FNSINC601 Apply Economic Principles to Work in the Financial Services

1. Outlined key features of common economic theories that relate to the decisions being made in your report.

 

2. Outlined key features of microeconomic principles and how they relate to debt and equity markets and organisational practices for companies.

3. Explained and applied two key mathematical principles and two statistical methods.

4. Described a range of statistical ratios and analysis tools relevant to the financial services industry and indicated what they are.

Answers:

Present economic theories and their influence on financial segment in Australia

The worldwide financial crisis is essentially set off by the collapsing of the sub-prime market of particularly mortgage in the US. Also, the housing bubble also occurred during the 2006.  Essentially huge loan defaults that led banks to basically assume ownership of nearly houses of no value that subsequently led the way to loss (Frydman and Phelps 2013). As a result, the banking segment collapsed. Banks too became disinclined to offer loans to the public and specifically to one another because of fear of settlement and recovery. Fundamentally, this state of affairs referred to as credit crunch also adversely affected the entire financial service sector. Thus, the crisis of the year 2008 essentially ballooned into worldwide financial crisis where billions of mortgage related investments, diverse well established investment banks went bankrupt and share markets also crashed globally. Nevertheless, the influence of the latest worldwide economic crisis is to a great extent small on a global scale due to the below mentioned factors:

• Stimulus package designed by the Rudd Government
• Declining cash rate undertaken by the RBA
• Overall strength of the economy of the nation Australia
• Resilience of the entire Chinese economy

As rightly indicated by Goodwin et al. (2013), the Keynesian economists were of the opinion that specifically during the period of worldwide economic crisis, the nations’ government need to augment the total amount of spending for fostering the growth rate of the economy and that was what done by the Australian government (Johnson 2014). The apex bank that is the central bank of the nation decreased the interest rate in a bid to boost the consumer spending.

Illustration of the economic and political climate related to financial service sector

Growth Outlook of the economy

Prior reports reflect that economic fundamentals of Australia can be regarded to be strong and the outlook also remains positive reflecting strong growth rate, moderate unemployment level together with contained inflation rate (Ascari and Sbordone 2014). Estimated real growth rate of GDP during the period 2012-2013 as well as 2013-2014 gets decreased by approximately ¼ of the one percentage ever since the time of budget. Again, the rate of unemployment stands at just about 6.25% during the middle of the year 2014. In essence, significant adjustment to the trade agreement mainly from perspective of Chinese growth and low estimated growth in wage weighed down profoundly on the country’s nominal gross domestic product along with fiscal situation (Benassy 2014). 

Nonetheless, the unemployment rate is also registered at approximately 6% by the mid of the period 2014 and the unemployment rate can be considered to be a bit higher than what is necessarily anticipated. Again, the unemployment rate is also expected to stabilise at a particular level during 2014-2015. However, the rate remained the lowest among the entire developed nations since there were countries that were still experiencing the adverse impacts of the global economic crisis (Scarth 2014).  

Essentially, the inflation rate is anticipated to remain well within the target band set of RBA. The inflation forecast is necessarily 2.5% throughout the quarter of June in 2014, a little stronger than what was offered in the budget, reflecting influence of superior price of import from particularly the low dollar.

Fundamentally, Keynesians are of the opinion that waiting for a country to attain to the level of full employment might possibly require long time. Keynesians are also of the opinion that “In the long run, we are all dead”. In essence, higher unemployment rate was essentially the result of the failure of the market and a short of the AD-aggregate demand. However, in this situation, the government of the nation can intervene and make attempts to rectify the detected market failure by using diverse expansionary fiscal stratagems with the aim of stimulating demand (Stock and Watson 2016). Thus, demand declines and simultaneously unemployment increases. In case, if inflation rate surpasses the nominal wages, then in that case the real wages also will also decline and the consumer spending will also decrease. As such, the New Keynesian Phillips Curve advocates that there exists a trade off between unemployment rate and the inflation rate (Heijdra 2017). In effect, higher demand gives way to decreased unemployment but also directs towards increased inflation rate. The diagram below represents the same: 

Significant Features of the general economic themes

The classical economics advocated by Adam Smith refers to the fact that individuals primarily take steps in the self-interest and develop social results that are also indicated as laissez faire economics (Agénor and Montiel 2015). In essence, this shows that lower government interventions.

