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  • Net Present Value: Definition, Formula, and Calculation

    Net Present Value: Definition, Formula, and Calculation

    At some point in time, every business has to make a decision on whether to invest in that machine, technology, land, or even a project. This is challenging because it directly impacts the business’s profit viability. The project or asset would surely bring cash flow in the future, but what is the present value of that cash flow–this has to be determined. The formula of Net Present Value or NPV is the solution here to identify the present value of the project or investments. 

    In this article, we will discuss Net Present Value, its formula, its drawbacks, how to calculate it, what the different value of NPV means, and why it is crucial for a business. 

    What is Net Present Value?

    Net Present Value is the discounted present value of all the future cash flows of investment in a capital project, real estate, or a new venture. We can call it a difference between the future and the present value of cash flows. This capital budgeting method helps a company identify the best profitable project based on its cash flow. 

    Companies can use NPV to compare the similar type of investment options. It also includes the interest rate or the discount rate of the project to make a comprehensive calculation. 

    Net Present Value has the principle of Time Value of Money at the core. This refers to the fact that with time inflation rusts investments, and the value of money will change and reduce in the future. For example, today’s Rs. 1000 would be worth Rs. 950 after five years. Thus, it is important for a company to discount the future value at a rate that can help it know how much the project is valued in the present. 

    The future value must be higher at an equal to or more than the discount rate for the project to be viable at present. There are other cost budgeting methods used in corporate finance including Average Rate of Return and Payback Period. However, NPV is used widely. 

    How to Calculate Net Present Value?

    You can calculate NPV using the following formula.

    When there is only a single cash flow entry 

    Net Present Value = Cash flow / (1+i)t  – Initial Investment Amount

    Where;

    i = Discount rate or required rate of return

    t= Number of periods

    If there are multiple cash flows during a period

    Net Present Value = (Z1 / 1+r) + (Z2 / 1+r)2 + …. – X0

    Where;

    Z= Cash flow

    r= Required rate of return

    X0 = Initial investment 

    It can also be written as = ∑ Rt / (1 + r)t

    Whereas Rt= Net cash inflows deducted by net cash outflows at the time t

    Using these formulas, a company can find the net present value of cash flows by using a specific discounted rate. The conclusion of this formula helps in deciding whether to invest in a capital-intensive project or not.

    Defining the Value of NPV

    There can be three values of NPV. 

    1. If it is 0 = No difference in inflows and outflows or taking up the project.
    2. If it is 0+ = The cash inflow is more than the outflow, and the project will drive positive values for the business.
    3. If it is -0 = The cash outflow is more than the inflow, and this project is not a feasible investment decision. 

    Understanding NPV with an Example

    Let’s understand NPV with an example to understand it better. Company A wants to expand its current operations by investing in Project X1. The future cash flows of this project during its 5-year tenure would be Rs. 50,000 for the first 4 years and Rs. 8,00,000 at the end of the 5th year. The discount rate is 6%. What would be this project’s present value if Company A takes it up at an initial cost of Rs.3,00,000?

    NPV = (Z1 / 1+r) + (Z2 / 1+r)2 + …. – X0

    = [Rs, 50,000 / (1 + 0.06)] + [50,000 / (1 + 0.06)2] + [50,000 / (1 + 0.06)3] + [50,000 / (1 + 0.06)4] + [8,00,000 / (1 + 0.06)5] – 3,00,000

    = 4,71,061.82 

    The difference is Inflows – Outflows

    = 4,71,061 – 3,00,000

    = 1,71,061

    Because inflows are more than the outflows, this is a good deal for Company A.

    Why is NPV Crucial for a Business?

    As stated earlier, a business needs to analyze whether a new investment project is feasible for its bottom line or not. NPV helps in determining it by accounting for the time value of money.

    Unlike other theoretical measures, NPV is a numerical method that makes the decisions more sensible. It uses the present and future value at a fixed discounted rate. This makes it easier for a business to compare and know the true opportunity cost of a project and decide whether to take it or pass it. 

    What are the Limitations of the NPV method?

    There are three main limitations of using Net Present Value. 

    • For the accuracy of the NPV method, the assumption of future cash flows and initial cost has to be certain. That can not be the case in reality, as predicting future cash flow is always tentative. 
    • Any change in the required rate of return, even of a small decimal, can have a huge impact on the cash inflows. Thus, it has to be very accurate. 
    • NPV can only be applied for comparing projects if they are the same in size. 

    Conclusion

    NPV is a great tool that factors in different aspects of any investment project for a business. It accounts for the future cash flows and discounts it for the true present value. A business or a company can use this method to derive a conclusion about whether to accept an investment project or avoid it. The only drawback of the NPV method is that it assumes that future cash flows would be certain, which might not be the case in reality. Regardless, NPV is one of the most used capital budgeting methods in finance. 

  • Multinational Company (MNC) – Meaning, Example

    Multinational Company (MNC) – Meaning, Example

    MNCs are the temples of globalization, connecting nations into a single chain of a globalized economy.

    Multinational companies are organizations that operate in more than one country and have subsidiaries or branches in many countries to manage the business. You must have heard of leading players such as Apple, Reliance, Unilever, TATA, Microsoft, Amazon, etc. These billion-dollar MNCs rule their respective fields and offer products or services to millions of people across the globe. 

    MNCs play a significant role in globalization by bringing a positive economic impact to the operational countries, generating millions of jobs, transfer of advanced technologies, cultural integrity, and lots more. They are the force behind making our world – a truly global village.

    Let us dig deeper to learn about the meaning of a multinational company, its types, and its features. We will also discuss some advantages and disadvantages of MNCs. So, let’s start:

    What is Multinational Company?

    A Multinational Corporation (MNC) is a corporate firm that runs business operations in its home country and owns its branches abroad. Companies that pilot the international expansion of their business fall under this category figuratively. These corporations set up their headquarters in one country (typically their home countries) to coordinate all global management. 

    There are particular criteria that a company has to meet before declaring itself as an MNC. A company that exports its products internationally does not qualify in this category as per the fundamentally defined MNC meaning. A corporate organization that generates roughly 25-30% of its revenue from its overseas ventures, makes foreign direct investments in other countries and conducts business operations there are known as MNCs.

    However, the fundamental requirement to establish an MNC is to make a direct investment in a foreign country and start a part of business operations there. International companies like Apple, Alphabet, Amazon, Johnson and Johnson, BATA, MasterCard, VISA, and Meta are some of the leading multinational corporations in the world. All these MNCs have a business presence in 100+ countries.

    Types of MNCs

    Now that we know what a multinational company is, it is vital to understand the different models that define these vast corporations. Depending upon the nature of industry and expansion, we can divide MNCs into four different categories. 

    Centralized Global Corporation

    A centralized global corporation is a multinational company model wherein the headquarter is situated in the home country. The chief members and executives oversee all global operations and serve as the decision-makers of both domestic and international offices. 

    Decentralized Corporation

    A decentralized corporation regulates autonomous facilities and offices in other countries while maintaining a strong presence in the home country. This model is one of the most successful types of MNCs in the world as every office manages the local business individually. 

    International Division

    International division is an MNC model where the parent company establishes a separate international office to manage all its global operations. While this structure helps businesses to reach out to a broader audience, it imposes numerous challenges in maintaining a tenacious brand image. 

    Transnational Enterprise 

    In transnational Enterprise, there exists a parent-subsidiary relationship between all global branches. In this type of multinational corporation, the parent company guides all subsidiaries and provides resources, but does not control its branches directly. This structure is a well-balanced combination of all other MNC models.

    Features of MNC

    If we consider an example of a multinational company, we will discover some business characteristics that are common to all. Let us identify the standard features that define an MNC business. 

    Globalization

    MNCs promote globalization by making foreign direct investments and starting business operations in other countries. These companies function through subsidiaries, franchises, factories, and operational offices in different locations. 

    Geographically Customized Operations

    Most MNCs focus on offering geographically customized operations by utilizing the land, labor force, resources, and raw materials of the host country.

    Vast Asset Buildup & Turnover

    The primary goal of MNCs is to build assets in different parts of the world, especially in developing countries where governments promote them. These businesses also draw huge annual turnover by conducting cost-effective productions. Amazon is an ideal multinational company example. 

    Enhanced Skill Development 

    MNCs provide skill development programs to meet their workforce requirements by introducing new technologies and tools. Many leading firms, like Honeywell, Accenture, etc., also train local talents to promote a healthy brand image. 

    Focus on Tech Upgrades 

    Technology upgrades go hand in hand with the growth of an MNC. These corporations focus on using the latest technologies to keep up with the tight market competition and retain their dominance in the industry. 

    Advantages and Disadvantages

    The structure of an MNC comes with advantages and disadvantages for both the firm and the country. With great power comes sumptuous control and domination, some things that do not go well together! Let’s discuss the pros and cons of MNCs. 

    Advantages of Multinational Corporations 

    Some of the prominent advantages of MNC companies are: 

    • An MNC brings an inflow of capital and investments to developing countries. It tries to improve its productive capacities overseas by building factories, facilitating enhanced training centers, and offering new technologies. 
    • It creates vast employment opportunities for local nationals with its expansion in different countries. MNCs provide comparatively higher wages, incentives, and perquisites to their employees, which creates a snowball effect by uplifting the standard of living. 
    • It reduces dependencies on government-funded aid by empowering local manufacturers and producers with direct investments. 
    • It provides high-quality products at lower costs of production by operating in favorable geographical conditions. These companies set up manufacturing plants in various countries for cost-efficient production. 
    • MNCs help diversify local markets and economies by offering a wide range of goods and services. It reduces the heavy reliance on primary products. 
    • MNCs improve the local infrastructure of developing countries to facilitate their production needs. Most companies establish better technology, communication, and transport facilities, roads, bridges, etc., around their operational centers. 

    Disadvantages of Multinational Corporations 

    It is not possible to define a multinational company without mentioning the disadvantages it ushers into the world. 

    • All MNCs give rise to huge environmental costs by creating potential harm to water supplies, local soils, and air. 
    • They leverage the need for specific skill sets in laborers and cause exploitation by offering comparatively lower wages. 
    • MNCs are least concerned about the host countries’ priorities. They often build legal monopolies in the market that potentially casts out numerous local enterprises. 

    Conclusion

    Every MNC plays a crucial role in stimulating the economic growth of a country. Governments of developing countries aim to attract and encourage leading MNCs to bring new technologies and employment opportunities for their people. Companies also benefit from different schemes and government subsidiaries to expand their operations. 

    The spillover effects of leading MNCs to domestic and small-scale firms boosts market conditions. So, the correlation between Foreign Direct Investments and MNC companies is one of the primary reasons why these corporations hold a powerful position globally. 

  • Difference between Economic Growth and Economic Development

    Difference between Economic Growth and Economic Development

    Most of the time, when hearing the terms economic growth and economic development, you might have thought about them being similar. However, in reality, these concepts are poles apart and different from one another. 

    Although both are crucial indicators of a country’s economic health, there are still some significant distinctions between them. 

    This post takes you through the key difference between economic growth and development and helps you understand both terms. 

    What is economic growth?

    Economic growth is the increase observed in the monetary value of all the products and services manufactured in an economy during a certain period. It is a quantitative measure that showcases a possible increase in the number of business transactions occurring in an economy. 

    Economic growth can be evaluated in terms of an increase in the overall market value of additional products and services produced through varying economic concepts, such as Gross National Product (GNP) and Gross Domestic Product (GDP). 

    Let’s understand this with an example. Suppose an exclusive fruit only grows naturally in India. Indians have consumed this fruit for years altogether. An American visits India and likes this fruit. He takes samples to America for his acquaintances. 

    Then, the American invest in a sizeable fruit exporting business in India as they like the fruit. 

    Hundreds of Indians engage with this newly structured company to farm, harvest, pack, and ship the fruit to American supermarkets. 

    The total value of the products and services created by this new fruit exporting business surpasses ten million dollars in one calendar year. The business will add this amount to India’s GDP. The country’s GDP will increase, which will be an indication that India has accomplished economic growth. 

    This way, it is clear that human capital, technology, labor force, and capital goods – all of them have the capabilities to contribute to economic growth.

    What is economic development?

    Economic development is a process through which the all-inclusive academic level, well-being, and health of a country’s population improve. It is also known as the enhanced production volume, owing to technological advancements.

    Economic development is more of a qualitative improvement and is generally regulated by the Human Development Index (HDI). A country’s overall development is based on several parameters, such as

    • Industrial and infrastructural development
    • Gross domestic product
    • Enhancement in self-esteem requirements
    • Quality of life
    • Per capita income
    • Living conditions
    • Standard of living
    • Technological advancements
    • Job opportunities

    And more. 

    Let’s take the example mentioned above here again. Before this fruit exporting business came into the picture, many Indians lived in small settlements across several miles. Only some Indians out of this lot had access to healthcare, clean water, schools, and other basic facilities. To look after their families, elders worked longer hours to harvest land that was unsuitable for many crops. 

