Economic Factors

  1. Introduction
  2. Securities Markets
  3. Brokers and Dealers
  4. Economic Factors
  5. Stocks and Shareholder's Rights
  6. Options
  7. Investment Products
  8. Alternative Investments
  9. Risk of Investing
  10. Trading Types and Accounts
  11. Rules of SEC and FINRA
  12. Prohibited Activities

What are Economic Factors

Economic Factors

Did you ever wonder why prices go up or down? What information leads to increases in mortgage rates, or why the Federal Reserve changes the interest rates? Economic factors are the multiple factors that influence all economic decisions when it comes to finances. These economic factors include interest rates, tax rates, laws, policies, wages, and government and political activities. While these factors may not be specifically related to the business they do influence investment values in the future. Economic factors affect the economy, including interest rates, tax rates, laws, policies, wages, and governmental activities. These factors are not directly related to the business but influence the investment value in the future.

There are multiple examples of economic factors:

  • Tax rate
  • Exchange rate
  • Inflation
  • Labor
  • Demand/Supply
  • Wages
  • Law and policies
  • Governmental activity
  • Recession

We use these economic factors to help determine our Consumer Price Index, Gross Domestic Product and Gross National Product. This information helps guide our investment practices and recommendations. We will take a deeper look at the three of them next.

Consumer Price Index

What is the Consumer Price Index?

The Consumer Price (CPI) Index is one of the most widely used measures of the economy. The CPI measures the prices a consumer pays for a section of products over a period. The CPI statistics cover a variety of individuals with different incomes, including retirees, but does not include certain populations, such as patients of mental hospitals, inmates or military soldiers.

The CPI is composed of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) and the Consumer Price Index for All Urban Consumers (CPI-U). The CPI gives the government, businesses, and citizens an idea about price changes in the economy and can act as a guide in order to make informed decisions about the economy.

Consumer Price Index CPI weighting pattern

To calculate the CPI we use this formula:

CPI formula

The following cities/metro areas are evaluated Monthly:

  1. Chicago-Naperville-Elgin, IL-IN-WI
  2. Los Angeles-Long Beach-Anaheim, CA
  3. New York-Newark-Jersey City, NY-NJ-PA

The Bureau Of Labor and Statistics calls and visits locations to monitor the prices of over 80,000 items in order to track and measure their prices. The BLS then sets the base year and uses the formula to calculate the CPI at that moment.

Investors use this information to monitor bonds and commodities.

Gross Domestic Product

Gross Domestic Product

Gross Domestic Product (GDP) is a widely used measure of economic activity within a country. It represents the monetary value of all final goods and services produced within a country's borders in a specific time period. GDP is calculated by adding up consumer spending, investment spending, government spending, and net exports. It is often used as a barometer for the overall health of a country's economy and can be used to compare the economic performance of different countries or to track changes in a country's economy over time. However, it has limitations and critics argue that it does not fully capture the well-being and sustainability of an economy.

Gross Domestic Product

Gross National Product

Gross National Product

Gross National Product (GNP) is a macroeconomic measure of the total value of goods and services produced by a country's residents and businesses, including those produced abroad. GNP includes the output of all domestically owned firms, as well as domestically produced goods and services generated by foreign firms. It also takes into account any income earned by residents from investments made abroad, while excluding any income earned by foreigners within the country's borders. GNP is considered an important measure of a country's economic health, as it provides a comprehensive view of the total economic activity of its residents and businesses, both domestically and abroad.

Gross National Product

Economic Cycle

The Economic Cycle

The economic cycle refers to the natural fluctuation of economic activity between periods of growth and contraction, also known as expansions and recessions. The cycle is driven by various factors, including changes in consumer and business spending, government policies, and global economic conditions. The four stages of the cycle include expansion, peak, contraction, and trough, and they follow a relatively predictable pattern. During expansion, economic output, employment, and consumer confidence increase, while recessions are characterized by falling output, rising unemployment, and decreased consumer confidence. The economic cycle is closely monitored by policymakers, investors, and businesses as it can have a significant impact on financial markets, employment, and overall economic well-being.

Economic Cycle

Balance of Payments

Balance of Payments

The Balance of Payments (BoP) is a statement that summarizes a country's transactions with the rest of the world over a given period, typically a year. It provides a record of all international financial transactions made by a country's residents, including trade in goods and services, financial investments, and transfers of capital. The BoP is divided into two main accounts: the current account and the capital account. The current account tracks the flow of goods and services between countries, as well as income earned from foreign investments and transfers of money.

The capital account records the flow of financial investments between countries, including foreign direct investment and portfolio investments. The BoP is an important tool for understanding a country's economic relationship with the rest of the world and can be used to identify potential imbalances in a country's international trade and investment flows.

Balance of Payments

Trade Deficits

Trade Deficit

A trade deficit occurs when a country imports more goods and services than it exports. This means that more money is flowing out of the country to pay for imports than is flowing in from the sale of exports. While a trade deficit can be concerning in some cases, it is not always a bad thing. For example, if a country is importing capital goods and technology to improve its infrastructure and productivity, it can lead to long-term economic growth. However, if a trade deficit is driven by excessive consumption and borrowing, it can lead to a reliance on foreign borrowing and potentially unstable economic conditions.

Trade Deficits

Supply Side Economic Theory

Supply-Side Economics

Supply-side economics is an economic theory that emphasizes the importance of increasing the production capacity of the economy as a means of achieving long-term economic growth and stability. This theory argues that by reducing taxes and regulations, and encouraging investment and entrepreneurship, the economy will produce more goods and services, leading to increased employment, higher wages, and greater economic output. Supply-side economics also advocates for monetary policies that are focused on controlling inflation rather than promoting economic growth. The theory is often associated with the "Reaganomics" policies of the 1980s and has remained influential in conservative economic thought. However, it remains a topic of debate among economists, with some questioning its effectiveness in promoting sustained economic growth and arguing that it primarily benefits the wealthy.

Supply-Side Economics

Keynesian Economic Theory

Keynesian Economic Theory

Keynesian economic theory is a macroeconomic approach that advocates for government intervention to stabilize the economy during periods of recession or depression. It is based on the ideas of British economist John Maynard Keynes, who argued that during times of economic downturns, increased government spending and tax cuts could stimulate demand and boost employment. The theory emphasizes the importance of consumer and business confidence in the economy, as well as the role of government in promoting full employment and stable economic growth. Keynesian economics has been influential in shaping modern economic policy, particularly in the areas of fiscal and monetary policy.

Keynesian Economic Theory

Monetary Economic Theory

Monetary Economic Theory

Monetary theory is a branch of macroeconomics that focuses on the role of money in the economy and the effects of monetary policy on key economic variables such as inflation, interest rates, and output. According to monetary theory, changes in the money supply can have a significant impact on economic activity, particularly in the short run. Central banks are responsible for implementing monetary policy, which typically involves adjusting interest rates or the money supply in order to achieve specific economic goals. Monetary theory has been influential in shaping central bank policies around the world and has been the subject of much debate among economists regarding the effectiveness and appropriateness of various monetary policy strategies.

Monetary Economic Theory

Welcome to your Economic Factors