Tag Archives | gross domestic product

Top Down Approach

See Also:
Bottom Up Approach
How to Prepare an Investor Package
Common Stock Definition
Debt Service Coverage Ratio (DSCR)
Consumer Price Index (CPI)
Prepare an Investor Package

Top Down Approach Definition

A top down approach definition is the act of seeking out securities by first looking at global economics, industry, and then individual companies. Finally, an investor finds an excellent security to invest in.

Top Down Approach Meaning

There are several different factors that are involved in a top down approach meaning. The top down approach analysis tries to incorporate all of these factors to try and find a best fit on a security that an investor is seeking.

Top Down Approach Factors

Those factors include the following:

1. Look at the Global Economy

A top down investor will first look at the global economy as a whole when conducting a top down approach. Different global economies affect a firm’s pricing and competition. Currency exchanges can have a large effect on this competition and should also be considered. If a firm is experiencing a lot of difficulty in competing in a country it conducts a lot of business in it may not be the best fit for an investor to buy the security.

2. Look at the Local Government and Economic Environment

The next step in the top down approach model is for an investor to look at the local government and economic environment of the best fit country. The best indicators to test the surface are by looking at the gross domestic product (GDP), unemployment rates, inflation, interest rates, and the budget deficit of the local government.

3. Indicate a Specific Industry

All of the factors above indicate a specific industry in which the investor might need to choose based upon the type of investment needed. Some industries perform better in certain economic environments than others. Based upon the conditions in steps one and two, you can choose the right industry. Industries might vary in their growth, volatility, and life cycles.

4. Choose a Specific Company

Finally, the last step is for an investor to choose a specific company within the industry. Investors want to pick a company considered in excellent condition. Perform this by doing a thorough financial analysis. In addition, gain opinions of several analysts who are familiar with the industry.

Top Down Approach Example

For example, the world economy is currently in a recession. However, Dwight has some money sitting in a bank account that he would like to invest in order to earn some sort of return. Dwight decides that he is going to follow a top down approach to investing to decide what security he should invest in and add to his portfolio.

Dwight first decides that he would like to invest domestically in the United States. This is because he believes the U.S. will bounce back sooner than most other countries. He then decides that he would like to invest in the oil and gas industry; it has historically been known to be a relatively recession proof industry and less volatile. After observing several different companies Dwight decides that he wants to invest in Chevco Inc.. Chevco Inc. has historically performed better than its peers even in recessions.

Note that using this approach does not always account for the desired return or deviation that an investor may want to take on or receive.

top down approach, Top Down Approach Definition, Top Down Approach Meaning

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Stagflation

See Also:
Economic Indicators
Balance of Payments
Supply and Demand Elasticity
The Feds Beige Book
What are the Twin Deficits?

Stagflation Definition

In economics, stagflation refers to the combination of stagnation and inflation. Stagnation refers to slowing economic growth or recession. It is a period of low gross domestic product and high unemployment. Inflation refers to rising consumer prices. The combination of these two conditions makes for a troubled economy.

The term stagflation was first used by economists in the 1970s when both the U.S. and the U.K. were experiencing simultaneous stagnation and inflation. At that time much of the economic trouble was due to rising oil prices which can contribute to both inflation and stagnation.

Central Banks and Stagflation

Central banks have certain tools for counteracting unfavorable economic conditions. They can implement monetary policy tools to try to influence the conditions of the economy. Central banks can raise or lower interest rates, raise or lower reserve requirements, and buy or sell currency to influence money supply.

For example, if inflation is rising, a central bank can raise interest rates, raise reserve requirements, or purchase currency to reduce the money supply in an attempt to curb inflation.

And during a period of stagnation, if the economy is slowing down, the central bank can lower interest rates in an attempt to increase the money supply and stimulate business and economic activity.

Stagflation Dilemma

However, when inflation and stagnation occur simultaneously, the tools of the central bank are not so simple to implement. For example, during a period of stagflation, a central bank could raise interest rates to fight inflation. But this would hurt the struggling economy. And the central bank could lower interest rates to stimulate the economy, but this would exacerbate inflation.

So one of the main reasons stagflation is such a problem is that central bank monetary policy is essentially unable to ameliorate the unfavorable economic conditions. Trying to fix one half of the problem only makes the other half of the problem worse. Additionally, it doesn’t matter which side of the problem they attempt to correct or influence.

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Recession Definition

See Also:
Economic Indicators
Stagflation
What are the ‘Twin Deficits’?
Supply and Demand Elasticity
London Interbank Offered Rate (Libor) Controversy

Recession Definition

A recession definition is a period of slowed economic activity. The term describes a contracting economy. It is typically defined as two consecutive quarters of declining gross domestic product. Characterize a recession by high unemployment, low productivity, and lower levels of investment. A recession is also a part of the business cycle. Furthermore, a typical recession lasts from six to eighteen months. In the U.S., a non-profit organization called the National Bureau for Economic Research (NBER) officially declares a recession.

Describe a recession as either short or long, and shallow or deep. Short or long refers to the duration of the recession. Whereas shallow or deep refers to the severity of the recession. But, refer to more severe recessions as deep.

US Recessions

If you want to learn more about the historic dates of expansions and contractions of the business cycle in the US, then go to: www.nber.org. Also, learn how you can be the best wingman with our free How to be a Wingman guide!

recession definition

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Gross Domestic Product (GDP)

Gross Domestic Product (GDP) Definition

The gross domestic product is the value of goods and services produced in a national economy usually over a year, but can be any period of time.

Gross Domestic Product (GDP) Explained

The GDP, defined is the primary indicator of a country’s economy over time. Gross domestic product history can tell a lot about the ups and downs of a country’s economy. The GDP normally includes private and government sectors as well as foreign businesses that operate within the confines of the nations border. However, the GDP does not include the overseas operations of the nation’s local businesses. One thing that does include the overseas operations is the gross national product or GNP. There is also a nominal GDP as well as a real GDP. These are GDP measurements that account or do not account for inflation. The nominal GDP does not account for inflation and is known as the current dollar rating for GDP. The real GDP does account for inflation and gives us a true and reliable number for GDP.

Gross Domestic Product (GDP) Formula

The gross domestic product formula is as follows:

GDP = Consumption + Gross Investments + Government Spending + (Exports – Imports)

Gross Domestic Product (GDP) Example

Ted is a employee for the government of Brechenstein, and he is currently trying to find the gross domestic product for his nation. He begins gathering information where he can and finds several facts needed to calculate the GDP. He found the private consumption to be $2 billion for the nation. Gross investments were found to be $10 billion, and the government spending was at a record level of $15 billion. The total amount of exports exceeded the imports by $1 billion. Thus using the formula above the total GDP for Brechenstein was found to be $28 billion.


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gross domestic product

See Also:
Consumer Price Index (CPI)
What is Inflation?
What is Deflation?
Currency Exchange Rates
Economic Indicators

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