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Economy, economic growth, GDP, Disposable personal income and impact of these factors on banking in details.
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The ability of an economy to produce increasing quantities of goods and services is known as economic growth.
There is either an expansion or recession.
Expansion means the economic is growing and recession means an economy is shrinking.
There is either an expansion or recession.
Expansion means the economic is growing and recession means an economy is shrinking.
Gross Domestic Product (GDP) is the market value of all final good produced during a period of time.
There are various factors to it namely
1. Consumption
2. Investments
3. Government Purchases
4. Net exports etc
There are various factors to it namely
1. Consumption
2. Investments
3. Government Purchases
4. Net exports etc
GDP includes both the amount of goods and services produced as well as the prices of those goods and services.
As a result, changes in GDP from one period to another included changes in prices as well as changes in production.
As a result, changes in GDP from one period to another included changes in prices as well as changes in production.
Now let's understand the difference between real GDP and nominal GDP.
Real GDP is the market value of goods and services produced using the actual prices of the time period being measured.
Using the actual prices, you are incorporating inflation into the equation.
Real GDP is the market value of goods and services produced using the actual prices of the time period being measured.
Using the actual prices, you are incorporating inflation into the equation.
So real GDP includes changes in production as well as changes in prices (inflation)
Nominal GDP is the market value of goods and services produced using constant prices.
By using the same prices, changes in nominal GDP are driven only by the changes in production.
Nominal GDP is the market value of goods and services produced using constant prices.
By using the same prices, changes in nominal GDP are driven only by the changes in production.
Therefore nominal GDP eliminates the impact of price changes between time periods, making it easier to measure the changes in production over time.
Disposable personal income.
For banks, DPI is a very important measure.
Personal income is the income received by the households.
Disposable personal income is the personal income minus the personal tax payments.
It is the money available to spend.
For banks, DPI is a very important measure.
Personal income is the income received by the households.
Disposable personal income is the personal income minus the personal tax payments.
It is the money available to spend.
Now let's talk about the economic impact on banks.
Positive impacts of economic growth.
1. More business transactions : Increased economic activities will generate more transactions for shopping and buying the different products. This will increase the fee income for banks.
Positive impacts of economic growth.
1. More business transactions : Increased economic activities will generate more transactions for shopping and buying the different products. This will increase the fee income for banks.
2. Consumer spending increases : Through this the swiping of money through cards increases and also helps banks to earn more through fees and defaults by charging higher interest rate.
3. Loan losses decline: considering a flourishing economy, people have money in their hands and therefore they usually don't default on their loan EMIs. This leads to lower loan losses for the bank.
4. Lending increases : Hoping for a better tomorrow makes people buy new houses/cars etc and this increases the loans given by the banks thereby helping make money through interest and improving net interest margins.
5. With economic expansion, the prices of real estate tend to increase which indirectly increases the loan amounts disbursed by banks.
This also leads to higher equity and Commodity prices which increases the trading incomes for banks.
Also capital market fees through IPOs.
This also leads to higher equity and Commodity prices which increases the trading incomes for banks.
Also capital market fees through IPOs.
Now let's study the negative impacts of economic expansion on banks.
1. Deposit growth slows : As the economy expands, deposit growth becomes stagnant as the customers shift money from deposit account to Investment accounts to benefit from increasing asset prices.
1. Deposit growth slows : As the economy expands, deposit growth becomes stagnant as the customers shift money from deposit account to Investment accounts to benefit from increasing asset prices.
2. Inflation and Interest Rate Increases:
As economic activity expands and eventually overheats, inflation and Interest rates rise. These impacts Negatively on banks.
As economic activity expands and eventually overheats, inflation and Interest rates rise. These impacts Negatively on banks.
3. Customer debt levels increase:
Increased confidence in the economy increases borrowing by business and consumers. This leads to higher debt levels which can create credit problems when the economy eventually slows down later in the business cycle.
Increased confidence in the economy increases borrowing by business and consumers. This leads to higher debt levels which can create credit problems when the economy eventually slows down later in the business cycle.
Always keep reading about the economic factors to understand the direction of the market.
Happy learning.
For more insights follow @skj_102
Thank you.
End of thread.
Happy learning.
For more insights follow @skj_102
Thank you.
End of thread.
