Measures of the Nation's economy: GDP, GNP, NDP

Gross Domestic Product (GDP ) or Gross Domestic Income (GDI) refers to the value of all completed goods and services produced within the country in a year (or a stipulated time period).

GDP = consumption + gross investment + government spending + (exports − imports)

It is regarded as the sum of profits added at every level of production. India was ranked 12th in the world in 2007, as far as GDP is concerned. Gross domestic product per capita is the mean value of the output produced per person, which is also the mean income.

While calculating GDP, the depreciation of capital stock is not considered (this is known as "gross"). If the depreciation is taken into account and subtracted from the GDP, then the indicator is called the Net Domestic Product. The gap between these two should ideally be narrowing - indicating an improving condition of capital stock.

Gross National Product defines the value of all goods and services produced in a country in one year, plus income earned by its citizens abroad, minus income earned by foreigners in the country.

GDP is more popular than GNP as a large number of nationals work in countries abroad these days.

Gross National Income (GNI) refers to the country's GDP, together with the income it receives from other countries through interests and dividends, minus similar payments it makes to other countries.

GNI is similar to GNP, but while calculating GNI you deduct indirect business taxes as well.

Terms For Today: Repo Rate, CRR, Inflation

We saw in the previous post that inflation is down as RBI mulls over further reduction in repo rate and CRR. So let's understand what they mean.

Repo Rate

A Repurchase Agreement (or repo) allows a borrower to use a financial security as guarantee for cash loan at a fixed rate of interest. A repo is equivalent to a cash transaction combined with a forward contract, as the borrower has to later buy back the security from the lender at a fixed price.

In the Indian context, repo rate is the rate at which banks borrow money from Reserve Bank of India (RBI).

Reverse repo is the rate at which RBI borrows money from banks.

CRR or Cash Reserve Ratio is a bank regulation which defines the amount of funds that the banks have to keep with the RBI (for India; a central bank otherwise). An increase of the CRR implies that the banks have less money available.

Statutory Liquidity Ratio (SLR) is the amount a commercial bank has to maintain, before it can provide credit to its customers. SLR is also determined and maintained by RBI to keep tabs on expansion of bank credit.

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation occurs when there are less goods (supply) and more buyers (demand), resulting in an increase in the price. Well, I'm sure we all learnt that in school, but it was important here as bank interest rates are connected to inflation.

Video Tutorials

Here's a link to some video tutorials on finance and the market.

http://vimeo.com/marketplace/videos/sort:date

A New List - Profit Booking, Investments, Mutual Funds et al

I've often used the word profit booking as being one of the reasons for the plumetting sensex over the past few days. So let's understand what that means first.

Profit booking means encashing or realising the profit or gain in a share by selling it - can be done by individuals or brokers or corporations.

Let's look at an example to understand.
If you buy a stock at about 100, which rises to 350 within two months. Then a week goes by and it only accounts to 355 or 360. Although it has risen in the past week, what's clear is that there is a slow-down. If you sell the stock now, you stand to take a profit from it - this is profit booking.

We now look at a few provisions which facilitate funding.

Investment is the choice by an individual to risk his savings with the hope of gain - in terms of a future return or interest from a deposit in the bank or a purchase made.

Private Equity consists of equity securities in operating companies which are not traded publicly on a stock exchange. A leveraged buyout, venture capital and growth capital are all categories of private equity investments.

Mutual Fund is a collective investment scheme which is professionally managed and pools in money from many different investors, and in turn invests the pooled money in stocks, bonds and other securities.

Hedge Funds is a private investment fund which is open to a limited range of investors and also permitted to undertake more activities than other investment funds. Hedge funds look to offset potential losses by 'hedging' (minimise exposure to risk) their investments using methods like 'short selling' (where you sell shares you don't own and repurchase, hoping to profit from a decline in the price).

Short selling can be best described by this pic I found on Wikipedia.

The opposite of this is 'going long', where a share is purchased with the expectation that its price will rise.

Another list of terms - Assets, bonds, stocks and securities

We went through derivatives yesterday, so the focus is on assets, bonds and stock exchange today.

Assets are everything of value, owned by a person or company.

• Tangible Assets - financial and fixed assets including bonds, stocks, cash, building, equipment etc
• Intangible Assets - nonphysical resources and rights such as copyrights, trademarks, patents etc

Bond is simply a loan - in the form of a security wherein the issuer owes the holder a debt and has to repay the holder (along with interest) at a later date, known as maturity.

Securities are negotiable instruments representing financial value. Categorised into debt securities and equity securities.

Stocks is often looked at as a synonym of shares. The share of a stock means a share of ownership in a company. Stocks can also refer to different financial instruments such as government bonds or securities.

Stock Exchange or Securities Exchange or bourse (European) is a corporation or mutual organisation which provides trading facilities to exchange stocks and other securities.

Today's List - Derivatives

Today I'll take a look at some terms which fall under the 'Derivatives Market'. I'd tried reading up on this in July, during the placement season (Torux!) and don't remember much of it now.

Derivatives are financial instruments (or contracts) which are derived from the value of an underlying, which can be an asset, an index or another derivative. The main types of derivatives: Forwards (Futures), Options and Swaps.

Forward contract is an agreement between two parties to buy or sell an asset at a specified time in future. Forwards are traded over-the-counter.

Futures are similar to forwards, but differ in two ways -

• Futures are standardised and are traded on an exchange
• Futures are margined, with significantly less credit risk

Option is a contract written by the seller which gives the buyer a right, but not an obligation, to buy (call option) or to sell (put option) a particular asset. The seller receives a premium in return for granting the option.

Swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream - these streams are called the legs of the swap.

The Derivatives market is divided into two - a market for exchange traded derivatives (futures) and a market for over-the-counter derivatives.

First List of Terms

Well, let's begin.

First up, the term itself - Economics. It's derived from the Ancient Greek term oikonomia, which means the 'management of a household, administration' or in short, the rules of the household'.

I think by natural progression the next term to spring to mind would be Finance - it refers to the fields of time, money and risk along with how they are related.

Funding, or financing, means to provide capital - for short or long term purposes.

Capital refers to financial wealth, or the amount of wealth that a person controls or is capable of controlling. It can also be referred to as cash flow.

A credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities.