Macro-economic analysis, Financial Management

Macro-Economic Analysis

Measuring the Level of Economic Activity

Gross National Product (GNP) and the Gross Domestic Product (GDP) are the two most widely used aggregates of the level of macroeconomic activity.

  • Gross National Product (GNP): The GNP is the value of all goods and services produced by the resources owned by the nation. Though GNP does not differentiate between resources owned by the citizens of the country within the country and abroad, it does not include the value of goods and services produced totally by resources owned by foreigners.
  • Gross Domestic Product (GDP): The gross domestic product measures the value of the products produced within the country irrespective of the ownership of resources used in the production. A high degree of correlation is generally observed between the GNP and the GDP though their definitions imply that GNP is more related to the nation's income than the GDP. While GNP is more useful in predicting sales of consumption goods, GDP is more related to the nation's production and hence useful in predicting the sales of intermediate products.

GNP and GDP are both used to estimate the level of economic activities and the future sales of consumption goods and services. Apart from these, these are three types of economic indicators: leading indicators, coincidental indicators, and lagging indicators.

  • Leading indicators: These indicators are highly sensitive to the changes in the economic environment and foretell the changes in economic activity i.e., they rise or fall ahead of similar changes in the economic activity. These indicators are used for projecting the future trends in economic activity.
  • Coincidental indicators: These changes move in tandem with the level of economic changes and are therefore, used to assess the current state of the economy.
  • Lagging indicators: These indicators move after the change in economic activity has occurred. They are useful in assessing and comparing the various economic statistics and the actual level of economic activity.

For valuation based on discounting future cash flows, the leading economic indicators are the most relevant of all the three types of indicators. Though there are a few prominent indicators, which would help in predicting the future trends of the economy, each one of them may have some erratic behavior too. An aggregate of a few of these indicators would serve as a better indicative measure.

Leading Indicators

  • New orders of manufacturers (consumer goods and materials industries).
  • Supply of money.
  • Contracts and orders for plant and equipment.
  • Consumer price index.
  • Average weekly initial claims for unemployment insurance.

Coincident Indicators

  • Employees on non-agricultural payrolls.
  • Industrial production.
  • Personal income less transfer payments.

 

Posted Date: 9/11/2012 5:02:12 AM | Location : United States







Related Discussions:- Macro-economic analysis, Assignment Help, Ask Question on Macro-economic analysis, Get Answer, Expert's Help, Macro-economic analysis Discussions

Write discussion on Macro-economic analysis
Your posts are moderated
Related Questions
Explain Vernon’s product life-cycle theory of FDI. What are the strength and weakness of the theory? Answer:  As to the product life-cycle theory, companies undertake FDI at a ce

Q. Show objections against profit maximization? 1) Profit cannot be ascertained well in advance to express the. Probability of return as future is Uncertain. It is not at all p

1) What is the financial goal of the entrepreneurial venture?  What are the major components for estimating value? 2) Briefly discuss the likely importance of an entrepreneur's

Q. What do you mean by Public deposits? Public deposits are the fixed deposited by the business enterprises directly from the company. This source of the raising the short term

Q. Definition of financial leverage? One of the goals of planning an appropriate capital structure is to maximize the return on equity shareholders fund or else maximize the ea

Financial Systems: The overall financial management framework will include a number of elements such as: Financial systems designed to capture the details of each financ

Define the meaning of objective - financial management The term objectives offers a normative framework. That is the focus in financial literature is on what a firm must try to

It is a phrase referring to the tendency of departments to become isolated from one another in a functionally structured company.

Zero base budgets: this is a new technique, which was first used by the US Department of Agriculture in 1961. Texas instruments, an MNC, have used it in the private sector.  But,

Imagine you have been allocated $100,000 which is to be invested in 8 companies listed on the Australian Stock Exchange (ASX). You are required to have a balanced portfolio betwee