks.  For  example  ,  in  case  of  a  reduction  in  required  reserves,  banks  make  more  loans  which  in  turn  increases  the  money  supply.      

The  Business  Cycle  

•  A  peak  is  the  transition  from  the  end  of  an  expansion  to  the  start  of  a  contraction.    

 •  A  trough  occurs  at  the  bottom  of  a  

recession  just  as  the  economy  enters  a  recovery.    

•  If  sales  of  an  industry  is  sensitive  to  macroeconomic  conditions,  those  industries  are  called  cyclical  industries.    

•  In  contrast  to  cyclical  industries,  defensive  industries  have  little  sensitivity  to  the  business  cycle.    

       

Sensitivity  to  the  Business  Cycle    

Ê  Sensitivity  of  Sales  

Ê  Operating  Leverage  (division  between  fixed  and  variable  costs)  –  Firms  with  high  fixed  costs  can  have  large  swings  in  their  profits  in  response  to  change  in  business  conditions.    

Ê  Financial  Leverage  (the  use  of  borrowing).  High  interest  payments  increase  the  sensitivity  of  profits  to  business  conditions.