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