CFA Institute Investment Foundations Program: Chapter 5 – Macroeconomics (Part I)

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.

Macroeconomic conditions affect the actions and behaviour of businesses, consumers, and governments. Macroeconomic considerations also affect decisions made by investment firms. Some investments, for instance, benefit from slow economic growth and low inflation, whereas others do well during periods of relatively strong economic growth with moderate inflation. Investment professionals use macroeconomic data to forecast the earnings potential of companies and to determine which asset classes may be more attractive.

Gross domestic product is the total value of all final products and services produced in an economy over a particular period of time. Nominal GDP uses current market values, and real GDP adjusts nominal GDP for changes in price levels.

GDP can be estimated by using an expenditure approach or an income approach. In the expenditure approach, the components of GDP are consumer spending, business spending, government spending, and net exports.

GDP per capita is equal to GDP divided by the population. It allows comparisons of GDP between countries or within a country.

GDP growth is determined by

·        growth of the labour force, which represents the increase of labour in the market;

·        productivity gains, which represent growth in output per unit of labour; and

·        availability of capital, which represents inputs other than labour necessary for production.

Phases of an economic cycle may include the following:

1.      Expansion

2.      Peak

3.      Contraction

4.      Trough

5.      Recovery

With the growth of international trade, mobility of labour, and more closely connected financial markets, movements in the business cycles of countries have become more closely aligned with each other.

Source: https://www.cfainstitute.org/en/programs/investment-foundations

Sample Question:

The largest component of total GDP is most likely to be:

gross investment.

government spending.

consumer or household spending.

 

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