How to determine the state of an Economy?

How to determine the state of an Economy?

Share this : Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedInShare on StumbleUponDigg this

Economy – is defined by Webster as “the process or system by which goods and services are produced, sold, and bought in a country or region”. In investing it is important to understand the state of the economy of the country you are investing in.

Why?

The current state of the economy of the country you are investing in will determine what financial products you will invest in as well as in what industries you will invest in.It is also important to understand the investing country’s trading partner countries economies. For example: US is a major trading partner of Canada, and the state of the US economy affects the value of the investments in Canada.

What are some major indicators to analyze to determine economy state?

Gross Domestic Product (GDP) – is defined as “… the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production,” [1] . GDP is usually measured every quarter, and compared to previous quarters to understand how the economy is doing. When GDP goes up compared to a previous quarter(s), it means the country/economy is producing more, and more people are employed. Which is a good thing. Generally each country maintains information about its economic indicators. For Canada such information is maintained by Statistics Canada.  You can find GDP related information for the last few quarters here :

http://www.statcan.gc.ca/daily-quotidien/150901/t002a-eng.htm 

You can see that GDP has been decreasing each quarter since the 3rdquarter of 2014. You can pull data for previous years to try to get a better understanding of how the economy is doing now compared to historical data. In order to evaluate the overall economy we can take a look at some of the other indicators.  For each indicator we will assign one of the three states. [ Good, Bad or Stable ]

GDP : Bad

Personal Income – is defined as “…real disposable personal income…”
…”, this means income adjusted for inflation that a person has available after all mandatory needs are met.In Canada’s case the stats Canada website only has data till 2013 for personal income, which tell us personal income increased every year from 2009 to 2013. Normally, personal income is broken down further to understand how much an average person is saving vs. spending, but an overall trend can be assumed here.  That the more personal income earned, the more income that will be spend by the consumer.

http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil105a-eng.htm

Personal Income: Good

Balance of Payments– “Is a record of all payments or monetary transactions between a particular country and other nations during a specific time period”.

Canada’s Balance of Payment Account Details:

http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ01a-eng.htm

Canada has been running a deficit since 2010. It is a user of the world’s resources to support its economy. However the deficit it runs year over year has been decreasing.

BOP: Good

There are two type of information a person can look at. Historical and Forecasts. The above 3 indicators we have looked at are historical (past ) data. Now let’s take a look at some future forecasts of various indicators.

http://www.tradingeconomics.com/canada/forecast

According to the forecast provided in the link.

  1. GDP is expected to go up over the next few quarters. – Good
  2. Unemployment rate is expected to be somewhat steady – Stable
  3. Inflation is expected to be somewhat steady – Stable
  4. Most other indicators are forecasted to be stable

Based on historical information and forecasts, it can be concluded the Canadian economy is stable/good.


 

Leave a Reply

Your email address will not be published. Required fields are marked *

css.php