Guide to economic and financial concepts
Most important concepts used in macroeconomics:
· Gross Domestic Product (GDP) : a measure of the total economic output of a country. It represents the value of all goods and services produced within a country's borders in a specific time period, typically a year or a quarter.
· Economic growth is commonly measured by the change in real GDP between two periods. Real GDP is an adjusted valuation of GDP to take into account price changes (inflation) that affect the total value of production.
· Recession: When GDP declines for more than two quarters.
· Inflation: the increase in the general price level of goods and services over time. It erodes the purchasing power of money and can have significant effects on an economy.
· Monetary Policy: The management of a nation's money supply by its central bank, through actions on its interest rates and more recent unconventional measures known as quantitative easing.
· Fiscal Policy: Government's use of taxation and spending to influence the economy, by affecting the global demand. It can be used to stimulate or cool down economic activity.
· Exchange Rates: The relative value of one currency
compared to another. Exchange rates affect international trade and capital
flows.
Essential concepts to understand financial markets:
· Stocks (Equities): These represent ownership in a company and entitle the holder to a share of the company's profits and a say in its governance.
· Bonds: Debt securities issued by governments, corporations, or other entities. Bondholders lend money in exchange for periodic interest payments and the return of the bond's face value at maturity.
· Derivatives: Financial contracts whose value derives from an underlying asset.
· Stock Exchange: A marketplace where stocks are
bought and sold. All the major stock exchanges are now fully electronic,
meaning investors place their orders through electronic orders.
Examples : New York Stock Exchange (biggest in the world), NASDAQ, Euronext (Europe’s biggest).
· Foreign Exchange Market (FOREX) : The global marketplace for trading currencies. This markets operate 24h a days and 7 days a week.
· Liquidity: The ease with which an asset can be bought or sold without significantly affecting its price. The perfectly liquid asset is cash, US treasuries (US government bonds) are considered the most liquid assets exchanged on financial markets.
· Volatility: The degree of variation in the price of an asset over time. High volatility implies larger price swings, which can present both opportunities and risks.
· Market Indexes: A collection of stocks, bonds, or
other assets used as a benchmark to measure the performance of a specific
market or sector. Market indexes can be price-weighted (the value of the
index is the average of all the share prices in it) or value-weighted (depends
on the total market capitalization of all the companies in it).
Examples: S&P500 (tracks the performance of the 500 most
valuable publicly traded companies listed in the US), CAC40 (tracks the
performance of the 40 most valuable publicly traded companies in France).
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