    After the export of this fruit and an upsurge in the government’s revenue, Indians received better access to basic facilities. The export industry started providing fixed working hours and better salaries. The development indicators, like access to healthcare, per capita income, and literacy rate, got improved, thus, indicating economic development. 

    Keep in mind that apart from the nation’s income growth, economic development also comprises economic, political, cultural, and social changes that contribute toward materialistic progress.

    Key Difference Between Economic Growth and Economic Development

    Economic growth measures the increase in the value of goods and services produced by a country over a specific period. It does not take into account income distribution or poverty levels within the country. Economic development refers to the process of improving the quality of life through economic growth, but it also takes into account poverty levels and income distribution within a country.

    Here is a comprehensive table outlining the key difference between economic growth and economic development.

    Factors
    Economic Growth
    Economic Development
    Definition
    Economic growth is known as the increase in a nation’s monetary growth in a specific period.
    Economic development is the overall improvement in a nation’s life quality, which comprises economic growth.
    Factors
    Economic growth is defined as a slow increase in one section of GDP, be it net exports, investment, government spending, or consumption.
    Economic development is relevant to human capital growth, structural changes, and a decrease in inequality instances that enhance the country’s quality of life.
    Term
    This is a short-term process.
    This is a long-term process.
    Measurement
    Economic growth is a quantitative measure.
    Economic development is both quantitative and qualitative.
    Government Support
    Economic growth is an automatic process that might or might not need the government’s intervention.
    Economic development requires consistent government intervention as all of the policies are created by the government.
    Effect
    Economic growth brings out quantitative changes in an economy.
    Economic development brings both quantitative and qualitative changes to an economy.
    Relevance
    It reflects per capita income or national income growth.
    It reflects development in the quality of life of a country.
    Span of Concept
    This one is a narrower concept.
    This one is a broader concept.
    Scope
    It deals with a uni-dimensional methodology that looks after the nation’s economic growth.
    It deals with a multi-dimensional methodology that looks after a nation’s income and quality of life.
    Applicability
    Economic growth applies to developed economies.
    Economic development applies to developing economies.
    Examples
    GNP and GDP
    Industrial development, per capita income, HDI

    Wrapping Up

    To wrap up both concepts, you must know that economic development is a subsection of economic growth. The former comprises a broader scope than the latter. While economic development has a myriad of indicators that help with the evaluation of an economy’s state, economic growth has a few indicators that help with the calculation. Keep in mind that while economic growth is vital, it is not the only requirement for economic development. 
  • Exchange-Traded Funds: Meaning, Types and Return on Investment in ETFs 

    Exchange-Traded Funds: Meaning, Types and Return on Investment in ETFs 

    Investing can be a tricky business with so many avenues available to choose from investors. ETFs or Exchange-traded Funds are one such investment option that operates the same as mutual funds but have the flexibility of being traded on an exchange like stocks. 

    In this article, we will talk about what is an exchange-traded fund, how it functions, what are different types of ETFs, the pros and cons, the return on ETFs, and lastly, things you should know before investing in ETFs. 

    What is an exchange-traded fund?

    Exchange-traded funds as the name suggests can be traded on an exchange. ETFs can be based on individual security such as a commodity product or can expand to include a collection of different underlying assets. It provides investors with the opportunity to track various sectors, indexes, and a pool of equity stocks under one fund. Thus, proving an attractive means for diversification. 

    The same diversification applies to investing across different sectors, i.e. clean energy-based ETFs that track a range of companies in this space. 

    How do ETFs function?

    ETFs function on the combined principles of mutual funds and stocks. Like mutual funds, ETFs contain a range of securities; they are more like open-ended mutual funds. Additionally, ETFs can be traded on exchanges like stocks. Exchange-traded funds are a good investment choice for investors having less familiarity and knowledge of the financial markets. 

    Because ETFs are traded on an exchange, their price tends to change during the trading day on a real-time basis. The level of fluctuations depends on the change in the underlying assets. For example, if an ETF is based on large-cap funds of BSE Sensex, any change in these large-cap funds would have a direct impact on the ETF. This is not the case with mutual funds as their price is measured only once a business day, which is also called the NAV (Net Asset Value).

    What are the different types of ETFs?

    Stock ETFs: Also known as equity ETFs, they contain different stocks from one sector or industry to track the performance, i.e. an ETF of pharmaceutical stocks. These ETFs have lower fees compared to mutual funds that invest in equity. Thus, favourable to pockets of investors. 

    Bond ETFs: Bond ETFs consist of bonds issued by a corporate, government, State, etc. as underlying assets and help investors with a regular income stream. The only difference between investing in bonds and bond ETFs is that the ETFs do not have a maturity date. 

    Active and Passive ETFs: Active ETFs are managed on a regular basis by fund managers and have the target to beat the benchmark. As a result, they are expensive to invest in compared to passive ETFs. Passive ETFs are designed to replicate the performance of benchmarks. They do not require active decision-making by fund managers and thus offer a good deal for novice investors with lower costs. 

    Sector or Industry-based ETFs: These ETFs are built with a focus on a particular industry or a sector. For example, investing in ESG (Environment, Social, and Governance) funds. This makes the investment concentrated, but as the investment is not directly made into underlying assets, the impact of change in underlying assets is not that severe. 

    Currency ETFs: Investors interested in the forex market whether national or international can leverage currency ETFs to passively benefit from changes in the underlying currency. They offer a great level of diversification and can act as a hedging tool against potential volatility in the currency market.  

    Commodity ETFs: Commodity ETFs allow investors to get the benefit from investing in commodity products such as gold, oil, wheat, rice, etc. passively. They have a lower correlation with the equity market and thus during a market downturn, provide protection to the investment portfolio. This is also a less expensive method to invest in commodities without buying and storing them physically. 

    Leveraged ETFs: This ETF can be a little technical to understand. Leveraged ETFs are constructed to get multiplying returns over the underlying assets. For example, a leveraged ETF is based on a gold index and the aim of this ETF is to get a 2X return. So if there is an upward move by 10 points in gold, the return on leveraged ETF would be 20 points. 

    Inverse ETFs: Inverse ETFs are based on the concept of short trading. Short trading refers to selling a stock first when the price is high and buying it back when the price falls. Thus, inverse ETFs tend to be positive when the market is down because they are a bet against the market fall.

    What to consider before investing in ETFs?

    There are a few factors that you as an investor should consider before investing in ETFs as mentioned below. 

    • Expense ratio: This is the total cost investors pay for investing in an ETF. It is a kind of fee you pay to the fund manager for investing in an ETF. 
    • Past performance: How an ETF has performed in the past can provide a great idea to investors of how the potential returns would be. History doesn’t always repeat but analyzing past performance can be a good measure of the expected returns. 
    • Trading volume: Trading volume suggests the popularity of the fund over a period of time. It is better to choose an ETF with a higher trading volume. 
    • Commissions: Typically, apart from the expense ratio, investors do not need to pay additional charges. Thus, this becomes a crucial factor to consider for investing in ETFs. 
    • Where an ETF is invested: The sector, industry, underlying assets, etc. are the significant deal breakers for investors to ponder upon. As an investor, you should ensure that you invest only in ETFs that align with your goals. For example, if you are not comfortable investing heavily in equity, there is no point in including only equity ETFs; you can go for ETFs that mix equity and debt instruments for minimizing the risk exposure. 

    What are the advantages and disadvantages of ETFs?

    Advantages:

    • Diversification: ETFs include a pool of assets and thus overweighs investing in individual assets, providing the benefit of diversification. 
    • Lower costs: Investors can get better rates by investing in ETFs compared to mutual funds because there are no entry or exit loads, or fees for managing the funds. 
    • Ease of liquidity: Because ETFs are traded on exchanges in real-time, investors have the luxury to liquidate their investment at any time as per their requirements. 

    Disadvantages:

    • Concentrated ETFs and lack of diversification: If the ETF selected is very focused on a single security, investors may not benefit from diversification. 
    • Demat-based brokerage transactions: ETFs are traded on exchanges and thus need to be bought via a Demat account and brokerage charges also apply. 
    • Risky investment: While ETFs provide better returns, compared to fixed income instruments such as bonds, and FDs, they are risky in nature. 

    How much return can you expect by investing in ETFs: Is it better than investing in equity stocks?

    The returns on ETF vary depending on the underlying assets. However, the average return can be anywhere between 10 to 12 percent annually. The return on investing in stocks has an average of 12 to 14 percent annually. It leads us to the question of whether investors should go for ETFs or individual stocks.

    The answer depends on the expertise and knowledge of investors. For novice investors, gaining and maintaining returns are crucial, thus ETFs are a sound option. While for experienced investors, individual stocks may work better because they know when to enter and exit. In the end, the decision depends on the goals and preferences of investors. 

    Conclusion

    ETFs are a great investment instrument to get the benefit of mutual funds and stocks. They are spread across a variety of securities and prove a great means for diversification. Unlike mutual funds, they do not consist of management fees, however, the expense ratio does apply to ETFs. Because ETFs are traded on exchanges, they are easy to trade and liquidate as per the requirements. 

  • How to Use Excel as a General Accounting Ledger

    How to Use Excel as a General Accounting Ledger

    Everyday transactions of a business are recorded in a journal known as General Journal. These entries are either directly entered into excel or imported from other applications into excel. The general journal entries are recorded in chronological order, and these entries form a general ledger. It also helps the users derive various reports, such as purchase statements, income statements, etc.

    A General Ledger is an archive of a company’s financial activities.  It holds details and potential insights about the company’s operations. A traditional ledger can be messy and hard to understand, while excel helps you customize, record, and reuse them endlessly.  

    Microsoft Excel is very powerful software. It has all the tools needed to create and maintain a general ledger. It is also a great alternative to accounting software. Businesses without the resources to invest in accounting software can start with Excel instead. 

    How to create financial statements using General Ledger

    The General Ledger is the primary record of all accounting transactions in a company. It’s important to maintain proper financial data as the financial statements are derived from it. This financial statement further represents a company’s financial health. 

    General Ledgers classify transactions by accounts, including data such as date, entry description, journal entry, credit or debit amount, and ending balance. These accounts list the transactions made throughout the month. The cash general ledger lists only the cash section, whereas the inventory general ledger lists the inventory increase. Using general ledgers helps you analyze the transactions that have impacted a particular account. 

    Managing General Ledger using Excel

    Every business is unique and so are its accounting needs. It’s important to sort the bookkeeping process based on the type of business. 

    In general, the first set of columns in a record-keeping book includes the transaction date, description, reference numbers, check numbers, etc. The next set includes accounts that are to be used throughout the year. From left to right, the first accounts listed should be income statement accounts followed by asset accounts, liability accounts, and finally, equity accounts. 

    After creating a General Ledger, maintaining them every month is crucial. So to help with that here are a few ways, 

    1- A blank general ledger template should be used to record each balance sheet account’s start balance each month.

    2- After each month’s income statement is reconciled, the balances are adjusted to zero.

    3- The general ledger should be updated each time you post a journal entry. The general ledger also records the activities relating to cash and inventory when you post a journal entry.

    4- Calculate each account’s ending balance at the end of each month. The trial balance is created using the ending balances in the general ledger.

    Creating Trial Balance in Excel

    Accounts used for posting transactions and current balances are listed in the trial balance. In Excel, you can create a trial balance by following these steps:

    1- A new spreadsheet should be created using the account numbers and descriptions from the chart of accounts.

    2- Next to each account, add a column for debits and credits. In the spreadsheet, enter the ending balances for each account from the general ledger.

    3- Take the total of all debits and credits and divide it by the number of accounts. You should have an equal number of debits and credits if you have posted journal entries and general ledger activity correctly.

    Verify that you posted the data properly to the general ledger if the total debits and credits don’t balance. For errors in your general ledger spreadsheet, check the formulas. It’s time to generate financial statements after you’ve established an accurate trial balance.

    Streamline your accounting and bookkeeping processes using Excel

    Better insights into business financials can be gained through streamlined accounting and bookkeeping tasks. To improve your business methods, you should ensure that your accounting and bookkeeping processes are well-organized to reduce internal costs and give you plenty of time.

    Following traditional methods of accounting and bookkeeping can be time-consuming and hard. They can even result in lost documents for business owners. The calculations may also be incorrect if the Data is written incorrectly in the sheet. But, using excel to manage your accounting and financial processes will be time-saving as well as result in a more accurate report.

    Conclusion

    Starting a business can be challenging when time and money are limited. Identifying customers and delivering high-quality products or services may be your top priorities. The bookkeeping and accounting tasks you need to perform when you first open your doors may not be automated.

    Excel accounting templates are often used by small business owners when they start up. Excel is easy to use, and most people are familiar with it. Excel is a great alternative to other accounting software. They help in producing accurate accounting reports. The person keeping track of the accounting records has to have proper knowledge and understanding of different tools within Excel. 

  • Position Trading – Definition, Example

    Position Trading – Definition, Example

    Position trading is a trading strategy in which a trading position is held for an extended period (usually weeks or months) to profit. In position trading, a trader usually has long-term thinking and holds the position for an extended period, irrespective of short-term fluctuations. For example, the positions could be long (buying the asset first) and short (selling it later) (selling the asset first). This type of trading is also recognized as trend following, and traders generally introduce trading positions using long-term charts (weekly, monthly).

