Table of Contents

 

Chapter 1  Economic Indicators and Business Cycles  Section 1.............................. 9

1.1 The Business Cycle................................................................................................................................. 9

1.1.1 Business cycle defined............................................................................................................................. 9

1.1.2 Phases of the business cycle................................................................................................................. 10

1.1.3 Causes of a recession............................................................................................................................ 12

Chapter 1  Economic Indicators and Business Cycles  Section 2............................ 16

1.2 Introduction to Economic Indicators................................................................................. 16

1.2.1 Economic indicators defined............................................................................................................... 16

1.2.2 Classification by timing........................................................................................................................ 17

1.2.3 Classification by direction................................................................................................................... 18

1.2.4 What the indicators indicate............................................................................................................... 19

1.2.5 Monitoring economic indicators........................................................................................................ 21

Chapter 2  Financial Markets and Interest Rates  Section 3................................... 27

2.1 Overview of Financial Markets................................................................................................. 27

2.1.1 What are financial markets?................................................................................................................ 27

2.1.2 Market participants............................................................................................................................... 28

2.2 Structure of Financial Markets.............................................................................................. 29

2.2.1 Debt and equity markets....................................................................................................................... 29

2.2.2 Primary and secondary markets.......................................................................................................... 30

2.2.3 Exchanges and over-the-counter markets......................................................................................... 30

2.2.4 Money and capital markets.................................................................................................................. 31

Chapter 2  Financial Markets and Interest Rates  Section 4................................... 34

2.3 Key Financial Markets..................................................................................................................... 34

2.3.1 Stock market............................................................................................................................................ 34

2.3.2 Bond market............................................................................................................................................ 36

2.3.3 Commodities markets............................................................................................................................. 37

2.3.4 Foreign exchange markets................................................................................................................... 38

Chapter 2  Financial Markets and Interest Rates  Section 5................................... 41

2.4 Overview of Interest Rates.......................................................................................................... 41

2.4.1 What are interest rates?........................................................................................................................ 41

2.4.2 Simple and compound interest............................................................................................................ 42

2.4.3 Fixed and floating interest rates......................................................................................................... 42

2.4.4 Annual percentage rates (APR)........................................................................................................... 43

2.4.5 Yield-to-maturity (YTM)........................................................................................................................ 43

2.5 Determination of Interest Rates............................................................................................. 43

2.5.1 Money supply and demand................................................................................................................... 44

2.5.2 Interest rates and risk............................................................................................................................ 45

2.5.3 Yield curves............................................................................................................................................. 47

Chapter 3  GDP and Monthly Indicators  Section 6............................................................ 51

3.1 Gross Domestic Product (GDP)...................................................................................................... 51

3.1.1 GDP defined............................................................................................................................................ 51

3.1.2 Measuring GDP using the expenditure approach........................................................................... 52

3.1.3 Measuring GDP using other approaches.......................................................................................... 55

Chapter 3  GDP and Monthly Indicators  Section 7............................................................ 60

3.1.4 Nominal GDP vs. Real GDP................................................................................................................. 60

3.1.5 The GDP Report...................................................................................................................................... 63

Chapter 3  GDP and Monthly Indicators  Section 8............................................................ 67

3.2 Economic Indicators and GDP Components........................................................................ 67

3.2.1 Consumer fundamentals....................................................................................................................... 68

3.2.2 Investment fundamentals...................................................................................................................... 69

3.2.3 Government expenditure fundamentals............................................................................................. 70

3.2.4 Net export fundamentals....................................................................................................................... 70

Chapter 4  Federal Reserve and Monetary Indicators  Section 9........................ 73

4.1 The Federal Reserve System......................................................................................................... 73

4.1.1 Federal Reserve Banks.......................................................................................................................... 74

4.1.2 Member Banks......................................................................................................................................... 75

4.1.3 Board of Governors............................................................................................................................... 76

4.1.4 Federal Open Market Committee (FOMC)........................................................................................ 76

4.1.5 Federal Advisory Council (FAC)........................................................................................................ 77

Chapter 4  Federal Reserve and Monetary Indicators  Section 10...................... 79

4.2 Monetary Policy................................................................................................................................... 79

4.2.1 Open market operations........................................................................................................................ 80

4.2.2 Reserve requirements............................................................................................................................. 81

4.2.3 Discount lending.................................................................................................................................... 82

4.2.4 Economic impact of monetary policy................................................................................................. 83

Chapter 4  Federal Reserve and Monetary Indicators  Section 11...................... 87

4.3 The Money Supply.................................................................................................................................. 87

4.3.1 Money supply measures........................................................................................................................ 87

4.3.2 History of the money supply and monetary policy........................................................................... 88

Chapter 4  Federal Reserve and Monetary Indicators  Section 12...................... 91

4.4 Following the Fed................................................................................................................................ 91

4.4.1 The FOMC Statement............................................................................................................................ 91

4.4.2 The Beige Book....................................................................................................................................... 94

4.4.3 Monetary Policy Report to the Congress.......................................................................................... 94

Chapter 5  Unemployment and Consumer Indicators  Section 13.......................... 98

5.1 The Unemployment Rate.................................................................................................................. 98

5.1.1 Defining unemployment......................................................................................................................... 99

5.1.2 Calculating the unemployment rate................................................................................................. 100

5.1.3 Criticisms of measuring unemployment........................................................................................... 101

Chapter 5  Unemployment and Consumer Indicators  Section 14........................ 105

5.2 The Employment Situation Report........................................................................................ 105

5.2.1 The household survey.......................................................................................................................... 106