The graphical presentation shows the classical employment: 

As rightly indicated by Agénor and Montiel (2015), the classical view of unemployment indicates towards individual labour supply. Essentially, the supply curve is upward rising since higher the wage amount, the greater is the attraction/motivation to work. Therefore, greater number of individuals intends to effectively operate and carry on their work. Yet again, business concerns also place demand for higher number of workers/labours. In actual fact, the labour demand can be reflected by the downward sloping curve since the higher the wage amount, the more costly it becomes to hire labours. For that reason, corporations also start hiring fewer workers since expenditure on wage increases. 

Great Depression

As rightly put forward by Mankiw (2014), the Great Depression can be referred to as the worst economic downturn in the times of modern history. In essence, the Keynesian economics illustrates the striking nature of economic recession along with the adversities related to the recession. Essentially, this triggered economic rethinking process. In actual fact, the market that was essentially left to its own failed. Lengnick (2015) points out towards the fact that John Maynard Keynes was of the opinion that governments have the requirement of using fiscal as well as monetary strategies for dynamically warding off economic downturn. Further, the Keynesians economists are also of the view that higher inflation rate was also essentially the outcome of market failure by utilizing appropriate expansionary fiscal policies that aimed at stimulating demand.

Phillips Curve:

As rightly put forward by Xianghui and Feng (2014), Phillips Curve indicates towards an inverse relationship between inflation rate and unemployment rate. Particularly, in this case, the primary insinuation is that government can control the rate of unemployment and the inflation rate by application of diverse monetary as well as fiscal strategies. By itself, the governing bodies can necessarily trade off increased inflation for lessening the unemployment rate else wise trade of rate of inflation for supplementary unemployment. 

Theory of Stagflation:

In essence, the stagflation theory reflects towards a period of higher rate of inflation and higher rate unemployment. During the period of 1973, oil price shock also lead to different novel incidents. Essentially, higher oil prices directs towards increase in prices, directing towards inflation. Essentially, higher oil prices also led to production costs to increase and lowering profit levels of the business concern. Subsequently, this led to the deceleration of the economies and augmented unemployment rate. Keynesian theory was essentially defied by the notion (Bernanke et al.  2015).

Monetarism:

Bernanke et al.  (2015) asserts that notion of monetarism indicates towards the fact that inflation is developed by excessive money supply and monetarists argues that strict control of the supply of money can lead to stability to inflation process as well as the entire nation.

Supply Side Economics:

During 1980s, monetarism was particularly dishonoured and the governing units began following a stratagem of economic rationalism or in other words market mechanisms (Brue et al. 2016). In essence, the Hawke government in Australia initiated the process of deregulation along with different macroeconomic reforms. 

Diverse microeconomic principles and their association to both debt as well as equity markets and organizational exercises

Microeconomic principles of both demand as well as supply can be associated to financial markets. Essentially, in diverse financial markets, the ones that deliver financial capital by way of savings expect to get a specific return. Nevertheless, the ones who place the demand for financial capital by receiving funds expect to pay a return. In essence, the return rate can appear at diverse forms, depending upon category of investment. In itself, a simple example of the return rate is essentially the interest rate. For example, during the period when money gets supplied and is kept at the savings bank account, it becomes important to receive a rate of interest on the deposited money. In addition to this, the interest that is paid is also a percentage of the deposit that happens to be interest rate (Brue et al. 2016).

The figure presented below reflects different factors of both demand and supply in the financial market. In essence, the horizontal axis in the graph necessarily represents quantity that is primarily loaned or borrowed in the financial markets. In addition to this, the vertical axis represents the rate of return that is in this case enumerated with interest rate (Mankiw 2014). In essence, the diagram below demonstrates the overall quantity of financial capital that consumers demand at diverse interest rates and the overall quantity that business concerns are eager to supply. 

Two mathematical and statistical mechanisms

Mathematical Principles:

Mathematical average indicates towards a particular number that can specify a central or typical value in a given set of data. Particularly, a percentage is also utilized for the purpose of enumeration that is applied in the study. However, in mathematical principles, the operation of percentage demonstrates a particular number or else a ratio represented as a specific fraction out of the whole 100.

As rightly indicated by Heijdra (2017), the mechanism of hypothesis testing also referred to as confirmatory analysis of data is utilized in this particular study. There exists a hypothesis that essentially can be examined depending upon observations of a procedure that is specifically modelled by an entire set of different random variables.

