Ultimate Stocks & Forex Trading Course: [Lesson 4] Aggregate Demand and Supply

Ultimate Stocks & Forex Trading Course: [Lesson 4] Aggregate Demand and Supply

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So in this module we're going to look at global  macro objectives and we're also going to be   taking a look at some very important key models  that you will have to understand in order to get   a handle on what's happening in the economy  and therefore also in the markets themselves. So the primary objective of creating a  macroeconomic outlook is to determine current and   future states of the following four major economic  factors so these are the four key economic factors   you need to consider at all times in order to  be able to assess the performance of an economy   growth so you're talking about GDP. Unemployment Inflation and Trade so the trade balance of that  economy so these four factors these metrics of   economic performance are considered  to be coincident economic indicators   meaning they reflect what is happening right  now in the present or even slightly in the past   in any given economy at any moment in time  so these are not forward-looking pieces of   data these are the main metrics of an economy  which other data seeks to predict in advance. Markets are considered to be discounting  mechanisms meaning they are forward-looking in   terms of the underlying economy and the business  cycle macro trading and investing operates on   the principle that markets move in line with the  underlying economy the majority of the time now   we have in italics here the word majority because  this is not a science this is not exactly 100 of   the time the markets will always move in line with  the underlying economy there is generally speaking   a strong correlation between the markets and the  economy but for example in a bubble this may be a   time when actually the market is rising completely  contrary to what is going on in the underlying   economy there is some dislocation some disconnect  between the markets and the underlying economy   so it's important to know that macro analysis is  useful because most of the time the markets will   move in line with the economy however just bear  in mind this is not the case 100 of the time.

So as a result because the market and  the underlying economy generally move   in the same direction there's a  correlation there most of the time   this means that the ability to predict growth  unemployment inflation and trade balance   provides traders and investors with the  ability to predict the business cycle   and therefore if you can predict the business  cycle i.e you can predict GDP we discussed   before they are more or less one of the same  then you can also predict broader market moves   the majority of the time so again not all the time  but the majority of the time that's the key so in   order to predict coincident economic indicators  so growth unemployment inflation trade in order to   predict those key metrics of economic performance  we must look at leading economic indicators. In this course we will assess how to use leading   economic indicators to predict  changes to an economy's growth   unemployment inflation and trade balance so  those key metrics of economic performance.

By doing so we can seek to predict market  moves and form a fundamental directional bias   for currencies on the Forex market as well  as for stocks bonds and also commodities. So in short you will learn how  to assess global markets and   allocate capital accordingly by determining  the answers to these following questions   what are the leading economic  indicators showing first and foremost. What does this mean for future growth unemployment   inflation and trade where are we  heading in the business cycle. What currencies bonds commodities and stocks  are most likely to over or underperform.

And then finally how will governments on the  fiscal side and central banks on the monetary   side respond to these economic developments we can  assess effects on growth unemployment inflation   and trade by assessing factors which shift the  aggregate demand curve and the aggregate supply   curve in an economy and we're going to be looking  when we go through the spreadsheet in a minute   at exactly what that means and also why  it's very very important to understand   so now we're going to look at forex bond and  commodity objectives in order to determine   forex bond and commodity market directions  we must analyze supply and demand factors   supply and demand are key drivers when looking to  predict moves in currencies bonds and commodities   this is especially true for the foreign  exchange market as you can only buy and sell   one currency by selling and  buying another so it's relative   when we look at stock market objectives i want  you to think about it just slightly differently. So in order to determine stock markets  direction the approach is the same as it   is for forex bonds and commodities so we  go through the same process and of course   in the stock market there are still supply and  demand factors that have to be taken into account   however when we are assessing potential  stock market returns the primary objective   is to determine future growth so think about  GDP what GDP is going to be why because GDP is a   representation of the entire output of an economy  and where is that output coming from in that   economy it is coming from the business section  out of those three pillars we looked at government   consumer business it is the output of the business  sector that GDP is reflective of so if you are   looking at stocks in terms of either indices  or individual stocks you have to have an idea   of what the overall output of economy is going  to be in order to have an understanding of what   stocks representing the businesses in that economy  are going to do and how they are going to perform. Since GDP is a coincidence indicator the markets  tend to move before the GDP data is released each   quarter and this is because professional money  managers or hedge funds and investment banks   this is what we're talking about here when we  say professional money managers they attempt   to predict GDP and they take positions in  the markets before the data is released   so to put that in the most simplest terms as an  example it would be the following hedge fund xyz   believes that GDP is going to be released at  the end of this quarter and it is going to be   higher than expected and it is going to be  increasing therefore they will buy stocks now   at the beginning of month one and as if they are  correct the next three months play out stocks will   rise and then GDP will be released at the end of  the quarter showing an increase and that will be   reflective of the stocks rising in the previous  three months does that make sense so they are   not looking to actually trade the GDP data in fact  when GDP data comes out at the end of the quarter   if they are correct and they have made money  they will tend to liquidate those positions so   if you are looking at GDP data and you are going  and buying GDP data because it comes out positive   you probably find it's going to end up turning  on you because hedge funds and investment banks   have already made their money and they actually  are just liquidating their positions now they've   been proven correct at the end of the quarter and  they'll be forward looking to the next quarter   so some very important points there if you're  taking notes i would suggest you write those down   the two main points there being one that the  markets are forward-looking and that's because   markets are discounting mechanisms when  the GDP data is released that will reflect   generally speaking most of the time so roughly  let's say seven times out of ten depending on   what market or index you're looking at but  most of the time that increase or decrease   will actually reflect the stock market moves in  those three months so it is no good waiting for   GDP to come out and then trading it you need  to have an idea of what GDP is going to be   so that you can position yourself in at the  beginning of the quarter and then when the   GDP data is released it will reflect the moves  in the market so if you think GDP is going to   increase and you buy stocks and it does increase  then stocks will move positively over that quarter   and the second key point is just  to think of stocks in terms of GDP   primarily and forex bonds and commodities  in terms of supply and demand and the   reasoning behind that will become much  clearer as we go through the course.

