Macro-economic analysis, Financial Management

Assignment Help:

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.

 


Related Discussions:- Macro-economic analysis

Call and refunding provisions, Call provision is the right of the iss...

Call provision is the right of the issuer to call back and retire the issued bonds before the maturity date. The issuer may call the bond and retire the bond by paying

Working capital financing plan for company implementation, What is the most...

What is the most conservative type of working capital financing plan a company could implement?  Explain. An all equity capital structure would be the mainly conservative type

Explain the risk of the capital asset pricing model, Discuss risk from the ...

Discuss risk from the perspective of the Capital Asset Pricing Model (CAPM). The Capital Asset Pricing Model, or also known as CAPM, can be employed to calculate the suitable req

Compute the discount and premium, Suppose the bid-ask spot prices for one B...

Suppose the bid-ask spot prices for one British pound are $1.50 and $1.60 respectively. 1. Compute the bid-ask prices for one US dollar in terms of British pound. 2. Suppose

Buy side analyst, How to Industry analysis and finally stock picking from B...

How to Industry analysis and finally stock picking from Buy-side perspective

Calculated betas provide different information, Calculated betas provide di...

Calculated betas provide different information if they are obtained by using daily, weekly or monthly data. Which data is the most appropriate? Fernández and Carabias (2007) an

Calculate the price of winnebago stock , Calculate the price of Winnebago s...

Calculate the price of Winnebago stock (Winnebago has no debt so this is the market value of the firm seperated by the number of common shares outstanding.) from the cashflows you

Show the compound value of the single flow, Q. Show the Compound Value of t...

Q. Show the Compound Value of the Single Flow ? Compound Value of the Single Flow (Lump Sum):- The process of computing future value becomes very cumbersome if they have to be

Explain the meaning of - purchase consideration, Explain the meaning of - P...

Explain the meaning of - Purchase consideration The  type  of  offer  made  to  target  company's  shareholders  would have  a  big  impact on acceptance. Apparently the price

Valuation an option-free bond with the tree, Let us construct a binom...

Let us construct a binomial interest rate tree for a 5.5% option free bond taking Table 3 as the binomial interest rate tree. Table 1 shows the various values in

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd