UNIT - IV

What Is Economic Growth?

Economic growth is an increase in the production of economic goods and services in one period
of time compared with a previous period. It can be measured in nominal or real (adjusted to
remove inflation) terms. Traditionally, aggregate economic growth is measured in terms
of gross national product (GNP) or gross domestic product (GDP), although alternative metrics
are sometimes used.

Phases of Economic Growth

The economy moves through different periods of activity. This movement is called the
“business cycle.” It consists of four phases:3

 Expansion – During this phase employment, income, industrial production, and sales all
increase, and there is a rising real GDP.
 Peak – This is when an economic expansion hits its ceiling. It is in effect a turning
point.
 Contraction – During this phase the elements of an expansion all begin to decrease. It
becomes a recession when a significant decline in economic activity spreads across the
economy.
 Trough – This is when an economic contraction hits its nadir.

How to Measure Economic Growth

The most common measure of economic growth is the real GDP. This is the total value of
everything, both goods and services, produced in an economy, with that value adjusted to
remove the effects of inflation. There are three different methods for looking at real GDP.5

 Quarterly growth at an annual rate – This looks at the change in the GDP from
quarter to quarter, which is then compounded into an annual rate. For example, if one
quarter’s change is 0.3%, then the annual rate would be extrapolated to be 1.2%.
 Four-quarter or year-over-year growth rate – This compares a single quarter’s GDP
from two successive years as a percentage. It is often used by businesses to offset the
effects of seasonal variations.
 Annual average growth rate – This is the average of changes in each of the four
quarters. For example, if in 2022 there were four-quarter rates of 2%, 3%, 1.5%, and
1%, the annual average growth rate for the year would be 7.5% ÷ 4 = 1.875%.

Definition of National Income-

According to Marshall: “The labor and capital of a country acting on its natural resources
produce annually a certain net aggregate of commodities, material and immaterial
including services of all kinds. This is the true net annual income or revenue of the
country or national dividend.”
Understanding National Income
National income is the sum total of the value of all the goods and services manufactured by the
residents of the country, in a year., within its domestic boundaries or outside. It is the net amount
of income of the citizens by production in a year.

To be more precise, national income is the accumulated money value of all final goods and
services produced in a country during one financial year. Computation of National Income is
very vital as it indicates the overall health of our economy for that particular year.

The aggregate economic performance of a nation is calculated with the help of National income
data. The basic purpose of national income is to throw light on aggregate output and income and
provide a basis for the government to formulate its policy, programs, to maximize the national
welfare of the people. Central Statistical Organization calculates the national income in India.

What Is Per Capita Income?

Per capita income is a measure of the amount of money earned per person in a nation or
geographic region. Per capita income is used to determine the average per-person income for an
area and to evaluate the standard of living and quality of life of the population. Per capita
income for a nation is calculated by dividing the country's national income by its population.

Understanding Per Capita Income

Per capita income counts each man, woman, and child, even newborn babies, as a member of
the population. This stands in contrast to other common measurements of an area's prosperity,
such as household income, which counts all people residing under one roof as a household, and
family income, which counts as a family those related by birth, marriage, or adoption who live
under the same roof.

Uses of Per Capita Income

Perhaps the most common use of income per capita is to ascertain an area's wealth or lack of
wealth. For example, income per capita is one metric the U.S. Bureau of Economic Analysis
(BEA) uses to rank the wealthiest counties in the United States, the other being median
household income.5

Per capita income is also useful in assessing an area's affordability. It can be used in conjunction
with data on real estate prices, for instance, to help determine if average homes are out of reach
for the average family. Notoriously expensive areas such as Manhattan and San Francisco
maintain extremely high ratios of average home price to income per capita.

Businesses can also use per capita income when considering opening a store in a town or
region. If a town's population has a high per capita income, the company might have a better
chance at generating revenue from selling their goods since the people would have more
spending money versus a town with a low per capita income.
Limitations of Per Capita Income

Although per capita income is a popular metric, it does have some limitations.

Livings Standards

Since per capita income uses the overall income of a population and divides it by the total
number of people, it doesn't always provide an accurate representation of the standard of living.
In other words, the data can be skewed, whereby it doesn't account for income inequality.

Inflation

Per capita income doesn't reflect inflation in an economy, which is the rate at which prices rise
over time. For example, if the per capita income for a nation rose from $50,000 per year to
$55,000 the next year, it would register as a 10% increase in annual income for the population.
However, if inflation for the same period was 4%, income would only be up by 6% in real
terms. Inflation erodes the purchasing power of the consumer and limits any increases in
income. As a result, per capita income can overstate income for a population.

International Comparisons

The cost of living differences can be inaccurate when making international comparisons since
exchange rates are not included in the calculation. Critics of per capita income suggest that
adjusting for purchasing power parity (PPP) is more accurate, whereby PPP helps to nullify the
exchange rate difference between countries. Also, other economies use bartering and other non-
monetary activity, which is not considered in calculating per capita income.

Savings and Wealth

Per capita income doesn't include an individuals savings or wealth. For example, a wealthy
person might have a low annual income from not working but draws from savings to maintain a
high-quality standard of living. The per capita metric would reflect the wealthy person as a low-
income earner.

Children

Per capita includes children in the total population, but children don't earn any income.
Countries with many children would have a skewed result since they would have more people
dividing up the income versus countries with fewer children.

Economic Welfare

The welfare of the people isn't necessarily captured with per capita income. For example, the
quality of work conditions, the number of hours worked, education level, and health benefits are
not included in per capita income calculations. As a result, the overall welfare of the community
may not be accurately reflected.
What Is Unemployment?

The term unemployment refers to a situation where a person actively searches for
employment but is unable to find work. Unemployment is considered to be a key measure of the
health of the economy.

The most frequently used measure of unemployment is the unemployment rate. It's calculated
by dividing the number of unemployed people by the number of people in the labor force.1

Many governments offer unemployment insurance to certain unemployed individuals who meet
eligibility requirements.

Types of Unemployment

Both voluntary and involuntary unemployment can be broken down into four types.

Frictional Unemployment

This type of unemployment is usually short-lived. It is also the least problematic from an
economic standpoint. It occurs when people voluntarily change jobs. After a person leaves a
company, it naturally takes time to find another job. Similarly, graduates just starting to look for
jobs to enter the workforce add to frictional unemployment.

Frictional unemployment is a natural result of the fact that market processes take time and
information can be costly. Searching for a new job, recruiting new workers, and matching the
right workers to the right jobs all take time and effort. This results in frictional unemployment.

Cyclical Unemployment

Cyclical unemployment is the variation in the number of unemployed workers over the course
of economic upturns and downturns, such as those related to changes in oil prices.
Unemployment rises during recessionary periods and declines during periods of economic
growth.

Preventing and alleviating cyclical unemployment during recessions is one of the key reasons
for the study of economics and the various policy tools that governments employ to stimulate
the economy on the downside of business cycles.

Structural Unemployment

Structural unemployment comes about through a technological change in the structure of the
economy in which labor markets operate. Technological changes can lead to unemployment
among workers displaced from jobs that are no longer needed. Examples of such changes
include the replacement of horse-drawn transport with automobiles and the automation of
manufacturing.
Retraining these workers can be difficult, costly, and time-consuming. Displaced workers often
end up either unemployed for extended periods or leaving the labor force entirely.

Institutional Unemployment

Institutional unemployment results from long-term or permanent institutional factors and

incentives in the economy.

What Is a Business Cycle?

Business cycles are a type of fluctuation found in the aggregate economic activity of a nation—
a cycle that consists of expansions occurring at about the same time in many economic
activities, followed by similarly general contractions. This sequence of changes is recurrent but
not periodic.

Stages of the Economic Cycle

An economic cycle is the circular movement of an economy as it moves from expansion
to contraction and back again. Economic expansion is characterized by growth and contraction,
including recession, a decline in economic activity that can last several months. Four stages
characterize the economic cycle or business cycle.1

Expansion

During expansion, the economy experiences relatively rapid growth, interest rates tend to be
low, and production increases. The economic indicators associated with growth, such as
employment and wages, corporate profits and output, aggregate demand, and the supply of
goods and services, tend to show sustained uptrends through the expansionary stage. The flow
of money through the economy remains healthy and the cost of money is cheap. However, the
increase in the money supply may spur inflation during the economic growth phase.

Peak
The peak of a cycle is when growth hits its maximum rate. Prices and economic indicators may
stabilize for a short period before reversing to the downside. Peak growth typically creates some
imbalances in the economy that need to be corrected. As a result, businesses may start to
reevaluate their budgets and spending when they believe that the economic cycle has reached its
peak.

Contraction
A correction occurs when growth slows, employment falls, and prices stagnate. As demand
decreases, businesses may not immediately adjust production levels, leading to oversaturated
markets with surplus supply and a downward movement in prices. If the contraction continues,
the recessionary environment may spiral into a depression.

Trough
The trough of the cycle is reached when the economy hits a low point, with supply and demand
hitting bottom before recovery. The low point in the cycle represents a painful moment for the
economy, with a widespread negative impact from stagnating spending and income. The low
point provides an opportunity for individuals and businesses to reconfigure their finances in
anticipation of a recovery.

What Is Infrastructure?
Infrastructure is defined as the basic physical systems of a business, region, or nation and often
involves the production of public goods or production processes. Examples of infrastructure
include transportation systems, communication networks, sewage, water, and school systems.

Types of Infrastructure
Infrastructure is often categorized as hard or soft. Hard infrastructure is the tangible, physical
assembly of structures such as roads, bridges, tunnels, and railways. Soft infrastructure is the
services required to maintain the economic, health, and social needs of a population.

Hard Infrastructure
Hard infrastructure is the physical system needed to run a modern, industrialized nation.
Examples include roads, highways, and bridges, as well as the assets required to make them
operational such as transit buses, vehicles, and oil refineries. Technical systems such as
networking equipment and cabling are considered hard infrastructure and provide a critical
function to support business operations.

According to the Brookings Institution, 16.6 million people have jobs in fields directly related
to infrastructure. From locomotive engineers and electrical power line installers to truck drivers
and construction laborers, infrastructure jobs account for nearly 11.8% of the nation’s
workforce.4

Soft Infrastructure
Soft infrastructure represents human capital and institutions necessary to maintain an economy
that delivers certain services to the population such as healthcare, financial institutions,
government offices, law enforcement, and education.

Investments in soft infrastructure target how people thrive and participate in daily life. In 2021,
President Biden's Build Back Better Plan targeted soft infrastructure proposals like expansions
to Medicare and tuition-free community college.
UNIT – V

What Is Cash Flow?

Cash flow is the net cash and cash equivalents transferred in and out of a company. Cash
received represents inflows, while money spent represents outflows. A company creates value
for shareholders through its ability to generate positive cash flows and maximize long-term free
cash flow (FCF). FCF is the cash from normal business operations after subtracting any money
spent on capital expenditures

Types of Cash Flow

Cash Flows From Operations (CFO)

Cash flow from operations (CFO), or operating cash flow, describes money flows involved
directly with the production and sale of goods from ordinary operations. CFO indicates whether
or not a company has enough funds coming in to pay its bills or operating expenses.

Operating cash flow is calculated by taking cash received from sales and subtracting operating
expenses that were paid in cash for the period. Operating cash flow is recorded on a company's
cash flow statement, indicates whether a company can generate enough cash flow to maintain
and expand operations, and shows when a company may need external financing for capital
expansion.3

Cash Flows From Investing (CFI)

Cash flow from investing (CFI) or investing cash flow reports how much cash has been
generated or spent from various investment-related activities in a specific period. Investing
activities include purchases of speculative assets, investments in securities, or sales of securities
or assets.