So simply put since the market is a  discounting mechanism stock indices will   tend to move in line with real-time changes  in GDP so this means that the majority of   the time and you can take seven times out  of ten as a rule of thumb across the board   a stock index will rise or fall and then GDP data  will be released which coincides with the rise or   fall in the stock index so obviously if the stock  market rises GDP is generally released positive   the stock market crashes it's released negative  what this means is it means that if you can use   leading economic indicators to predict GDP so the  output of an economy it will actually mean that   seven times out of ten you'll be able to identify  stock market direction by the end of the quarter   this is also by the way the reason why the stock  market itself is considered a leading indicator   and markets in general are considered leading  indicators price as we will see much later in the   course in the technical analysis section is in and  of itself the leading indicator when looking at a   chart please download the attached spreadsheet for  global macro objectives with key economic models   and we're going to dive over to that spreadsheets  now and have a look inside okay so we're going to   start off on the first tab here labeled aggregate  demand so first of all what is aggregate demand   so aggregate demand is the total demand for goods  and services in an economy at any given time now   when you look at this spreadsheet here don't worry  too much about these tables okay these are just   simply the inputs for this chart over here as well  as these tables over here these numbers are just   simply the inputs for this chart to create  this chart over here so don't worry too much   about exactly what these numbers are the exact  numbers themselves are not especially important   so if we look at the first chart here on the left  you can see down the y-axis we have price level   so this is the general level of prices of  goods and services within an economy so it's   the general it's an average level of prices  they will take a basket of goods and services   in order to calculate that level of prices and  changes to the general level of prices up and   down are represented by inflation or deflation  so inflation and increase in the general level   of prices of goods and services within an  economy so going up the y-axis inflationary   and if the general level of prices of goods and  services in an economy declines or it starts   to come down it drops the average level drops  this is deflationary so coming down the y-axis   is deflationary the general level of prices of  goods and services within an economy is declining   as we go from say six to 5 to 4 and of course 1 3  to 11 these are just arbitrary numbers these are   not reflective of any given economy they're just  for demonstration purposes but as we come down the   y-axis this is deflationary and as we go up the  y-axis this is inflationary so if we come and have   a look now on the x-axis down here you can see  naught through to 1400 we have plotted real GDP   so real GDP just simply GDP adjusted for inflation  and we will discuss more in the future GDP module   the differences between real GDP nominal GDP  but for the time being you just need to know   that on the y-axis we have plotted inflation  or the general level of prices and inflation   technically inflation is actually the changes or  deflation the changing of the general level of   prices it's not the actual level of price itself  so six for example as a point on the y-axis is not   inflation it's the change between say six to seven  and inflation is always an increase which is the   inflation okay so it changes to the y-axis not the  y-axis itself that is representative of inflation   and down here we have real GDP you can see we  have the formula here for aggregate demand so why   real GDP in economics terms is symbolized by  the letter y so y real GDP equals C plus I   plus G plus NX and this C plus I plus G plus NX  is the aggregate demand formula which we have   down here so what exactly then is the aggregate  demand formula well the aggregate demand formula   is simply the different inputs which make up  the total aggregate demand in an economy so   really when we're looking at this line down here  this is what's known as an aggregate demand curve   so 81 is simply the aggregate demand curve but  having shifted and we'll discuss this in a moment   and this line down here on this chart  is the SRAS this is the short run   aggregate supply curve so when we're looking at  this chart it's actually quite straightforward   we have the total amount of demand so we're  just looking at demand and supply curves   but because we're looking at it on a macro  level we're looking at it in terms of total   economy it is determined as aggregate so  total demand and aggregate supply total supply   okay so when we talk about the aggregate  demand formula all we are simply saying   is what are the components what are the factors  which