Introduction To Securities & Investment - Chapter 2 (Continued) - The Economic Environment

Front 1

State - controlled Economies

Back 1

State (government) decides what is produced and how its distributed. Sometimes referred to as 'Planned Economies'.

Front 2

Market Economies

Back 2

Driven by supply and demand. Businesses produce goods and services to meet the demands from consumers. Competition for jobs and competition for customers.

Front 3

Mixed Economies

Back 3

combination of state - controlled and market economies.
Government will provide a welfare system. Governments will also spend money running key areas like defence, education, public transport, health and police services.
Taxes are collected from wage earners and companies and raising money through borrowing in capital markets.

Front 4

European Central Bank (ECB)

Back 4

based in Frankfurt. Assumed responsibilities upon creation of the euro (1 January 1999). Principally responsible for setting monetary policy for the entire Eurozone, set through its president and council; the latter comprises the governors of each of the eurozone's national central banks.

Front 5

Impact of inflation - credit creation

Back 5

Banking system provides a mechanism by way of which credit can be created. Banks can increase the total amount of money in the economy. Too much leads to an undesirable increase in inflation.

Front 6

Gross Domestic Product (GDP)

Back 6

Most commonly used measure of a country's output. It measures economic activity on an expenditure basis and is calculated quarterly:
consumer spending + Government spending + investment + exports - imports = GDP
A steadily increasing GDP = healthy economy. 2 quarters of successive declining growth = recession.

Front 7

Balance of Payments - technical

Back 7

Summary of all transactions between the UK and the rest of the world.
Main components of balance of Payments are the current account (used to calculate value of goods and services that flow into and out of the country) and the capital account (records international capital transactions).
Trade Balance comprises a Visible trade balance (difference between value of imported and exported goods) and an invisible trade balance (difference between imported and exported services).

Front 8

Public Sector Net Cash Requirement (PSNCR)

Back 8

difference between government expenditure and government income. In a slowing economy, spending tends to exceed tax revenues and the government will need to raise borrowing by issuing government bonds.

Excessive government spending, causing a growing PSNCR, has the potential to increase the rate of inflation.

Front 9

Level of Unemployment

Back 9

the extent to which those seeking employment cannot find work is an indicator of the health of the economy. Higher levels of Unemployment indicate low demand in the economy for goods and services produced.

In addition, high unemployment levels have a negative impact on the government's finances. increased social security payments, and it's income will decrease because of the lack of tax revenues from the unemployed.