Negative cash flow from investing activities might be due to significant amounts of cash being
invested in the company, such as research and development (R&D), and is not always a warning
sign.1

Cash Flows From Financing (CFF)

Cash flows from financing (CFF), or financing cash flow, shows the net flows of cash used to
fund the company and its capital. Financing activities include transactions involving issuing
debt, equity, and paying dividends. Cash flow from financing activities provides investors
insight into a company’s financial strength and how well its capital structure is managed.
What Is a Capital Gain?
A capital gain refers to the increase in the value of a capital asset when it is sold. Put simply, a
capital gain occurs when you sell an asset for more than what you originally paid for it.

Almost any type of asset you own is a capital asset. This can include a type of investment (like
a stock, bond, or real estate) or something purchased for personal use (like furniture or a boat).

Capital gains are realized when you sell an asset by subtracting the original purchase price from
the sale price. The Internal Revenue Service (IRS) taxes individuals on capital gains in certain
circumstances.

Capital gains fall into two categories:

 Short-term capital gains: Gains realized on assets that you've sold after holding them
for one year or less
 Long-term capital gains: Gains realized on assets that you've sold after holding them
for more than one year

Both short- and long-term gains must be claimed on your annual tax return. Understanding this
distinction and factoring it into an investment strategy is particularly important for day traders
and others who take advantage of the greater ease of trading in the market online.

Risk Rewarding

Risk-reward is a general trade-off underlying nearly anything from which a return can be
generated. Anytime you invest money into something, there is a risk, whether large or small,
that you might not get your money back—that the investment may fail. For bearing that risk,
you expect a return that compensates you for potential losses. In theory, the higher the risk, the
more you should receive for holding the investment, and the lower the risk, the less you should
receive, on average.

In the chart below, we see the range of risk levels that apply to different types of investment
securities. These categories, ranging from conservative to very aggressive, correspond with the
potential returns you could earn on an investment. Conservative investments offer you lower
risk and moderate profits, while very aggressive investments provide a chance for outsized
gains but also expose you to the possibility of big losses.

What Is Asset Accumulation?

Asset accumulation is building wealth over time by earning, saving, and investing money. It can
be measured by the total dollar value of all assets, by the amount of income that is derived from
the assets, or by the change in the total value of the assets over a period of time.
Concept of Asset Accumulation

Asset accumulation typically refers to the acquisition of financial assets that represent value or
yield income. The income may include interest payments, dividends, rents, royalties, fees, or
capital gains.

These assets derive their value through a contractual claim rather than a tangible quality.
Examples of non-physical financial instruments include stocks, bank deposits, and bonds.

For businesses, asset accumulation can also, less commonly, refer to the accumulation of the
tangible means of production, such as factories or research and development, as well as physical
assets, such as real estate.

What Is Risk Analysis?

The term risk analysis refers to the assessment process that identifies the potential for
any adverse events that may negatively affect organizations and the environment. Risk analysis
is commonly performed by corporations (banks, construction groups, health care, etc.),
governments, and nonprofits. Conducting a risk analysis can help organizations determine
whether they should undertake a project or approve a financial application, and what actions
they may need to take to protect their interests. This type of analysis facilitates a balance
between risks and risk reduction. Risk analysts often work in with forecasting professionals to
minimize future negative unforeseen effects.

 Risk analysis seeks to identify, measure, and mitigate various risk exposures or hazards
facing a business, investment, or project.
 Quantitative risk analysis uses mathematical models and simulations to assign numerical
values to risk.
 Qualitative risk analysis relies on a person's subjective judgment to build a theoretical
model of risk for a given scenario.
 Risk analysis can include risk benefit, needs assessment, or root cause analysis.
 Risk analysis entails identifying risk, defining uncertainty, completing analysis models,
and implementing solutions.
Types of Risk Analysis

Risk-Benefits

Many people are aware of a cost-benefit analysis. In this type of analysis, an analyst compares
the benefits a company receives to the financial and non-financial expenses related to the
benefits. The potential benefits may cause other, new types of potential expenses to occur. In a
similar manner, a risk-benefit analysis compares potential benefits with associated potential
risks. Benefits may be ranked and evaluated based on their likelihood of success or the
projected impact the benefits may have.

