2023 Bloomberg Market Concepts ( BMC ) Exam 3
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- gross domestic product (GDP)
Answer: market value of all final goods and services produced within a country
GDP = C + I + G + (X-M)
C= personal consumption I = private investment G = government spending X = exports M = imports (C = 2/3 of US GDP)
provides backdrop for investing bc is a measure of all economic activity
"actual GDP growth has entirely lost its capacity to surprise... leading indicators...PMI garners disproportionate attention"
- nominal GDP vs real GDP
Answer: nominal GDP = $ amount of GDP real GDP growth = nominal GDP
growth - inflation (isolates increases in production and/or increases in prices of goods&services)
- recession
Answer: 2 successive quarters of negative real GDP growth
- inflation
Answer: general increase in prices of goods&services which diminishes the
purchasing power of money (a unit of money tomorrow would buy less than the same unit of money today)
- primary sources of inflation data
Answer:
1) personal consumption expenditures (PCE) ^^ measure of price changes in consumer goods and services ^^ shows what consumers are spending their income on 1 / 3
2) consumer price index (CPI) ^^ based on a representative basket of goods&services ^^ difficulties w/ being truly representative bc times, interests, & tech change ^^ CPI basket is updated @ start of ea yr to reflect previous yr
- unemployment
Answer: consumer spending is almost purely driven by salaries
^^ economy tends to shrink when more people lose their jobs (depresses GDP growth)
1) nonfarm payrolls ^^ most important unemployment indicator ^^ measures monthly change in # of US employees
- business confidence
Answer: businesses make large investments and hire people when they feel
confident there will be additional demand for their goods&services 1) purchasing managers index (PMI) ^^ index of US manufacturing activity ^^ surveys people in charge of buying goods and services for corporations ^^ above 50 = optimism, below 50 = pessimism
- housing
Answer: 1) housing starts
^^ before construction begins, must be confident that future home buyers can assume 30 yr mortgages ^^ after buying a new house, consumer also purchases appliances, interior deco- rations, etc
- main entities that trade currencies
Answer:
1) financial institutions buying&selling securities in foreign currencies 2) corporations selling goods&services across borders 3) travelers changing currencies for personal use
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- pegged currencies
Answer: currencies that are linked to another currency with a locked exchange rate ^^ done to offer impression of certainty ^^ oftentimes difficult to convince others that pegged currency is as strong as peg
peg currency using FX reserves ^^ "a stack of cash used to manipulate supply and demand of currency" ^^ USD = most common FX reserve currency bc most liquid
govs also lift interest rates to defend pegs
- triangular arbitrage
Answer: keeping currency matrix fixed so you can't make money converting
between currencies
- currency valuation
Answer: change in rate of one currency pair only tells relative value of those two currencies ^^ use trade-weighted baskets to determine overall strength or weakness of a currency (identical goods&services should cost the same, no matter where they're sold around the world)
- main currency drivers
Answer:
1) surprise changes in interest rates ^^ rise in interest rates in one country will cause that country's currency to strengthen relative to another 2) surprise changes in inflation ^^ money supply of one country expands rapidly compared to another country...exchange rate of first country will depreciate against the second country 3) surprise changes in trade ^^ when exporting, foreign buyer needs to buy home currency of the exporter (x-m) = positive = demand for home currency ^^ when importing, need to sell home currency in order to buy currency of foreign seller (x-m) = negative = diminished demand for home currency
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