What are the basic tools of economic analysis

What are the basic tools and Macro factors of economic analysis which affect the stock prices?

Economic activities have a major impact on overall stock prices. So it is essential for the investors to assess the economy as well as its implications for the stock market. Because investors are interested to know the forces in the economy which affect the performance of organisations in which they want to participate as they wish to invest.

Meaning of Economic Analysis:-

Economic analysis includes a study of economic trends in the economy. Economic analysis is indicated by gross national product, balance of payments, price level, employment and government spending.

Besides, it includes a study of economic policy of the government as monetary policy, fiscal policy, industrial policy and import and export policy etc. What are the basic tools of economic analysis?

TOOLS FOR ECONOMIC ANALYSIS

FOLLOWING the tools of economic analysis which are used for economic analysis.

1. Growth rates of National Income
2. Monetary policy of the central bank
3. Inflation
4. Interest Rates
5. Fiscal Policy of the Government
6. Foreign Exchange Rates
7. Infrastructure
8. Consumer sentiments and feelings
9. Long Term Growth of the economy
10. Short Term Growth Expectations

( 1 ) Growth rates of National Income:-

Different measures are taken by the investors for the analysis of the growth rates of national income. Such measures are as GNP ( Gross National Product ), NNP ( Net National Income ), GDP ( Gross Domestic Product ). The growth rates indicate the growth of the economy. Because every government makes such an estimate of GNP, NNP and GDP analysis every year.

THE growth rates of national income indicate the prosperity of the economy. Every economy has passed through the Depression, Recovery, Boom and Recession. Because investors try to find out the best stage of the business cycle through which the economy is passing. If they find the growth rate of the economy as national income is positive, then they are keen to invest in such an economy. What are the basic tools of economic analysis

( 2 ) Monetary policy of the Central Bank:-

Liquidity position of any country depends upon the monetary policy declared by its central bank. So every investor needs access to purchase various securities to fulfil their various social obligations. Because monetary policy determined the money in circulation. If monetary policy is very tight then commercial banks are unable to lend money to their customers. As a result of which investment becomes scarce and economic activity may slow down or decline. Because appropriate liquidity is required for every economy. 

However, excess liquidity can lead to inflation, higher interest rates and leading to expense of capital and decline in growth rate. What are the basic tools of economic analysis

( 3 ) Inflation:-

Inflation is a trend of rising prices. Such inflation can be seen in the WPI   ( Wholesale Price Index ) and CPI ( Consumer price Index ). This inflation has a considerable impact on the performance of business houses and the capital market. Higher rates of inflation upset the economic plans of business houses. It means extra costs to businesses leading to reduction in their profit margin.

Inflation reduces the value of fixed income of securities. An increase in the expected rate of inflation leads to an increase in interest rates. Due to which increases business uncertainty of business and investment decisions. Because investors consider that currently prevailing rates of inflation are likely to prevail in the future. What are the basic tools of economic analysis

( 4 ) Interest Rates:-

It is the amount paid on the borrowed capital by the individual and business. Interest rates are considered as the cost of the credit. The interest rates in the unorganised sector are not controlled and may fluctuate. These rates are depending upon the demand and supply of funds in the market. What are the basic tools of economic analysis

Increase in interest rates is caused by inflation, government policy, rising risk and other factors. In result of which higher cost of production which will lead to lower profitability and lower demand. A low interest rate stimulates investments by making credit available cheaply and easily. It also decreases the cost of production for business and ensures higher profitability. So investors have to analyse the interest rates prevailing in the different segments of the economy. What are the basic tools of economic analysis

( 5 ) Fiscal Policy of the Government:-

The fiscal policy of the government involves the collection and spending of revenue. Because fiscal policy has a crucial impact on the business. The government is the largest investor and spender of money. As the government can stimulate the economy directly through spending. In results of which employment will be generated as well as the demand.

Fiscal policy mostly affects the short term demand. Fiscal policy can lead to economic growth due to price stability. An annual budget of every government contains detailed information on each and every item of expenditure and revenue and resulting deficit. So direct impact can be considered on the business and capital market. Which trends stimulate the investors to invest.

(6) Foreign Exchange Rates:-

An international economy is the foreign exchange rate, also called the exchange rate. Because the performance and the profitability of business houses are influenced to a large extent by the exchange rates of the rupee against major currencies of the world. A depreciation in the domestic value of money will make imports more expensive. So a business who is depending on imports may adversely affect its profitability.

The movement of exchange rates appears similar to the movement of the share market. A rising exchange rate increases the demand for securities in the capital markets. So investors have to analyse the balance of trade position, balance of payment position and foreign exchange reserves. What are the basic tools of economic analysis

(7) Infrastructure:-

The development of every country depends upon its infrastructure. Such infrastructure facilities such as power, transportation, communication channels and conditions of the roads. Which also affects the performance and Profitability of business. Lack of infrastructure leads to inefficiency in business activities which ensure lower productivity. So investors also analyse the infrastructure facilities available in the economy, before finalising his investment plans.

( 8 ) Consumer Sentiments and feelings:-

Sentiments of consumers can be expressed in terms of future expenditure planned. They feel about the future economies. A high interest rate and tax saving opportunity will encourage the consumer sentiments of current purchase. The consumer sentiments can affect both the cash flows as well as the required risk on financial market investments. So investors must take into account the consumer growth prospect index before investing in a specific investment of business.

( 9 ) Long Term Growth of the economy:-

Long term growth of the economy also affects an investor\’s decisions to a large extent. But long term growth depends upon the technology, incentives to expand and trained labour forces. 

It includes economic stability, foreign competition, and the political situation of the country. Any changes in these factors may lead to changes in future economic growth. All investors must analyse long term growth of the economy before investing. What are the basic tools of economic analysis

( 10 ) Short Term Growth Expectations:-

Investors have to assess the short term demand trends and influences. These influences are to be estimated on the basis of economic sectors, business and investments. These short term economic perspectives can be used by various investors for the purpose of investment. What are the basic tools of economic analysis?

Conclusion:-

All investments are influenced with such economic forces. So every investor would like to analyse all these economic impacts on their investment in the future trends. After this analysis they will be able to know the exact expectations of their investment returns. Economic tools such as inflation rates, interest rates, monetary policy and fiscal policy have crucial importance for the investors. What are the basic tools of economic analysis?

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What are the basic tools of economic analysis?