    Positions can be held for months or even years on average. Position traders, by definition, are trend followers and are less concerned with short-term fluctuations unless they influence the long-term outlook of their position. Most position traders do not trade actively and are outperformed in terms of holding time by long-term buy-and-hold and hold investors.

    When making decisions, position traders typically use a combination of technical and fundamental analysis, but they also consider market trends and historical patterns. Position traders who can successfully identify the right entry and exit points and know when to place a stop-loss order are considered good position traders.

    3 strategies in position trading

    Position trading is the most related trading strategy to traditional investment. Position traders profit from long-term price movements and, as a result, prefer markets with well-defined trends and narrow price ranges to markets with high fluctuation and wider trading ranges.

    Technical Strategy

    A technical strategy relies primarily on charts to anticipate the long-term trend of an asset’s price. Generally, it evaluates the asset’s cost, quantity, and relative strength, and trades are initiated when the asset price demonstrates long-term trend behavior. This trading is purely price-driven and does not take advantage of fundamental factors. A technical strategy relies solely on charts to determine the long-term trend of an asset’s price. Price fluctuations are the most common application of technical analysis, but some analysts also supervise other performance measures such as trade volume or open interest levels. Fundamental considerations are overlooked in this trade, solely driven by market conditions.

    Fundamental Strategy

    A fundamental strategy focuses on the underlying variables that influence the price of an asset. The strategy only considers qualitative factors and seeks a structural shift in business fundamentals. The fundamental analysis uses publicly available data to determine the value of a stock or other type of investment. Fundamental analysis considers sales, earnings, future growth, return on equity, profit margins, and other factors to determine a company’s underlying worth and potential for future stock growth. All this information can be found in a corporation’s financial statements. To determine a stock’s fair market value, analysts frequently assess the economy’s overall health, followed by the competitiveness of the industry in question.

    Techno fundamental Strategy

    A fundamental techno strategy enables trading decisions based on technical and fundamental analysis. It employs charts to examine price behavior and fundamentals in order to evaluate long-term qualitative change. The trade is implemented if the price is aligned with the change in fundamentals. These strategies usually implement technical and fundamental screeners to help find qualified trading bets. While developing strategies, traders can generate entry and exit rules as well as stop-loss rules. When starting to trade, traders should also consider their capital base and market experience.

    Positional traders sometimes use capital allocation rules and stop losses to maintain risk and prevent losing everything during unpredictable market conditions.

    Risk factors in position trading

    • Position trading can result in massive losses if the trader is unable to predict a sudden shift in trend.
    • In the case of a sudden decrease in asset prices, leveraged trades can wipe out the trader’s entire capital.
    • Some traders do not think about investment portfolio rules, which can cost them a lot of money if they put all their cards in one show.
    • Many traders get swept away during prolonged market runs and fail to trim their positions despite multiple warning signs. It tends to put their capital at higher risk.

    Advantages of position trading

    • Traders will experience less stress and effort as positions can be monitored more passively.
    • Implementing a long-term trading strategy to maximize profits margins
    • More time is available for other (investment and non-investment) activities than with labor-intensive and time-consuming trading methods.
    • Technical and fundamental analysis can help to reduce risks.
    • Lower risk than day trading and swing trading because investors are less concerned with sudden, short-term price fluctuations.
    • Most large asset moves occur overnight, and positional trading can capture these movements.
    • The accessibility of leverage is beneficial in leverage trading because the asset can be utilized as collateral.
    • Positional trading necessarily requires less constant participation on the part of the trader than swing or day trading.

    Disadvantages of position trading

    • If trends reverse, there is a greater chance that substantial losses.
    • Significant capital is required to get started and keep investments running for long periods of time. 
    • Short-term access to funds is limited.
    • Position trading performs effectively in up and down-trending markets. In a sideways market, it is inconceivable to generate revenue from positional trades.
    • Analyzing data and asset fundamentals takes precision skills; newcomers may want to take guidance from a position trading firm. 
    • The costs of holding positions for a prolonged period of time can start reducing profit margins.
    • Position trading necessitates long-term capital, which is not the case with other trading strategies. 
    • It helps secure the trader’s capital and demonstrates him to liquidity risks.

    Conclusion

    Trading is a high-risk activity, and before achieving massive market success, traders must train and test themselves. Position trading is similar. To learn position trading, one must spend a substantial amount of time monitoring, comprehension, and comprehending market movements. Evaluating past data and identifying patterns is the most effective method for learning position trading. Once a trader understands market patterns, identifying and executing trading strategies while strict adherence to sound risk management principles becomes relatively simple.

  • LIBOR- London Interbank Offered Rate

    LIBOR- London Interbank Offered Rate

     Every weekday at around 11 a.m., 18 sizable banks report to the British Bankers’ Association the interest rate at which they think they can borrow a “reasonable” sum of money from one another in the so-called London interbank market. They provide rates for 15 borrowing periods, ranging from one day to one year, in their reports. Then, for each of the 15 maturities, it announces the average interest rate at which banks claim they can borrow US dollars. 

    Additionally, nine other currencies go through the same procedure. London interbank offered rate (LIBOR) is the term for the average, which is frequently used even though there are 150 rates (LIBOR).

    What is LIBOR?

    Like the US federal funds rate, LIBOR is an interbank rate that reflects the interest that major banks charge one another when borrowing money for short periods of time, ranging from an overnight to a year.

    The LIBOR Rate (London Interbank Offer) is an estimated rate that is determined by averaging the current interest rates being charged by the largest, most prestigious banks in London. It serves as a benchmark rate for the domestic and international financial markets, where it is subject to daily fluctuations due to changes in certain market conditions. The London Interbank Offered Rate (also known as Libor), which is used to calculate interest rates on mortgages, corporate debt, and loans with adjustable rates, has been a significant benchmark for more than 40 years. 

    However, the development of new interest rate-based financial instruments like forward rate agreements and interest rate swaps, which also need uniform and open interest rate benchmarks, coincided with its introduction. 

    As an average of what banks believe they would have to pay to borrow a “reasonable” amount of money for a predetermined short period, LIBOR is intended to reflect reality. It stands in for the cost of funds even though a bank might not actually require those funds on any given day.

