Importance of Economy to investors

-> Price changes

- inflation – rise of price of goods. rising prices reduce value of future interest and divident payments together with the real value of investment.

-disinflation – decrease in rate of inflation/during recession

-deflation – opposite of inflation

Inflation Measures

Retail Price Index (RPI)

Consumer Price Index (CPI)

Like the RPI, the CPI measures the average change from month to month in the prices of consumer goods and services bought by consumers within the UK, but it differs from the RPI in respect of the households it represents, the range of goods and services included and the way in which the index is constructed.

The RPI is still published alongside the CPI, and continues to be used for increases in pensions, state benefits and index-linked gilts.

The CPI does not necessarily measure the actual inflation rate experienced by individuals. People whose incomes are fixed in money terms suffer most from inflation, as a given sum of money will buy less than it used to if prices have risen.

Business Cycles

-Recession

-Recovery Expansion (output growth accelerates and company profits rise while inflation and IR is low)

-Boom (economy is growing above average output. inflation rises and IR increase by regulators)

-Contraction (output growth slows, infation is high, regulators hesitate to cut IR. level of GDP falls compared to previous quarter, contracting economy)

-Recession (output growth is sluggish and company profits are weak and inflation and IR is falling. 2 successive quarters of declining GDP occurs)

Short term Interest Rates

These are set by relevant country regulators and is used by them as form of control over the economy in order the meet the govt’s inflation target which is aimed at maintainiing low in flation rates. long term interest rates are influenced by investor’s expectations of inflations in the long run

PNSCR

A vital component of GDP is govt spending on both current and capital expenditure. The difference is between govts expenditure and revenues is known as public sector net cash requirement(PSNCR) as per uk. This indicates the extent to which the public sector needs to borrow from other sectors of the economy and from overseas.

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