In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here). It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing. Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations. This series of articles will highlight the core knowledge of each chapter.
Chapter 5 provides an overview of macroeconomics. The learning outcome of chapter 5 is as follows:
· Describe why macroeconomic considerations are important to an investment firm and how macroeconomic information may be used;
· Define gross domestic product (GDP) and GDP per capita;
· Identify basic components of GDP;
· Describe economic growth and factors that affect it;
· Describe phases of a business cycle and their characteristics;
· Explain the global nature of business cycles;
· Describe economic indicators and their uses and limitations;
· Define inflation, deflation, stagflation, and hyperinflation, and describe how inflation affects consumers, businesses, and investments;
· Describe and compare monetary and fiscal policy;
· Explain limitations of monetary policy and fiscal policy.
Economic indicators—measures of economic activity—are regularly reported and analysed. These measures may be leading, lagging, or coincident indicators.
Inflation is a general rise in the prices of products and services. Measures of inflation include consumer price indices, producer price indices, and implicit GDP deflators.
Changes in price levels can affect economic growth because consumers, companies, and governments may change the timing of their purchases, the amount of their spending, and their saving and spending decisions based on anticipated changes in prices.
Three additional price level changes investors also consider are deflation, stagflation, and hyperinflation.
Economic growth, inflation, and unemployment are major concerns of central banks and governments. They each use different financial tools to affect economic activity. Central banks, which are often independent from governments, use monetary policy. Governments use fiscal policy.
Monetary policy refers to central bank activities that are directed toward influencing the money supply and credit in an economy. Its goal is to influence output, price stability, and employment.
Fiscal policy involves the use of government spending and tax policies to influence the level of aggregate demand in an economy and thus the level of economic activity.
Both fiscal and monetary policies have limitations: they are affected by time lags and the responses to and consequences of each may not be as expected.