    Purposes of LIBOR

    • For treasury activities, Derivatives and Debt Finance, Letters of credit, bilateral and syndicated loans, private placements (US and EU), securitizations, and floating rate notes are all priced using LIBOR. 
    • LIBOR is used in various types of corporate-facing derivatives transactions, like hedging against business risks or risks in a specific transaction. (e.g. securitisation or a structured finance transaction). Additionally, in the context of managing a corporate portfolio (e.g., balancing rates of return on investments and assets against liabilities).
    • Some commercial contracts, such as those with late payment clauses or share/business purchase agreements with gross up provisions or price adjustment mechanisms, may use LIBOR as a reference rate for payment obligations (where payment is made after completion date).  In some situations, it may also be used to define an investment return hurdle.
    • LIBOR is used to help banks set rates for adjustable-rate loans in addition to setting rates for interbank loans. These include credit card debt and mortgages with interest-only payments. To make a profit, lenders may add one or two points.
    • Some industry regulations may include LIBOR as a requirement. For instance, for insurers, the LIBOR swap curve is currently used to calculate EOIPA risk free rates, which are used to calculate pension liabilities. Any change will have an effect on insurers’ capital positions.

    How is LIBOR calculated?

    The Intercontinental Exchange (ICE) calculates Libor, and Refinitiv publishes the results. It is an index that gauges the cost of borrowing money for major international financial institutions doing business in London or with London-based counterparties. The BBA polls a panel of 18 major international banks for the USD Libor each day, asking, “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 am?” The BBA discards the highest four and lowest four responses, and averages the remaining middle ten, producing a 22% trimmed mean. At 11:30 am, the average is reported.

    Actually, Libor is a collection of indexes. For each of the five currencies, there are separate Libor rates reported for seven different debt maturities. Overnight is the shortest maturity and one year is the longest. The three-month dollar Libor, which is the index produced by asking the panel what rate they would pay to borrow dollars for three months, is referred to in numerous private contracts in the United States.

    Why is LIBOR criticised?

    Reforms emphasising the submission of LIBOR based on transaction data and market surveillance were put into place as a result of LIBOR manipulation by big banks. However, LIBOR was still discovered to be extremely prone. The UK Financial Conduct Authority declared that LIBOR would be phased out by the end of 2021 after much consideration. 

    The FCA is concerned about the LIBOR benchmark’s viability, as was already mentioned. Many people around the world share these concerns. The number of transactions that support the estimates that panel banks submit to ICE Benchmark Administration in order to calculate LIBOR is significantly less than it has historically been due to market and regulatory changes that have taken place since the global financial crisis of 2007–2008. In some interest periods, LIBOR has tended to reflect major banks’ assessments of their cost of borrowing rather than the actual cost of borrowing as determined by market transactions. Banks on panels will assist in maintaining the system to ensure a smooth transition. It will be suggested to replace them with alternative risk-free reference rates based on transactions.

    Conclusion

    The LIBOR rate (London Interbank Offered Rate is what it stands for), is a collection of daily average rates, serving as the benchmark interest rate for lending and borrowing among international banks. 

    Financial institutions all over the world use these rates as the standard base interest rate when determining how much to charge for loans and other debt instruments. 

    Since its invention in the mid-1980s, the LIBOR rate has been regarded as the most significant number in the world. Important changes to the financial market will result from its termination within the next three years.



  • Investing in Bonds: Features, Returns, and Bond Markets Explained.

    Investing in Bonds: Features, Returns, and Bond Markets Explained.

    If you are familiar with investment and personal finance, you must also be aware of the term “bonds.” Although bonds are a typical investment, it is still hard for some people to understand their technicalities and other terms. No worries, you do not have to have a master’s in finance if you are thinking of investing, or to be someone who wants to diversify their portfolio. In both cases, this blog will be helpful for you to understand the features of bonds, the market, and how to invest.

    What are bonds?

    A bond is a loan given to a company or government by an investor. A company or government borrows money from an investor by issuing a bond, and in return, they are paid interest on the money they have loaned. Companies and governments frequently issue bonds for new projects or ongoing expenses. Bonds are often used as a less risky investment in comparison with stocks.

    Different kinds of bonds

    The primary step for investing in bonds is selecting the type of bond you want.

    Types of bonds to choose from:

    Corporate Bonds: They are a form of debt and have the same fundamental characteristics as other forms of corporate debt. Corporate bonds differ from traditional bonds in that they can be sold to investors through the secondary market instead of being issued directly by the company. This is one reason why corporate bond yields tend to be higher than traditional bonds.

    Municipal Bonds: Municipal bonds are issued by a municipality or local government and are backed by the full faith and credit of the issuing entity. Municipal bonds have a fixed interest rate that investors pay back over time.

    Government Bonds: A government bond is a financial security issued by the government of a country. It can be in the form of bonds or notes. The most common type of government bond is treasury bills, which are short-term debt instruments issued by governments to finance their budget deficit and meet other financial obligations. 

    Agency bonds: Agency bonds are a type of bond an agency issues. General obligation (G.O.) and revenue bonds are the most common types of agency bonds.

    General Obligation Bonds: These are the most common type of agency bonds, and they have been used for many years to finance public infrastructure projects such as roads, bridges, highways, and schools. They do not restrict their use or how much can be borrowed from them. As long as the debt service payments on these bonds meet certain conditions, there is no limit to how much money can be borrowed against them.

    What factors should you consider when investing in bonds?

    Investing in bonds of any kind, be it corporate, government, or non-conforming debt obligations (NCDs), necessitates a thorough knowledge of the instruments’ workings, risks, and potential returns. Here are the six things you need to consider when investing in bonds:

    1. Check the coupon rate or YIELD Rate: Checking the coupon rate or YIELD rate is a way of calculating how much you should save on groceries. You can calculate the amount of money you will save by using coupons. This is one of them:

    Check the coupon rate or yield rate = (Total Coupons/Total Cost) * 100%

    1. The minimum investment required: Some bonds have a 1 lakh minimum. Some have 10 lakh, so you must check it based on your investment appetite. It depends on your budget and how much you are willing to invest initially to understand how the bond and its market work.
    2. Check the rating of the bond: Checking the rating of the bond means checking whether there are any changes in its creditworthiness. The main reason for this is to see if it has been downgraded or if it has been upgraded. If you have a bond that you want to sell, then you need to check its ratings before selling it as well as after selling it. You can also use this information to decide whether to buy a particular bond. 
    3. Time Tenure and Interest Payment (I.P.) Frequency: How long is the bond valid? The frequency of payment is the time between interest payments. The higher the frequency, the more often the interest will be paid. This can be a significant factor in determining whether or not a bond is appropriate for your situation. 
    4. Issuer Profile: The issuer profile of the bond is a summary of the information about the issuer. The Issuer Profile section briefly describes who issued the bond, how it was published, and any other relevant information. 

