Chapter

29
The Stock Market and the Economy

Prepared by:

Fernando & Yvonn Quijano

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

CHAPTER 29: The Stock Market and the Economy

The Stock Market and the Economy

29
Chapter Outline
Stocks and Bonds Bonds Stocks Determining the Price of a Stock The Stock Market Since 1948 Stock Market Effects on the Economy The Crash of October 1987 The Boom of 19952000 Fed Policy and the Stock Market The Post-Boom Economy

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CHAPTER 29: The Stock Market and the Economy

STOCKS AND BONDS

BONDS bond A document that formally promises to pay back a loan under specified terms, usually over a specific time period.

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CHAPTER 29: The Stock Market and the Economy

STOCKS AND BONDS

STOCKS stock A certificate that certifies ownership of a certain portion of a firm. capital gain An increase in the value of an asset. realized capital gain The gain that occurs when the owner of an asset actually sells it for more than he or she paid for it.

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STOCKS AND BONDS

DETERMINING THE PRICE OF A STOCK

Things that are likely to affect the price of a stock include:

What people expect its future dividends

will be.
When the dividends are expected to be

paid.
The amount of risk involved.

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THE STOCK MARKET SINCE 1948

Dow Jones Industrial Average An index based on the stock prices of 30 actively traded large companies. The oldest and most widely followed index of stock market performance. NASDAQ Composite An index based on the stock prices of over 5,000 companies traded on the NASDAQ Stock Market. The NASDAQ market takes its name from the National Association of Securities Dealers Automated Quotation System.
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CHAPTER 29: The Stock Market and the Economy

THE STOCK MARKET SINCE 1948

Standard and Poors 500 (S&P 500) An index based on the stock prices of the largest 500 firms traded on the New York Stock Exchange, the NASDAQ Stock Market, and the American Stock Exchange.

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THE STOCK MARKET SINCE 1948

FIGURE 16.1 The S&P 500 Stock Price Index, 1948 I2005 II

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THE STOCK MARKET SINCE 1948

FIGURE 16.2 Ratio of After-Tax Profits to GDP, 1948 I2005 II

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CHAPTER 29: The Stock Market and the Economy

STOCK MARKET EFFECTS ON THE ECONOMY

An increase in stock prices causes an increase in wealth, and consequently an increase in consumer spending. Investment is also affected by higher stock prices. With a higher stock price, a firm can raise more money per share to finance investment projects.

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STOCK MARKET EFFECTS ON THE ECONOMY

THE CRASH OF OCTOBER 1987
The value of stocks in the United States fell by about a trillion dollars between August 1987 and the end of October 1987. If the multiplier is 1.4, the total decrease in GDP would be about 1.4 x $40 billion = $56 billion, or about 1.4 percent of GDP. The stock market crash of 1987 did not result in a recession in 1988 because households and business firms did not lower their expectations drastically.

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STOCK MARKET EFFECTS ON THE ECONOMY

THE BOOM OF 19952000

FIGURE 16.3 Personal Saving Rate, 1995 I2002 III

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STOCK MARKET EFFECTS ON THE ECONOMY

FIGURE 16.4 Investment-Output Ratio, 1995 I2002 III

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STOCK MARKET EFFECTS ON THE ECONOMY

FIGURE 16.5 Ratio of Federal Government Budget Surplus to GDP, 1995 I2002 III
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STOCK MARKET EFFECTS ON THE ECONOMY

FIGURE 16.6 Growth Rate of Real GDP, 1995 I2002 III

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STOCK MARKET EFFECTS ON THE ECONOMY

FIGURE 16.7 The Unemployment Rate, 1995 I2002 III

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STOCK MARKET EFFECTS ON THE ECONOMY

FIGURE 16.8 Inflation Rate, 1995 I2002 III

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STOCK MARKET EFFECTS ON THE ECONOMY

FIGURE 16.9 3-Month Treasury Bill Rate, 1995 I2002 III

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STOCK MARKET EFFECTS ON THE ECONOMY

FED POLICY AND THE STOCK MARKET
The Fed cares about the stock market to the extent that the stock market affects the things that it ultimately cares about, namely, output, unemployment, and inflation.

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STOCK MARKET EFFECTS ON THE ECONOMY

THE POST-BOOM ECONOMY
Both stock market wealth and housing wealth have important effects on the economy.

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REVIEW TERMS AND CONCEPTS

bond capital gain Dow Jones Industrial Average NASDAQ Composite realized capital gain Standard and Poors 500 (S&P 500) stock

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