5.2.2 The establishment survey.................................................................................................................... 107

5.2.3 Comparing household and establishment employment................................................................ 108

5.2.4 Market reaction to the employment situation report.................................................................... 109

5.3 Other Employment Indicators................................................................................................. 109

5.3.1 Unemployment Claims Report........................................................................................................... 110

5.3.2 ADP Employment Report.................................................................................................................... 111

5.3.3 Monster Employment Index................................................................................................................ 111

Chapter 5  Unemployment and Consumer Indicators  Section 15........................ 114

5.4 Consumer Sentiment and Confidence.................................................................................. 114

5.4.1 Consumer Sentiment Index................................................................................................................. 115

5.4.2 Consumer Confidence Index.............................................................................................................. 116

5.5 Personal Income and Outlays................................................................................................... 118

5.5.1 Personal income................................................................................................................................... 119

5.5.2 Disposable personal income.............................................................................................................. 120

5.5.3 Personal spending............................................................................................................................... 121

5.5.4 Personal savings.................................................................................................................................. 121

Chapter 6  Inflation and Productivity Indicators  Section 16............................. 124

6.1 Tracking Inflation........................................................................................................................... 124

6.1.1 The effects of inflation........................................................................................................................ 124

6.1.2 Calculating an annual rate of inflation......................................................................................... 125

6.1.3 Deflation and disinflation................................................................................................................. 127

Chapter 6  Inflation and Productivity Indicators  Section 17............................. 130

6.2 Inflation Measures........................................................................................................................... 130

6.2.1 Consumer Price Index......................................................................................................................... 130

6.2.2 Core inflation index............................................................................................................................ 132

6.2.3 Producer Price Index (PPI)................................................................................................................ 132

6.2.4 Market reaction to inflation measures............................................................................................ 133

6.3 Inflation and Commodities......................................................................................................... 134

6.3.1 Commodities and commodity exchanges......................................................................................... 134

6.3.2 Commodity prices and inflation....................................................................................................... 136

Chapter 6  Inflation and Productivity Indicators  Section 18............................. 140

6.4 Productivity and Economic Growth................................................................................... 140

6.4.1 Labor productivity............................................................................................................................... 141

6.4.2 Aggregate production function........................................................................................................ 141

6.5 Productivity Indicators.............................................................................................................. 143

6.5.1 Productivity and Costs Report.......................................................................................................... 143

6.5.2 Employment Cost Index Report......................................................................................................... 144

6.4.3 Market reaction to productivity indicators.................................................................................... 146

Chapter 7  Industrial and Commercial Indicators  Section 19............................. 149

7.1 Industrial Production................................................................................................................... 149

7.1.1 Industrial production and capacity utilization............................................................................. 150

7.1.2 Durable goods orders......................................................................................................................... 151

7.1.3 Factory orders...................................................................................................................................... 154

7.1.4 Market reaction to industrial production indicators................................................................... 155

Chapter 7  Industrial and Commercial Indicators  Section 20............................. 159

7.2 Housing and Construction.......................................................................................................... 159

7.2.1 New residential construction (a.k.a. housing starts).................................................................... 160

7.2.2 Existing home sales............................................................................................................................. 162

7.2.3 New residential sales.......................................................................................................................... 165

7.2.4 Market reaction to housing and construction indicators............................................................ 166

Chapter 8  International Trade Indicators  Section 21............................................. 171

8.1 Introduction to International Trade............................................................................... 171

8.1.1 Imports, exports, and the balance of trade..................................................................................... 171

8.1.2 Absolute and comparative advantage............................................................................................. 172

8.1.3 Specialization and the gains from trade......................................................................................... 175

Chapter 8  International Trade Indicators  Section 22............................................. 179

8.2 International Trade Report...................................................................................................... 179

8.3 Measuring Trade Balances......................................................................................................... 183

8.3.1 Components of the current account balance................................................................................. 183

8.3.2 The balance of trade as the balance of payments......................................................................... 185

8.4 Summary of International Transactions....................................................................... 186

Review Questions Answers...................................................................................................................... 192

Chapter 1  Section 1................................................................................................................................. 192

Chapter 1  Section 2................................................................................................................................. 196

Chapter 2  Section 3................................................................................................................................. 200

Chapter 2  Section 4................................................................................................................................. 203

Chapter 2  Section 5................................................................................................................................. 206

Chapter 3  Section 6................................................................................................................................. 211

Chapter 3  Section 7................................................................................................................................. 216

Chapter 3  Section 8................................................................................................................................. 218

Chapter 4  Section 9................................................................................................................................. 220

Chapter 4  Section 10............................................................................................................................... 222

Chapter 4  Section 11............................................................................................................................... 226

Chapter 4  Section 12............................................................................................................................... 229

Chapter 5  Section 13............................................................................................................................... 230

Chapter 5  Section 14............................................................................................................................... 233

Chapter 5  Section 15............................................................................................................................... 236

Chapter 6  Section 16............................................................................................................................... 238

Chapter 6  Section 17............................................................................................................................... 241

Chapter 6  Section 18............................................................................................................................... 244

Chapter 7  Section 19............................................................................................................................... 246

Chapter 7  Section 20............................................................................................................................... 249

Chapter 8  Section 21............................................................................................................................... 253

Chapter 8  Section 22............................................................................................................................... 257

Glossary................................................................................................................................................................ 260

Index.......................................................................................................................................................................... 273

Final Examination......................................................................................................................................... 279

CPASelfstudy.com Course Evaluation.......................................................................................... 305