Correlation also indicates towards a mutual relationship or in other words association between two or more items. This mechanism of correlation that establishes a particular association that can represent whether there subsists any kind of association along with the strength of association between different variables can be regarded as effective statistical technique (Scarth 2014). 

Significant statistical ratio and evaluation tools that pertinent for the present study

Ratio can be regarded as a simple mathematical or statistical tool that can demonstrate significant relations that remain hidden in a large set of data. Essentially, this also allows meaningful comparisons that can be carried out in the study (Heijdra 2017). However, there are certain ratios that can be reflected as particular fractions otherwise decimals or percentages. 

Two important sources of relevant financial service information:

• Financial Service Industry Reference Committee
• Australian Securities and Investments (ASIC) (Lengnick 2015) 

According to principles of statistics, the main purpose of descriptive statistical mechanism is to summarize a particular observation set. Again, as per principles of statistics, the primary aim of inferential statistics is to appear at inferences that mainly include predictions along with decisions as regards a particular population based on delivered information in a specific sample (Xianghui and Feng 2014). Particularly, sampling techniques are primarily of different types that is to say cluster sampling, quota sampling, judgement sampling, pure random sampling, convenience sampling as well as systematic sampling many others. 

The evaluated documentation from diverse sources mainly includes different steps. The present study initially takes account of analysis of primary sources, evaluation of model documents using effectual procedures. Essentially, the first step contains going through the documents, observing different parts, attempting to gather fitting processes from the available documents and utilizing the same as the historical verification (Xianghui and Feng 2014). After the process of analysis of documents, the overall process of operations that can be followed can be internalized.

The present study has helped me to gain comprehensive understanding as regards both the preparation along with presentation of financial declarations of corporations that can be necessarily governed by the directives as well as accounting standards. Particularly, in this regards, this current study has assisted me to gain understanding as regards obligatory information that can mainly prove to be significant to different users as the basis based on which diverse accounts can be developed. Essentially, the purpose of setting standard in financial reporting thereby can help in understanding the importance of maintaining uniformity along with consistency in the procedure of financial pronouncements. Therefore, the present module has assisted me to acquire vivid idea as regards meaning of accounting standards, importance of accounting standards and the requirement for the specific standards. Additionally, the present study has helped me to gain detailed understanding as regards different economic themes, important macroeconomic factors along with their influence on the workings of the industry. In essentially, the thorough understanding concerning importance of economic framework together with their consequences, implications of real life economic issues and the ways the detected problems might be resolved. Apart from this, the current segment also has assisted me to comprehend financial modelling mechanisms as well as financial decision making together with statistical as well as mathematical tools of appearing at appropriate economic decisions.  

References

Agénor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton university press.

Ascari, G. and Sbordone, A.M., 2014. The macroeconomics of trend inflation. Journal of Economic Literature, 52(3), pp.679-739.

Benassy, J.P., 2014. Macroeconomics: an introduction to the non-Walrasian approach. Academic Press.

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Brue, S.L., McConnell, C.R. and Macpherson, D.A., 2016. Contemporary labor economics. McGraw-Hill Education.

Frydman, R. and Phelps, E.S. eds., 2013. Rethinking expectations: The way forward for macroeconomics. Princeton University Press.

Goodwin, N., Nelson, J., Harris, J., Torras, M. and Roach, B., 2013. Macroeconomics in context. ME Sharpe.

Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.

Johnson, R.C., 2014. Five facts about value-added exports and implications for macroeconomics and trade research. The Journal of Economic Perspectives, 28(2), pp.119-142.

Lengnick, M., 2015. Essays in Agent-Based Macro and Monetary Economics (Doctoral dissertation, Christian-Albrechts Universität Kiel).

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Scarth, W., 2014. Macroeconomics. Edward Elgar Publishing.

Stock, J.H. and Watson, M.W., 2016. Dynamic factor models, factor-augmented vector autoregressions, and structural vector autoregressions in macroeconomics. Handbook of macroeconomics, 2, pp.415-525.

Xianghui, C. and Feng, L., 2014. Microscopic Research on the Macro-stability Mechanism of Stock Index Futures: the Empirical Analysis of HS300 Stock Index Futures' Inhibition on Positive Feedback Trading. Securities Market Herald, 12, p.005.