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Economic Fundamentals

INTRODUCTION

Economics, put simply, is the study of shortages: supply versus demand. As the demand for a product or service rises, the price of those products or services will tend to rise. Alternatively if the provider of those goods or services tries to flood the market with those goods or services, the price will tend to decline as the supply outpaces the demand. The supply and demand model works for all goods and services including stocks, bonds, real estate, and money. Series 65candidates will see a fair number of questions on economics.

GROSS DOMESTIC PRODUCT

A country's gross domestic product (GDP) measures the overall health of a nation's economy. The GDP is denned as the value of all goods and services produced in a country including consumption, investments, government spending, and exports minus imports during a given year.

Economists chart the health of the economy by measuring the country's GDP and by monitoring supply and demand models, along with the nation's business cycle. A country's economy is always in flux. Periods of increasing output are always followed by periods of falling output. The business cycle has four distinct stages:

1. Expansion

2. Peak

3. Contraction

4. Trough

EXPANSION

During an expansionary phase, an economy will see an increase in overall business activity and output. Corporate sales, manufacturing output, wages, and savings will all increase while the economy is expanding or growing. An economy cannot continue to grow indefinitely and GDP will top out at the peak in the business cycle. An economic expansion is characterized by:

• Increasing GDP

• Rising consumer demand

• Rising stock market

• Rising production

• Rising real estate prices

PEAK

As the economy tops out, the GDP reaches its maximum output for this cycle as wages, manufacturing, and savings all peak.

CONTRACTION

During a contraction, GDP falls, along with productivity, wages, and savings. Unemployment begins to rise, the stock market begins to fall, and corporate profits decline as inventories rise.

TROUGH

The economy bottoms out in the trough as GDP hits its lowest level for the cycle. As GDP bottoms out, unemployment reaches its highest level, wages bottom out, and savings bottom out. The economy is now poised to enter a new expansionary phase and start the cycle all over again.

 
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