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Lecture 3

INFO 16029 Lecture 3: Finance 17-02-06 final

19 Pages

Faculty of Applied Science & Technology
Course Code
INFO 16029

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Finance Monday, February 6, 2017 Does anyone need to hand in a hard copy of your assignment still? Sorry about last week thats the first week Ive had to cancel. Were going to condense the rest. There are some things Im going to skip over, and Id suggest that if Im skipping over it, dont spend a lot of time studying it. If there is anything on the test that we dont cover in class, I will deduct that from your test. You shouldnt be responsible for information we dont discuss in class, but I dont think there will be anything like that. Its heavily on what we have already done, especially the KYC stuff. Were going through Unit 4, 5 and 7 that is information that will be on the test. Week 4: Unit 4 Economic Factors and Financial Markets Review of financial Statements, Cash/Debt Management & TMV - Cash flow statement income and expenses money coming in and going out o Age, job, experience, type of job you do things like that will affect the cash flow statement - Personal balance sheet net worth statement what is that about? o All the things you own and all the things you owe (loans), and what you have are you assets (house, liquid, investment) - Corporate statements related to personal statements - Future and present value statements make sure you practice those again and make sure your calculator is programmed properly. Its a silly way to lose marks. - Credit scores you can influence your own credit scores What you will learn (slide) (Reading slide) Economic Indicators (slide) Youve probably heard of some of these before, but these three things are all leading indicators: they tell us a lot about what is happening in the economy. Gross Domestic Product (GDP) this calculates all the things we make in the country (it can be services as well). Its the final products. I have a video to show you how that is calculated. Youre not expected to calculate the GDP there are thousands of people that work together to calculate this. But when Stats Canada comes up with this figure for us, we need to know what it means. Annual Inflation Rate (CPI) ( also known as the Consumer Price Index) If were producing more and creating a lot of stuff in the economy, what do you think is happening? S: Lower unemployment. T: Yes, but as we all get employed then, what is our access to money like? Its better. You have money coming in, so its a good thing. But as money is coming in, prices can go up. If you owned a company and youre selling widgets and everyone is making money, then you can probably put the price up. Thats what inflation is about the prices increasing and decreasing. As GDP goes up, so too will prices. If GDP is going down, it means companies are producing less, it means that they have less people on staff (probably layoffs or harder to get a job generally). My hope is that GDP is high when you graduate. If GDP is going down, so too are prices. If no one has any money, you cant sell your widgets for top dollar anymore. Unemployment Rate the percentage of people that arent employed. Who is included in this? People who are able and wanting to work. My dad is retired, and he isnt seeking work, so he isnt included in this. S: So how do they calculate it? T: Stats Canada does it. There are surveys that go around, and there are videos on here that show how it happens. Some Important Links (slide) Lets look at how these are calculated. [GDP Explanation Video] This example had four different industries involved. There are many more involved. There is someone who creates the tires, the rims, the wires, and so on. And thats just one little company. So we cannot calculate this ourselves, but we can use this information to help guide us in whats going to happen in the economy. As GDP is increasing, the economy is doing very well, and when GDP is decreasing, the economy is slowing down. [CPI Explanation Video] So CPI is measuring the price changes. Youve heard her talk about adjustments on Pension Plans and so on are people who are retired. When CPI/inflation increases, so does the government pension. Most of us work in an environment where that doesnt happen. You dont automatically get a raise because inflation went up. CPI is really difficult to calculate. I think it would be the most boring job in the world youd go into stores and write down the price of everything. Business Cycles (slide) Our business cycle does go up and down all the time. Ive done a little pictorial here to see the wave pattern. In reality, the up times tend to be much longer than the recessionary times (they dont usually last more than 2 years, whereas expansion inflation usually happens for about 10 years and often longer). As we have this wave of economic activity, and the economy is improving, what is happening to GDP? Its increasing. Prices start to creep up. Its particularly near the top of the curve that this happens. Then we crest the curve, companies have been doing really well, but suddenly, they are noticing that prices have increased so much that people arent buying as much. Companies react pretty quickly when products arent selling. They cut back on their production because they dont want whole warehouses of stuff they cant sell. They lay off their employees or eliminate some positions altogether. When you have firms laying employees off and creating less stuff, we can all be unemployed and searching for that one job. If we are all competing, they dont have to pay as much either, so wages start to decrease, and then prices have to come down, too, because we dont have as much to spend on stuff. Then we turn the corner again, new businesses have great startup ideas and the whole cycle starts again. GDP and CPI will increase, and unemployment will decrease. [writing summary on the board] During this first phase, whats happening to GDP? Its increasing. Whats happening to prices? They're increasing! So whats happening to unemployment? Its decreasing. Now when we start to hit the trough here what is happening? GDP is decreasing. Prices decrease and unemployment increases. See how they're all connected? They all give us leading indicators to tell us what is going on in the economy. S: how do you know if were having a recession? T: That is a great question, I wish you could determine that. But you cant tell if its a recession until its over, Its 2 quarters down. One other thing I want to talk to you about is that is the economy changes like this what companies do you think are doing well? Thats called expansion. What companies are doing well? S: retail T: yes people are buying clothes and food S2: manufacturers S3: oil T: it depends but probably yes S4: business and financial services T: Yes S5: real estate S6: An agent? T: like a real estate agent? Sure Does this mean everyone is doing badly when things turn a corner and are turning into a recession? Who might do well in a recession? S: banks because people are getting more loans? T: Well in a recession we are tapering that off. Think of yourself S: real estate T: You are all focused on the housing market! You'll still see the market active here yes but its cheaper. Think about you Lets say you go into the liquor store and you're buying a nice gift for your prof at the end of the term. Its a gift for someone. If you're worried about money, do you buy the gift bag at the liquor store or go next door to the dollar store? Do people spend more money at the dollar store when they're low on money? Wal-Mart might do better in a recession. Any discount store might do better in a recession. Where do you eat during a recession?
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