Macroeconomics

Section: Macroeconomics Estimated study time: 45 minutes Content: Macroeconomics examines the behavior of the economy as a whole — output, employment, inflation, and policy. For investment analysis, the macroeconomic cycle is the primary driver of asset class returns: equities outperform during expansions, bonds during recessions, and commodities during inflationary periods. Gross Domestic Product (GDP) measures total economic output and is the primary indicator of economic health. GDP can be calculated using three equivalent approaches: the expenditure approach (GDP = C + I + G + NX, where C = consumption, I = investment, G = government spending, NX = net exports), the income approach (sum of all incomes earned in production), and the output approach (sum of value added at each stage of production). Real GDP adjusts for inflation using a price deflator, making it the better measure for tracking changes in actual output. Business cycles describe the recurring expansion and contraction of economic activity. The four phases are: expansion (rising output, employment, and confidence), peak (maximum output before contraction begins), contraction/recession (two or more consecutive quarters of negative GDP growth), and trough (minimum output before recovery). Leading economic indicators — such as the yield curve slope, new orders for capital goods, and housing starts — change before the economy turns. Coincident indicators (industrial production, employment) move with the business cycle. Lagging indicators (commercial loans outstanding, corporate bond yields relative to T-bills) confirm cycle shifts after the fact. For portfolio managers, identifying the cycle phase determines asset allocation: overweight equities in early expansion, shift to defensive stocks in late expansion, overweight bonds at the peak. Inflation is the sustained rise in the general price level over time. The Consumer…