make up total aggregate demand in an economy   and we know down here that is C plus I plus  G plus NX so what is C plus I plus G plus NX,   C stands for consumption so this is the consumer  how much the consumer is willing to go out   and spend is the first factor in aggregate demand  how much aggregates demand there is in an economy   the second factor here which is I is investment so  we're looking at this now from the business side   so we've already looked at the consumer remember  the three pillars of an economy that we looked at   so you had consumer business and government  we've looked at the consumer already   the second component of aggregate demand in an  economy so total demand for goods and services   comes from investment and this really is the  business section of the economy so if businesses   for example want to expand their operations they  may go out and invest or buy more capital and   this creates demand for those goods and services  and the third input here of the aggregate demand   formula is G and this accounts for government  spending so that's the third pillar in the   economy that we looked at in terms of consumer  business and government so you can see that   the behavior of the consumer of businesses who  are investing consumers who are buying and the   government who is spending and this could be on  a number of things which again we will look at   further on in the GDP module but the combination  of spending from the consumer from businesses and   from government is what makes up total demand  within an economy so the key word there being   within because that is the demand that comes  from inside that economy and then of course you   have NX which comes from outside and those four  factors make up the total demand for an economy   and you can look at this as being a closed economy  so this makes up the total demand of all goods and   services in a closed economy remember like we  looked at before so this is your closed economy. And the fourth and final factor in aggregate  demand so how much demand there is for goods   and services within an economy comes from net  exports so now you're starting to look at it in   terms of an open economy because of course in the  real world economies are not closed they trade and   they engage in importing and exporting so if  you have consumption investment in government   spending within a closed economy you also then  have to add in the factor in the real world of   other countries other economies seeking products  from that economy as well and therefore demand   comes from the outside as well as the inside and  that is when you would be considering that fully   as an open economy so when we're talking about  demand or total demand in economy we know we are   looking at C plus I plus G plus NX so consumption  plus investment plus government spending plus net   exports and net exports NX is just simply  exports minus imports and it's important   to note that when you're looking at consumption  investment government spending and net exports   you are looking at these in monetary amounts  so this would be for example consumption   would be three billion let's say it would be a lot  more than that generally speaking but let's say   for argument's sake consumption is three billion  dollars investment is three billion dollars   government spending is three billion dollars net  exports is three billion dollars then overall GDP   would be C plus I plus G plus NX so it  would be 12 billion dollars so again   you're looking at this in terms of a monetary  value that's very very important to remember   so you can see here that if for example we  were to increase consumption in any given year   GDP would increase if we were to decrease  investment if investment was to decrease   in the economy in any given year GDP  which is symbolized by the letter y   would decrease if government spending was  going to increase let's say it were to double. This would have a positive effect on GDP on output   if net exports so if let's say there was an  increase in the amount of net exports so a an   economy or a country became more of a net exporter  you can see GDP would increase so in this scenario   let's say consumption has gone up investment  for whatever reason has gone down very slightly   government spending has increased and net exports  have risen you can see GDP has actually real GDP   this is has increased from 12 previously to  16. so what this will show on this chart above   is a shift in the aggregate demand curve to the  right so aggregate demand has increased and it's   important to note down here that the consumption  investment government spending and net exports is   the aggregate demand part of this equation and  y is GDP but you can see that aggregate demand. Equals GDP okay so GDP and aggregates demand are actually two  separate things GDP is in relation to the total   output of an economy but the output of an economy  will be equal to the demand in that economy.

2021-12-13 14:39

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