    6. Other Factors such as Taxation, Secured/Unsecured, Optionality (Callable/Putable): Investing in a bond is a legal procedure, so you need to take care of multiple factors such as taxation, security of the bond, what type of bond it is (secured or unsecured), etc. Make sure you go through all these processes before making the final investment.

    Investment Strategy Considerations

    An investment strategy is a process of choosing and implementing an investment plan. It involves several decisions, including the type of investment to be made, how much money to invest, when to make it, and where to put it. If you wish the value of your investment to increase over time, you are likely looking for a long-term investment. On the other hand, if you believe its value will decrease over time, this is probably a short-term investment. 

    Active vs. Passive Strategies

    Active strategies are those that involve the operational management of a bond portfolio. The investor takes all or some of the risk in managing a bond portfolio, whereas passive strategies do not require active management and are only focused on tracking an index. Functional approaches can include: buying and selling bonds to manage interest rate exposures; shorting bonds to hedge against price declines; adding credit protection to bonds with higher default risks; etc. Passive strategies focus solely on holding a fixed-income investment portfolio at maturity based on their benchmark index without any active trading or hedging activities.

    Role of Bonds in a Portfolio

    The role of bonds in a portfolio is to provide some protection against inflation. The idea is that if you have a bond fund, you will be protected from the effects of inflation on your principal. In other words, the value of your bond fund will not rise and fall with changes in interest rates or stock prices. This means that it will neither lose weight when interest rates go up nor gain value when they go down. For this reason, bonds are considered a very stable investment option for investors who do not want their investments to fluctuate too much over time.

    Understanding bond market prices

    Bond market prices are the interest rates investors pay to borrow money from bond markets. A bond is a loan in which you agree to repay a fixed amount of money at a future date, typically with interest. You can buy bonds directly from an issuing company or through a broker. The bond price will be based on its credit rating and other factors, including whether it is backed by the government or some other entity (such as an insurance company). If you hold your bonds until they mature, you’ll get back all your principal plus any accrued interest minus whatever fees you paid for buying them.

    What determines the price of a bond in the open market?

    The price of a bond in the open market is determined by supply and demand. The collection of bonds comes from the issuance of new bonds, which are governed by the government’s budget. If there are more bonds than people want to buy, then you will see an increase in their prices. Conversely, if there are fewer bonds than people want to buy, you will see a decrease in their prices.

    Why should you invest in bonds?

    Bonds are a great way to ensure your money is safe and secure. Bonds are also an excellent way to leverage your savings, as you can invest in bonds of different maturities (from 1 year to 30 years) and get the benefits of diversification.

    How much bond exposure should you have?

    The answer to this question depends on your circumstances and the type of bond you hold.

    If you are in a position to buy bonds directly from an issuer, then it is probably best to have no more than 10% of your portfolio allocated to bonds. This will leave room for other investments if they prove attractive at some point in the future. You can also reduce the amount of bond exposure by selling any existing bonds you own or buying less expensive ones. If you do so, ensure enough cash is available to pay off any outstanding debt obligations as quickly as possible.

    In conclusion

    any investment requires in-depth knowledge and research. This blog was an introductory tool for you to develop a fundamental understanding of bonds. We advise you to keep yourself updated on your financial ability to make better decisions regarding your wealth. 

  • Market Cap to GDP Ratio: Meaning and Analysis

    Market Cap to GDP Ratio: Meaning and Analysis

    If you are into investments, then you must have heard the name of Warren Buffet, one of the most successful investors of the century. In this blog, we will be discussing a very important indicator that he considers while making an investment, which is called the Market Cap to GDP Ratio. Normally it is believed that this ratio is very much applicable in most developed countries. Let’s get into the blog and get a deep understanding of this method to make better investment decisions.

    What is Market Cap to GDP ratio (The Buffett Indicator)?

    The market cap to GDP ratio is a measure of the size of a country’s stock market relative to its gross domestic product (GDP). This indicator measures how much money is invested in stocks as opposed to other types of investments.

    A company’s market capitalization, or “market cap,” is the total dollar value of all shares outstanding for a particular company. The figure can be measured by multiplying the number of shares by their current price per share. For example, if Apple Inc.’s stock trades at $100 per share and has 500 million shares outstanding, then its market cap would be $5 billion ($100 x 500 million).

    The market cap to GDP ratio is a popular measure of the size of an economy. It’s calculated as the market capitalization (the total value of all shares outstanding) divided by gross domestic product (GDP). The number gives you a sense of how much money there is in circulation relative to economic output. 

    Market Cap to GDP is one metric that investors use when determining whether or not a company’s stock price is over-or undervalued. A high market cap to GDP ratio indicates that a company’s shares are priced at an extreme premium/discount and could indicate excessive risk in investing in its shares. 

    Predictive Value of the Model

    The predictive value of the market cap to GDP ratio is a measure of how much the market capitalization (market cap) is worth of the country’s gross domestic product (GDP). It can be used as an indicator for future growth. The predictive value of this ratio has been calculated using data from the World Bank and International Monetary Fund.

    This indicator can be used as an indication of how much money investors are willing to put into a particular country, and thus it can be considered an indicator of confidence in the economy. A high level indicates that investors believe that there is more money available in that economy than what they have access to. On the other hand, a low level suggests that investors believe there are fewer resources available.

    Ratio of Market Cap to GDP

    The ratio of market cap to GDP is the number of dollars per year that the market cap (market capitalization) of a given company represents in relation to the country’s gross domestic product. The formula for this ratio is Market Cap/GDP = X, where X is the value of Market Cap compared to GDP. This means that if we have $1 trillion in annual revenue and $10 billion in annual expenses, then our market cap would be 10 times larger than our total economic output.

    Market Cap To GDP Ratio

    50% < Ratio < 75% – Modestly Undervalued

    75% < Ratio < 90% – Fairly Valued

    90% < Ratio < 115% – Mostly Overvalued

    What about Indian valuations?

    The Indian stock market is valued at $3.5 trillion, which is a little over 1% of the country’s GDP (source: The Economist). This means that the market cap to GDP ratio in India is around $100 billion. In comparison, China has a stock market valuation of $22 trillion, which is 12 times larger than India’s and it has a stock market valuation of around 5% of its GDP.

    If the ratio of the value of all listed companies/gross domestic product comes in at 50 to 75%, then the stock market is modestly undervalued. There should always be a comparison of what the market ratio has historically been.

    Benefits of the Buffett indicator

    It is a simple and effective tool for identifying undervalued stocks. The indicator works by measuring the price-to-earnings (P/E) ratio of a stock relative to its average P/E over the past 10 years. In other words, it compares the current market value of a company with its historical average P/E over the last decade.

