5. Economic Analysis

Table of Contents

Microeconomic and Macroeconomic- 

Microeconomics and Macroeconomics are the two main branches of economics that help to analyze and understand the economic activities of individuals, firms, and the overall economy.

Microeconomics is the study of the behavior of individuals and firms in the market and how they interact with each other to make decisions regarding the allocation of resources. On the other hand, Macroeconomics is the study of the economy as a whole and its overall performance.

Microeconomics Macroeconomics
Focuses on the behavior of individuals and firms in the market Focuses on the overall economy as a whole
Analyzes how individuals and firms make decisions regarding resource allocation Analyzes the performance of the economy in terms of GDP, inflation, and unemployment
Deals with issues such as demand, supply, market equilibrium, and pricing of goods and services Deals with issues such as fiscal policy, monetary policy, international trade, and economic growth
Helps to understand the behavior of individual consumers and firms in a competitive market Helps to understand the overall performance of the economy and the role of government in shaping economic policies
Focuses on microeconomic variables such as the price of goods and services, cost of production, and profit margins Focuses on macroeconomic variables such as GDP, inflation, unemployment, and interest rates
Example: Analyzing the market for smartphones and how consumers respond to changes in prices and features Example: Analyzing the impact of fiscal and monetary policies on the overall economy

Introduction to Various Macroeconomic Variables

The government and central bankers, in any economy, as policymakers strive to promote economic stability and growth. Their continuous attempt is to implement policies, which ensure a low unemployment rate, price stability with a low inflation rate, and steady growth in economic outputs. However, in spite of the best intentions and efforts of policymakers, economies go through cycles of booms and busts.

  1. National Income: National income refers to the total income earned by a country’s residents, including individuals, businesses, and the government. It is an important macroeconomic variable that helps to gauge the economic performance of a country. There are three methods of measuring national income:
    1. Product Method: This method calculates national income as the sum of all goods and services produced by a country during a particular period.
    2. Income Method: This method calculates national income as the sum of all income earned by the residents of a country during a particular period. This includes salaries, wages, rent, and profits.
    3. Expenditure Method: This method calculates national income as the sum of all spending on goods and services by individuals, businesses, and the government during a particular period.
  2. Saving and Investments: Saving refers to the portion of income that is not spent on consumption. Investment refers to the purchase of goods that are used to produce other goods and services. Saving and investment are important macroeconomic variables because they influence a country’s economic growth and development.
  3. Inflation & Interest Rates: Inflation refers to the general increase in prices of goods and services in an economy. Interest rates refer to the cost of borrowing or the return on investment. These two variables are closely related because inflation can cause interest rates to rise, and high interest rates can cause inflation to decrease.
  4. Unemployment Rate: The unemployment rate is the percentage of the labor force that is unemployed but actively seeking employment. It is an important macroeconomic variable that indicates the health of a country’s economy. High unemployment rates can indicate a lack of economic growth and development.
  5. FDI and FPI’s Flow: Foreign Direct Investment (FDI) refers to the investment made by a foreign company in the production of goods and services in another country. Foreign Portfolio Investment (FPI) refers to investments in the stock market or other financial assets of a foreign country. These investments are important macroeconomic variables because they can bring in capital and technology and help to boost economic growth.
  6. Fiscal Policies and Impact: Fiscal policies refer to government policies that influence taxation and spending. These policies can have a significant impact on the economy by affecting consumer behavior, business investment, and economic growth.
  7. Monetary Policies and Impact: Monetary policies refer to government policies that influence the money supply and interest rates. These policies can have a significant impact on the economy by affecting inflation, interest rates, and economic growth.
  8. International Trade, Exchange, and Trade Deficit: International trade refers to the exchange of goods and services between countries. Exchange rates refer to the value of one currency in relation to another. Trade deficit occurs when a country imports more goods than it exports, resulting in a negative balance of trade. These variables are important macroeconomic factors because they can affect a country’s balance of payments and its overall economic growth.
  9. Globalization – Positive and Negative: Globalization refers to the increased interconnectedness and integration of economies, societies, and cultures around the world. It can bring economic benefits such as increased trade, investment, and job opportunities. However, it can also have negative effects such as job losses, income inequality, and environmental degradation.

Role of Economic Analysis in Fundamental Analysis

Fundamental analysis is a method used to determine whether a business is likely to grow or shrink. Economic analysis is an important part of fundamental analysis as it helps understand the external environment and how it may affect a particular business. For example, studying the GDP growth rate can help understand the overall economy of the country, and monitoring interest rates, inflation, public expenditure, and fiscal deficit can help predict future direction of monetary and fiscal policies. By analyzing these factors, an analyst can understand how the economy is likely to affect the industry they are analyzing.

Secular, Cyclical and Seasonal trends-

Economic Trend Type Description Examples
Secular Trends Long-term changes due to factors such as technology, culture, demography, and consumer preferences Shifts in consumer preferences towards sustainable products, technological advancements leading to automation and AI
Cyclical Trends Temporary trends affecting the quantity of goods and services being consumed Economic cycles, commodity cycles, inventory cycles
Seasonal Trends Highly predictable patterns in the production and consumption of goods and services due to factors such as weather and holidays Increase in demand for winter clothing during winter season, surge in retail sales during holiday season

Mock-Test-

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CHAPTER 5- ECONOMIC ANALYSIS

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1. How is inflation measured at the retail level?

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2. What is the focus of microeconomics?

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3. What is inflation?

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4. What distinguishes Foreign Direct Investment (FDI) from Foreign Portfolio Investment (FPI)?

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5. What is the relationship between interest rates and inflation?

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6. What causes demand pull inflation?

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7. Which branch of economics deals with the economy as a whole?

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8. Two major influencers of the public policies in an economy are & .

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9. What is fiscal policy?

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10. What does the unemployment rate indicate?

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11. Why are higher levels of savings and higher conversion into investments considered good for an economy?

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12. National income of an economy can be measured through which of the following methods?

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13. What is fiscal deficit?

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14. Focus of microeconomics is on factors that influence aggregate supply and demand in an economy such as unemployment rates, gross domestic product (GDP), overall price levels, inflation, savings rate, investment rate et State whether True or False.

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15. What is the relationship between savings and investments?

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16. How is national income measured in an economy?