ECONOMIC FORECASTING:
The common
techniques used are analysis of key economic indicators, diffusion index,
surveys and econometric model building. These techniques help him to
decide the right time to incest and the type of security he has to
purchase i.e. stocks or bonds or some combination of stocks and bonds.
ECONOMIC INDICATORS
The
economic indicators are statistics about the economy that indicate the present
status, progress or slow down of the economy. They are capital investment,
business profits, money supply, GNP, interest rate, unemployment rate, etc. The
economic indicators are grouped into leading, coincidental and lagging
indicators. The indicators are selected on the following criteria
∑ Economic significance
∑ Statistical adequacy
∑ Timing
∑ Conformity
The leading indicators:
The leading
indicators indicate what is going to happen in the economy. It helps the
investor to predict the path of the economy. The popular leading indicators are
the fiscal policy, monetary policy, productivity, rainfall, capital investment
and the stock indices. The fiscal policy shows what the government aims at and
the fiscal deficit or surplus has an effect on the economy.
The coincidental indicators:
The
coincidental indicators indicate what the economy is. The coincidental
indicators are gross national product, industrial production, interest rates and
reserve funds. GDP is the aggregate amount of goods and services produced in
the national economy. The gap between the budgeted GDP and the actual GDP
attained indicates the present situation. If there is a large gap between the
actual growth and potential growth, the economy is slowing down. Low corporate
profits and industrial production show that the economy is hit by recession.
The lagging indicators:
The changes
that are occurring in the leading and coincidental indicators are reflected in
the lagging indicators. Lagging indicators are identified as unemployment rate,
consumer price index and flow of foreign funds. These leading, coincidental and
lagging indicators provide an insight into the economy s current and future
position.
DIFFUSION INDEX
Diffusion
index is a composite or consensus index. The diffusion index consists of
leading, coincidental and lagging indicators. This type of index has been
constructed by the National Bureau of Economic Research in USA. But the
diffusion index is complex in nature to calculate and the irregular movements
that occur in individual indicators cannot be completely eliminated.
ECONOMETRIC MODEL BUILDING
For model
building several economic variables are taken into consideration. The
assumptions underlying the analysis are specified. The relationship between the
independent and dependent variables is given mathematically. While using the
model, the analyst has to think clearly all the inter-relationship between the
variables. When these inter-relationships are specified, he can forecast not
only the direction but also the magnitude. But his prediction depends on his
understanding of economic theory and the assumptions on which the model had
been built. The models mostly use simultaneous equations.
Factors affecting Economic Forecasting
¸ GDP ( Gross Domestic Product)
¸ Inflation
¸ Interest rates
¸ Government revenue, expenditure and deficits
¸ Exchange rates
¸ Infrastructure
¸ Monsoon
¸ Economic and political stability
STOCK
INVESTMENT DECISION Look for a stable company : financially strong
Look for a company that can
grow and prosper: Profit and success
Look for a
company that has good management and corporate structure: Right people in right direction
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