Stock markets have becoming more integrated in recent years. There are several factors that contributed to the linkages or interdependencies of stock market. The question of whether the stock market can predict the economy has been widely debated. Those who support the market’s predictive ability argue that the stock market is forward-looking and current prices reflect the future earnings potential or profitability of companies. Since stock prices reflect expectations about profitability and since profitability is directly linked to economic activity, fluctuations in stock prices are thought to lead the direction of the economy.
The subprime crisis that began in August 2007 in the USA has been labeled as the worst financial crisis since the Great Depression. The crisis has developed into the largest financial shock, affecting heavy damage on markets and institutions at the core of the global financial system (IMF 2008). The stock market activity is one of the principal activities in the corporate world among the chain of activities, which got affected due to the financial crisis.
Some studies have suggested that the stock market development can have highly constructive role in encouraging growth. Fama (1991) argues that the stock market is a single leading indicator of the business cycle. This is contrary to Harvey (1989), who finds that the stock market is not a predictor of economic activities. These studies have finding the causality between stock market and economic growth in Saudi Arabia.
1.1.1 Stock market The stock market indices are one of the principal indicators of the economic activities. According to the Wikipedia, a stock market or equity market is a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. Funds are channeled from savers to borrowers, either directly or indirectly. The direct channel is through financial markets, exchanges where securities or financial instruments are bought and sold. Financial markets provide direct finance when borrowers issue securities directly to savers.
In principal, a well functioning stock market may help the development process in an economy through the following; first growth of savings, secondly efficient allocation of investment resources and lastly better utilization of the existing resources. The stock market is supposed to encourage savings by providing household with an additional instrument which may better meet their own risk preferences and liquidity needs. If a household has a sudden increase in wealth, its current and future consumption levels will increase. One of the main components of household wealth is the value of stocks held by household. When stock prices rise, household wealth increases, and when stocks prices fall, household wealth decreases. Stocks prices affect the economy by affecting household wealth, which affects household consumption. In well developed capital market, share ownership provides individuals with a relatively liquid means of sharing risk in investment project.
Cliff Pratten claims that the activities of buying and selling stock and shares on the stock market are extremely important for the allocation of capital within economies. Although mast of the business on the stock market consists of dealing in exiting securities, the prices of these securities provide important signals. Companies whose share prices are at premium to the book value of their assets and low dividend yields have a badge of approval which enhances their chances of borrowing capital on favourable terms and of raising capital by issuing new shares. Besides that, transaction prices and quotations provide investors with an indication of the market value of their wealth which may influence their decisions about consumption expenditure. When prices are at historically high level and rising this indicates confidence among investors and may affect the confidence of businessmen and hence their investment decisions.
1.1.2 Economic growth Economic growth is the increase of per capita gross domestic product (GDP) or other measure of aggregate income. Traditional neoclassical models of growth are a direct outgrowth of the Harrod-Domor and Solow models, which both stress the importance of savings. The Solow neoclassical growth model in particular represented the seminal contribution to the neoclassical theory of growth and later earned Solow the Noble Prize in economics. It expanded on the Harrod- Dumor formulation or Harrod-Dumor growth model by adding a second factor, labor and introducing a third independent variable, technology to the growth equation.
Traditional neoclassical growth theory, output growth results from one or more of three factors: increase in labor quantity and quality (through population growth and educational), second increase in capital (through saving and investment) and thirdly improvement in technology. The Solow neoclassical growth model, for which Robert Solow of the Massachusetts institute of Technology received the Nobel Prize, is probably the best known model of economic growth.
Growth is a main important part behind of a success of a nation. It is often measured as the rate of change in GDP. Economic growth refers only to the quantity of goods and services produced. Economic growth can be either positive or negative. Negative growth can be referred to by saying that the economy is shrinking. Negative growth is associated with economic recession and economic depression.