Needs Assessment

A needs risk analysis is an analysis of the current state of a company. Often, a company will
undergo a needs assessment to better understand a need or gap that is already known.
Alternatively, a needs assessment may be done if management is not aware of gaps or
deficiencies. This analysis lets the company know where they need to spending more resources
in.

Business Impact Analysis

In many cases, a business may see a potential risk looming and wants to know how the situation
may impact the business. For example, consider the probability of a concrete worker strike to
a real estate developer. The real estate developer may perform a business impact analysis to
understand how each additional day of the delay may impact their operations.

Root Cause Analysis

Opposite of a needs analysis, a root cause analysis is performed because something is

happening that shouldn't be. This type of risk analysis strives to identify and eliminate processes
that cause issues. Whereas other types of risk analysis often forecast what needs to be done or
what could be getting done, a root cause analysis aims to identify the impact of things that have
already happened or continue to happen.

Perform a Risk Analysis

Step #1: Identify Risks

The first step in many types of risk analysis to is to make a list of potential risks you
may encounter. These may be internal threats that arise from within a company, though most
risks will be external that occur from outside forces. It is important to incorporate many
different members of a company for this brainstorming session as different departments may
have different perspectives and inputs.

Step #2: Identify Uncertainty

The primary concern of risk analysis is to identify troublesome areas for a company.
Most often, the riskiest aspects may be the areas that are undefined. Therefore, a critical aspect
of risk analysis is to understand how each potential risk has uncertainty and to quantify the
range of risk that uncertainty may hold.
Step #3: Estimate Impact

Most often, the goal of a risk analysis is to better understand how risk will financially
impact a company. This is usually calculated as the risk value, which is the probability of an
event happening multiplied by the cost of the event.

Step #4: Build Analysis Model(s)

The inputs from above are often fed into an analysis model. The analysis model will take
all available pieces of data and information, and the model will attempt to yield different
outcomes, probabilities, and financial projections of what may occur. In more advanced
situations, scenario analysis or simulations can determine an average outcome value that can be
used to quantify the average instance of an event occurring.

Step #5: Analyze Results

With the model run and the data available to be reviewed, it's time to analyze the results.
Management often takes the information and determines the best course of action by comparing
the likelihood of risk, projected financial impact, and model simulations. Management may also
request to see different scenarios run for different risks based on different variables or inputs.

Step #6: Implement Solutions

After management has digested the information, it is time to put a plan in action.
Sometimes, the plan is to do nothing; in risk acceptance strategies, a company has decided it
will not change course as it makes most financial sense to simply live with the risk of something
happening and dealing with it after it occurs. In other cases, management may want to reduce or
eliminate the risk.

What Is Asset Management?

Asset management is the practice of increasing total wealth over time by acquiring,
maintaining, and trading investments that have the potential to grow in value.

Asset management professionals perform this service for others. They may also be
called portfolio managers or financial advisors. Many work independently, while others work
for an investment bank or other type of financial institution.

Types of Asset Managers

There are several different types of asset managers, distinguished by the type of asset
and level of service they provide. Each type of asset manager has a different level of
responsibility to the client, so it is important to understand a manager's obligations before
deciding to invest.

Registered Investment Advisers

A registered investment adviser (RIA) is a firm that advises clients on securities trades
or even manages their portfolios. RIAs are closely regulated and are required to register with the
SEC if they manage more than $100 million in assets.

Investment Broker

A broker is an individual or firm that acts as an intermediary for their clients, buying
stocks and securities and providing custody over customer assets. Brokers generally do not have
a fiduciary duty to their clients, so it is always important to thoroughly research them before
buying.

Financial Advisor

A financial advisor is a professional who can recommend investments to their clients or buy and
sell securities on their behalf. Financial advisors may or may not have a fiduciary duty to their
clients, so it is always important to ask first. Many financial advisors specialize in a specific
area, such as tax or estate planning.

Robo-Advisor

The most affordable type of investment manager isn't a person at all. A robo-advisor is a
computer algorithm that automatically monitors and rebalances an investor's portfolio
accordingly, selling and buying investments aligned with programmed goals and risk tolerances.
Because there is no person involved, robo-advisors cost much less than a personalized
investment service.