    • Comparison of periods

    • The Buffett indicator helps us think beyond the cycle.

    • Interpreting the market cap to GDP ratio

    • Share of profits as a proportion of GDPComparisons from country to country.

    Limitations of the Buffet Indicator

    One of the most important limitations of this indicator is that it only considers listed companies, while  non-listed companies get neglected in the market valuation. Normally, most of the government owned companies are not listed on the market, while the private players who have growing businesses are listed.

    How To Do The Analysis?

    The market cap to GDP ratio is the most popular metric for analyzing a company’s market value. It shows how much money that company has compared with its country’s gross domestic product (GDP). This ratio can be used by investors to determine if a stock is overvalued or undervalued.

    This metric compares the market capitalization, which is the total dollar amount of shares outstanding multiplied by their average price per share, with the country’s annual economic output. The result gives an idea of whether a stock is cheap or expensive relative to its economy and other companies in its industry. 

    In conclusion, we hope that now you must have had a firm understanding of the concept of market cap to GDP ratio, its importance, and its analysis. We also advise you to keep yourself updated with the latest trends in the market.

  • Gross Domestic Product

    Gross Domestic Product

    Gross domestic product, also known as GDP, is among the most common measures of economic activity. Governments, central banks, and business organizations often cite it in newspapers, on TV, and in reports. A wide range of national and global economies use it as a reference point. Generally, businesses and workers are better off when GDP grows, especially if inflation does not pose a problem.

    What is GDP?

    In economic terms, GDP is the sum of all items sold in the market during a specified period that compose the country’s economy. GDP refers to the final value of a good or service that has been produced in a country in a given period of time. The period can either be a quarter or a year. Economic activity and output are measured using the GDP worldwide.

    GDP measures the total monetary value or market value of all the goods and services produced within the borders of a country. It is a comprehensive measure of a country’s economic health because it provides a broad picture of its overall domestic production.

    The GDP is generally calculated annually, but sometimes it is calculated quarterly as well. For example, the U.S. government releases annualized GDP estimates every quarter and every year. As this report includes real-term data sets, the data is adjusted for inflation and adjusted for price changes.

    Types of GDP

    Let us now talk about different types of GDPs which are commonly used in an economy:

    Nominal GDP

    Statistically, nominal GDP measures the amount of economic production for an economy considering current prices. It is used to compare output within a year in terms of different quarters of the same year. Nominal GDP is calculated by valuing all goods and services at the prices they sell for in the given year. Real GDP is used when comparing two years’ GDP.   

    Real GDP

    It is a macroeconomic statistic that measures the impact of inflation or deflation on the trend in output over time by adjusting the value of GDP for inflation. Real GDP measures the total value of goods and services produced in a given year and is adjusted for inflation. 

    GDP is affected by inflation since goods and services are valued in money. A price increase tends to increase a country’s GDP, even when the quantity of goods produced remains the same. 

    GDP Per Capita

    A country’s GDP per capita measures its GDP per person. It states that the income or output per person in an economy is a good indicator of average productivity and living standards. It is possible to express GDP per capita in nominal terms, real terms, or PPP terms. As a measure of economic production value, per-capita GDP shows how much each individual contributes to economic production.

    GDP Growth Rate

    Economic growth is measured by a country’s GDP growth rate, which compares its growth from year to year (or quarter to quarter). Inflation and unemployment rates are among the key policy targets used to measure the growth rate of GDP. The GDP growth is usually expressed in percentage.

    GDP Purchasing Power Parity

    In economics, purchasing power parity (PPP) is a method used by economists to compare the economic productivity and standards of living in different countries. When GDP is measured in purchasing power parity, it measures the volume of GDP for different countries or regions in international dollars, even though it is not directly a measure of GDP. It is calculated by dividing GDP by the corresponding PPP. To compare real outputs, real incomes, and living standards across countries, the method adjusts for differences in local prices and costs of living.

    Nominal vs Real GDP

    Compared to nominal GDP, real gross domestic product (GDP) more accurately reflects an economy’s output. Economists can use real GDP to measure a country’s annual growth or contraction by eliminating distortions caused by inflation or deflation or fluctuations in currency rates.

    A simple explanation for why real GDP is the most accurate way to measure national economic performance can be provided.

    Imagine, for instance, a hypothetical country whose nominal GDP has increased from $100 billion in 2000 to $150 billion in 2010. As a result of inflation, the local currency’s relative value decreased by 50% over the same period.

    In terms of nominal GDP alone, the economy has grown by 50% over the past decade. It would, however, be $75 billion if the GDP was expressed in 2000 dollars.

    Why GDP is important

    A financial system is an indicator of its size, performance, and widespread fitness for all its stakeholders, consisting of traders, politicians, and citizens. GDP is an important dimension of an economy. GDP is calculated on an annual as well as quarterly basis. The Central Statistics Office, which comes under the Ministry of Statistics and Program, calculates GDP using statistics accumulated from across the nation.

    If the GDP number is developing, then the economic system has ended up being more efficient. If the GDP is shrinking, then the economy has ended up much less productive. This assessment may be especially insightful when performed over an extended duration, as it allows long-term developments to emerge.

    The metric can be utilized in several approaches, making it an invaluable tool:

    • A corporation or firm looking to amplify into new markets might use GDP to evaluate which markets are the healthiest.
    • An investor interested in rising markets might look at GDP to apprehend which nations are growing at the quickest quotes and, consequently, would possibly provide the greatest return on investment (ROI).
    • A policymaker may use GDP to understand how guidelines have impacted the economy.

    How To Calculate GDP

    There are three main ways to calculate the GDP. If calculated properly, the results from all three methods should be the same.

    • The Expenditure Approach

    The expenditure approach, also referred to as the spending approach, determines how much is spent by the various economic groups. The following formula can be used to calculate GDP through this approach:

    GDP = C + G + I + NX

    In which,

    • C = consumption;
    • G = government expenditure;
    • I = investment; and
    • NX = net exports 

    All of these factors contribute to the GDP of a country.

    • The Income Approach

    The income approach determines the income generated by each factor of production in an economy, including labor’s wages, land’s rent, capital’s return in the form of interest, and businesses’ profits.

    GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income

    • The Production Approach

    The production approach is the opposite of the expenditure approach. The production approach estimates the total value of economic output and subtracts the cost of intermediate goods that are consumed in the process rather than measuring the input costs that go into economic activity. 

    Wrap Up

    GDP isn’t always a degree of the overall widespread development of an economy. However, changes within the output of products and offerings per person are often be used as a degree of whether the average citizen in a country is doing better or worse. The best economies also rely on the distribution of GDP to calculate the growth and development of their economy.