1.2 Saudi Arabia SOURCES: WORLD DEVELOPMENT INDICATOR (WDI) 2009
Above graph shows market capitalization in Middle East countries on year 2009. According to WDI Saudi Arabia’s market capitalization is highest among it. Market capitalization is a proxy to stock market in this study. GDP of Saudi Arabia is stable from earliest seventies until recently. So we choose Saudi Arabia as a case of this study.
1.2.1 Background of Saudi Arabia
The Kingdom of Saudi Arabia covers most of the Arabian Peninsula. It is a large country. It size is 2186000 square kilometers. The major west coast port of Jeddah is 1500 kilometres by road from its east coast counterpart, Dammam. The state bordering Saudi Arabia, beginning from the north and proceeding in a clockwise fashion, are Jordan, Iraq, Kuwait, Bahrain, Qatar, the United Arab Emirates, Oman and Yemen.
1.2.2 Economy of Saudi Arabia
Saudi Arabia is the world largest proven oil reserves and is the world largest exporter of oil. Its oil industry is state owned, and the government maintains control over all of the kingdom’s mineral resources. The Saudi Arabial oil company, known as Saudi Aramco, is the world’s largest oil company.
The Saudi Arabia economy expanded 0.60 percent over the last year, as measured by the year-over-year change in Gross Domestic Product. Unlike the commonly used quarterly GDP growth rate the annual GDP growth rate takes into account a full year of economic activity, thus avoiding the need to make any type of seasonal adjustment. The Saudi Arabia Gross Domestic Product is worth 369 billion dollars or 0.60% of the world economy, according to the World Bank. From 1969 until 2009, Saudi Arabia’s average annual GDP Growth was 5.06 percent reaching an historical high of 27.49 percent in December of 1974.
1.2.3 Stock Market of Saudi Arabia
Saudi Arabia joint stock companies had their beginning in the mid 1930’s, when the first such company, the Arab Automobile Company was established. On 1975 there were 14 public companies. The rapid economic expansion and Saudisation of foreign banks in the 1970’s led to the establishment of a number of large corporations and joint veture banks. Major share offering were made the public during this period. The market remained informal, until the early 1980’s when the government embarked on a rapid development program.
In 1984, a Ministerial Committee consisting of Ministry of Finance and National Economy, Ministry of Commerce and Saudi Arabian Monetary Agency, SAMA was formed to regulate and develop the market. With the aim of improving the regulatory framework, share trading intermediation was restricted to commercial banks. In 1984, the Saudi Share Registration Company (SSRC) was established by the commercial banks. The company provides central registration facilities for joint stock companies and settles all equity transactions. Automated clearing and Settlement was introduced in 1989.
The Electronics Securities Information System (ESIS), developed and operated by SAMA, was introduced in 1990. Tadawul, the new securities trading, clearing and settlements was launched in October 2001. On 2003 the Capital Market Authority was established pursuant to the “Capital Market Law”. The authority represents the government apparatus which is mainly entrusted with management and organization of the Saudi Capital Market. The development of this share market is to protect the investors and fairness and a integrity of the capital market. The stock market index of the Saudi Stock Exchange, the Tadawul All-Share Index (TASI) is growing by leaps and bounds every fiscal year and the Saudi Stock Exchange is presently ranked 11th in the world in terms of market capitalization.
Chart of stock price of Saudi Arabia versus GDP of Saudi Arabia
The chart illustrates the relationship between the growth rate of GDP and stock price of Saudi Arabia. Growth rate of GDP is more volatile compare the growth rate of stock price from 1991 until 2009. All through the time period of growth rate of GDP very volatile. As for stock price, the growth rate is quite calm and it remains the same throughout the study period from 1991 to 2003. Beginning from 2004 the stock price of Saudi Arabia start to increase and sharply drop down on 2006 and it showing volatile although the time period after 2004.
1.3 Problem statement Financial market performs an important role in the economic development process; particularly, stock market is one of the indicators in financial market. The growing importance of stock market around the world has opened a new avenue of research into the relationship between stock market and economic growth. The measurement of stock market development is important because it is the precept for predicting economic growth.
