Investors are often looking for insights into the future movement of asset markets. However, they are bombarded by a multitude of figures (financial and economic) produced and distributed to the public, which creates uncertainty and confusion as to the most relevant indicators. An effective investing strategy is one anchored by a holistic understanding of the economic environment within which assets reside. Consequently, macroeconomic indicators can provide an investor with valuable information to assist in both short-term and long-term investment decisions.

How To Find Real Interest Rate Real Gdp Money Supply
How To Find Real Interest Rate Real Gdp Money Supply Equation

The previous article of this series covered two macroeconomic variables – employment and inflation – that impact investments. This article will further this discussion, showing the potential impact that movements in real GDP and inflation have on the prices of assets in the financial market.

Money Supply M2 in the United Kingdom decreased to 2862407 GBP Million in May from 2878460 GBP Million in April of 2021. Money Supply M2 in the United Kingdom averaged 1286898.53 GBP Million from 1986 until 2021, reaching an all time high of 2878460 GBP Million in April of 2021 and a record low of 167383 GBP Million in December of 1986.

Real Gross Domestic Product (GDP)

Real GDP, released quarterly by the U.S. Department of Commerce’s Bureau of Economic Analysis, is one of the most important indicators, particularly for equity investors who are focused on corporate profit growth. Real GDP is an inflation adjusted measure of the value of goods and services produced in a country in a given year. The real GDP provides a comprehensive way to evaluate health of an economy. Two consecutive quarters of negative, as measured by GDP, is considered a recession and increases fears about deflation. Conversely, two consecutive quarters of economic growth increases concern of inflation.

Many investors are interested in leading indicators that help predict quarterly real GDP to make better investment decisions. Monthly data utilized in the calculation of real GDP such as retail sales, current account balances and capital goods shipments, can provide advance predictions of real GDP movements prior to the quarterly release.

Further, supplementary indicators that are not part of GDP calculations such as wholesale inventories, the “beige book,” the Purchasing Managers’ Index (PMI) and the Labour Report, also give an indication of the health of an economy.

How To Find Real Interest Rate Real Gdp Money Supply

The same kind of transactions happens throughout the year making the GDP to $4800 and the velocity of money for the year to 24. Velocity of Money Formula – Example #2. Below is the data of Country X from the year 2005 to 2015 along with the money supply and GDP. Calculate the Velocity of Money by the given information.
Higher real interest rates result in less investment spending, and lower real interest rates result in more investment spending. When this happens, real GDP increases by more than the change in autonomous expenditures. If the supply of money doesn't change, the interest rate must rise; this will cause investment spending to fall.

What it means for investors

Market indices such as the bond, foreign exchange, commodities and stock and stock futures markets, are typically positively correlated to the real GDP expectations. As such, the positive real GDP expectations are generally reflected in a rise in asset prices. Knowledge about areas of the economy that are growing or declining may prove valuable with regards to which assets to buy and sell, as well as, the timing of buy and sell decisions.

https://cleanever.amebaownd.com/posts/23123994. Specifically, an investor may look at the rate of change of the Purchasing Managers Index (PMI) figure from one month to another. For example, the February Institute for Supply Management (ISM) Report disclosed a PMI of 52.9 percent, a decrease of 0.6 percentage point from January’s reading of 53.5 percent. A savvy investor will keep an eye on the following months PMI figures. If a downward trend continues, this may be an indication of a weakening U.S. economy, which is not favourable for markets as it may lead to declining asset values.

Interest Rates

The investor community pays specific attention to the Federal Reserve’s (Fed’s) federal fund rate, which is the interest rate paid by banks to borrow money from the Federal Reserve banks. The Fed uses this rate as a monetary policy tool in an effort to control the money supply within the economy and by extension the rate of inflation.

For example, if an economy is in recession, such as the U.S. following the financial crisis of 2007, the Fed would lower the Federal Reserve rate in an effort to encourage banks to borrow more money. This serves to increase the money supply within the banking system and ultimately the economy at large.

What it means for investors

It should be noted that changes in interest rates typically have an indirect impact on financial markets. For instance, a decline in interest rates, as discussed above, will first make it cheaper for banks, businesses and individuals to borrow money, which increases the amount of money businesses and consumers have to spend.

A decline in interest rates will mean that individuals possess more discretionary money to spend on the goods and services of the business community. This has a positive impact on the revenues and profits of a business. Similarly, a fall in interest rates will mean a fall in the cost of borrowing, thus businesses can purchase more equipment, participate in Merger and Acquisitions (M & As) and other fund expansion projects. This rise in business spending characteristically increases the growth of the company and its profit margin.

Stock prices, which reflect the future value the market places on the company’s stock, should rise in the wake of increasing current and future profit expectations. If enough companies experience a rise in stock prices market indices such as the Dow Jones Industrial Average and the S&P 500, which many people equate with the entire market, should go up.

Accordingly, investors in stocks will see their investment increase in value due to gains in stock price appreciation (and also at times dividends).

Final Note

Real GDP and interest rates have a wide and varied impact on both the economy and financial markets. Investors must keep in mind that market movements are the result of a number of interrelated indicators. Consequently, utilizing economic indicators along with standard asset and securities analysis can lead to more robust investment decisions.

By Jade De Labastide (MSc., BSc.)

JDL Business

The Equation of Exchange addresses the relationship between money and price level, and between money and nominal GDP.

How To Find Real Interest Rate Real Gdp Money Supply

The equation simply states: M x V = P x Y

Where M = the money supply, usually the M1

V = the velocity of money

How To Find Real Interest Rate Real Gdp Money Supply Equation

P = the price level

Y = real output, or real GDP.

Velocity is the number of times the average dollar is spent to buy final goods and services in a given year. Velocity can be calculated by using V = (P x Y ) / M

The equation tells us that total spending (M x V) is equal to total sales revenue (P x Y). Since (P x Y) is equal to the nominal GDP, then M x V = nominal GDP.

Velocity (V) and Real GDP (Y) are effectively constant in the short run, therefore any changes in money supply (M), will cause a proportional change in the price level (P). Can you play slots for real money in the us.

Re-writing the equation, we get: P = ( M x V ) / Y

This equation demonstrated a di