There have been numerous studies analysing the connection between stock market and economic. The economic literature as provided ample evidence that stock price has positive effect on economic growth. Guha and Mukherjee (2008) examined positive relationship between stock market development and economic growth. The same thing goes to Shahbaz, Ahmed and Ali (2008) and Paytatakti Oskooe (2010). While Shahnoushi, Ebadi, Danehsvar
The Inflation In India Economics Essay
As a increase in general price level and therefore a fall in the value of money inflation is a normal level of prices of goods and services lack of time. inflation is use to to refer to a raise in the price of normal level as a goods and services,it affects some specific goods and services as in commodities inflation its increase journal level of time. the major type of inflation is inflation affecting a common man, because of this create a problem due to inflation. when the supply supply and demand goes out of control ,consumer should change their buying habits for manufacture to short production in 2007 in USA could best illustrate the effects of inflation housing prices demand is increase continuously from 2002 onword,it comes result in a dramatic decrease in demand.
Inflation will be clear a major problem in economy if the demand is increases bt supply of goods is constant, because if there is a lot of customer but very few suppliers then supplier can’t do anything, because the income is increase but deliver of the goods is constant, in market place the producer would not be able to control the cost of raw material and labor also. if this is happen it result comes with less profit or in some extreme case no profit ,it should come to out of business, the manufacture would not have an incentive to invest in new equipment and lack of technology. Uncertainty force people to withdraw money from the bank and change it into product with bigger lasting value like gold.the inflation causes lead the country lower economic growth, from the year 1950-1960 the average was at 2.00% inflation, between 1960-1970 the average was 7.2%,in 1970-1980 the average was 8.5%.there are lots of monetary measures like credit control, demonetization of currency, issue of new currency, reduction in unnecessary expenditure,increae in taxes, increase in savings ,surplus budgets, public debt. these are the monetary measures. There ae some fiscal measures like,to increase production,rational wage policy,prie control,rationing.there are so many tyes of economic crises ,in economy there is a inflation affected to Indian economy so when the global food trade systems stop delivering and the meager pay the price,for several years the global trade in tack foods has been heading towards a catastroph
In Indian economy the inflation have been bombarded comment, the causes of inflation is demand for goods, the economy us can make the largest contribution to prosperity and political stability by restoring the helth of the us t,in inflation income is increase bt no supply is increase because of lack of transperncy in inflation.so supplier cant give the satisfaction of goods,so mainly this is called inflation. There are so many factor influencing the inflation,the inflation import raises ,in the inflation rise in the labour cost ,it also effect indiscriminate lending by fund flush banks ,there are co-relation between inflation and gold price,people like marc Faber are habitually on air and cyber waves ,tout the idea that since central banks are inflating money supply. to investment in gold to defend yourself against inflation. we are already known that everybody is thinking the similar things and performing, in the same behavior, rationalizations are but excuse for all types of insanity but even so how strong is the affiliation between gold and inflation anyway hedge against inflation. one can make a commonsense case level that gold is a play against inflation due to partial supply, that is indeed the main basis of the squabble of many people in the financial. but we at fore trader decide to do away with groundless assumption for moment. By collecting the data cross-correlation between oil,gold,and inflation over a 30 years time, starting in 1980,and triumph to our day,the some of people surprising conclusion.
India is the one of the 7th largest country with land mass of 3.29 million sq k.m and largest in population of over a billion. this is knowing of 16 percent of the world population, the Indian country one of the produce about the worth gdp to fulfill the needs 2.5 million of oil per day which is 6.5 percent the total demand for oil.mow a days a oil must be used in so many different kinds of industry so that’s why there is a lack of shirtless ,so must known as a good decision for a good industrial company oli price is certainly as external factor how it affects in the Indian economy ,this research is made in underwork.in the international price affects whole the sale price in india exchange rage or rupee to dollar the Indian growth of rate,forex reserves of india,oil,and non-oil the trade balance. the analyze of the oil price and gold of inflation to offer policy suggestion.
Crude oil rates (2010-2011) 2011
2011 Average $87.48
2010 Average $71.21
From 1991 to 2012 there crises of inflation givin above so these are the describe above. In 2007 ther is crises in us. in this the price is increasing bt the money of value is decreasing so thts why inflation in us gone through . in india so many people is working as a labour .these chart indicating the inflation of before 20 years study .and right now wt happen in Indian market this chart indicate this.
Types of inflation:
Inflation is generally means rise in prices, in inflation the price of a tub of goods and services that is envoy of the economy as a whole. it is a persistence and substantial rise in general level of prices after full employment level of output.
Demand-pull inflation :
The demand pull inflation is also called wage inflation or excess demand inflation when the total demand for goods and services in economy supply the same. when the supply is not much of as prices of the goods and services should raise leading to a condition called as demand -pull inflation. Inflation intriguing place due to demand pressure is known as demand pull inflation,demand pull inflation is increasing in quantity of money,it increase in business outlays or government expenditure,demand pull inflation foreign expenditure n goods and service
In the cost push inflation if the incresse in the cost of production of goods and services is causes to be a forceful increase in the prices of finished goods and services.this type of inflation should or should not be transpire in conjunction with demand pull inflation.the cost pull inflation increase in the on the whole price level due to cost-pressures is known as cost-push or supply side inflation.in cost pull inflation is going higher wage rates,higher profit margins,higher taxes and higher prices of input.the inflation is more often called administered price .
Other type of inflation:
1.fiscal inflation: this inflation occurs when there is overload government spend where there is scarcity budget.
2.hyperinflation:this is also known as escapee inflation or galloping inflation ,this type of inflation should be dispatch or soon after war.this should usually lead to the complete collapse of a monetary system. this type of inflation is ephemeral .
EFFECTS OF INFLATION:
Effect of inflation is described as enemy number one,so a high rate of inflation makes he life of poor miserable, the inflation mainly affect on economic growth due to a number of factor,distortion of comparative prices. rearrangement f welth between debtors and creditors ,aversion to long-term contact and excessive use of resources for bearing inflation hazar.this is effort to higher prices of input.
EFFECT ON ECONOMIC ACTIVITIES:
The effect on production is adverse effect on the profitability of business organization.
The firms find it gainful to hold rather than make to earn profits in the future.
In India the lack of uncertainty in the economic activities,so because of this decrease in saving.
There is another inflation is in the corresponding period of the previous year, the inflation rate was too low in the consequent year even a smaller raise in th price index will logically give rate of inflation .a similar absolute increase in the price index now will shoe a lower inflation rate at this condition.
The most instantaneous effects of inflation are the decreased purchasing power of the doller and its decrease. Decrease is specialy hard on retreat people with permanent income.
The people who are not fixed income are more able to handle because they can simply increase.
The third part of destabilizing effect on inflation id that some people choose to conjecture heavily in an attements, spending is converted from the normal guide and some structural redundancy.
The 4% inflation rates means that the price level for that given year has raisen 4% from a certain measuring year (currently 1982 is used).
To measure the price level for that for the current year .
INTEREST RATES AND INFLATION
C:UsersadminDesktopinterest-rate4_filesinflation.gif Inflation is the heave over time in the prices of good and services.the inflation usually considered as n annual percentage, presently like interest rates so many people directly think of inflation as a bad thing, but this is not essentially the case.Inflation is a natural by product of a vigorous,growing economy .there is a no inflation or deflation the lowering price actually a very too worse economic,wages raise at the similar rate as prices.
From the above facts and anaylisis over them we come out to many a conclusions in the way of positive approach and moreover this that gold, crude oil and also dollars are basically inter related to each other and also that they play a very important role over the economy of a country like India. We have also find out to be that gold as india being the largest under the consumption of all over the world has a great impact on the thinking of the citizens as a whole. Talking about the inflation part which took place in the year 1991 and it anaylisis till now we have come to many a conclusion over it that inflation rate in a country like india does affect to the country as whole but the fact that india did survive in such conditions earlier also and would pick a tick to survive in the future span as well.