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TABLE OF CONTENT
¢ Stock Market ² Ankur kharbanda.
¢ Economic Growth - Aditya

¢ Relationship b/w stock and eco growth. ² Anurag

shukla.
¢ Endogenous economic growth model ² Abhishek
Mittal.
¢ Example: China ² Akanksha Sharma.

¢ Conclusion ² Anurag Shah.

STOCK MARKET

¢A stock market is a public market 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.

¢ Thesize of the world stock market was

estimated at about $36.6 trillion US at the
beginning of October 2008.The u u
 world
derivatives market has been estimated at
about $791 trillion face or nominal value,
ÊMPORTANCE OF STOCK MARKET
The *+$ is one of the most important
sources for companies to raise money.
History has shown that the price of shares and
other assets is an important part of the dynamics
of economic activity.
The stock market is often considered the primary
indicator of a country's economic strength and
development.
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¢ Some analysts view stock markets in developing

countries as "casinos" that have little positive
impact on economic growth, recent evidence
suggests that stock markets can give a big boost
to economic development.
¢ Stock markets may affect economic activity
through the creation of liquidity.
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Stock market liquidity helps forecast
economic growth even after accounting for
a variety of nonfinancial factors that
influence economic growth.

After controlling for inflation, fiscal

policy, political stability, education, the
efficiency of the legal system, exchange
rate policy, and openness to international
trade, stock market liquidity is still a
reliable indicator of future long-term
growth.


 

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¢ +*#*+ (*. is a term used to indicate the
increase of per capita gross domestic product (GDP)
or other measure of aggregate income. Êt 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  . Negative growth is
associated with economic recession and economic
depression.


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¢ Consumer spending
¢ Exchange Rate
¢ Gross domestic product
¢ GDP per capita
¢ GNP
¢ Stock Market
¢ Ênterest Rate
¢ National Debt
¢ Rate of Ênflation
¢ Unemployment
¢ Balance of Trade
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¢ The (*$*+$0*&+ (
,) or (*$
*+$#+* (
) is a basic measure of a
country's overall economic output. Êt is the market
value of all final goods and services made within the
borders of a country in a year. Êt is often positively
correlated with the standard of living,
¢ GDP can be determined in three ways, all of which
should in principle give the same result. They are the
product (or output) approach, the income approach,
and the expenditure approach. The most direct of the
three is the product approach, which sums the outputs
of every class of enterprise to arrive at the total.
 ,

- ,,

¢ Usually in this approach the economy is broken
down into classes of enterprise: agriculture,
construction, manufacturing, etc. Their outputs are
estimated largely on the basis of surveys which
businesses fill out. To avoid "double-counting" in
cases where the output of one enterprise is not a
final good, but serves as input into another
enterprise, either only final goods outputs must be
counted, or a "value-added" approach must be
taken, where what is counted is not the total value
output by an enterprise, but its value-added: the
difference between the value of its output and the
value of its input.
¢ Gross Value Added = Sum of values added by all
enterprises = Sales of goods - purchase of intermediate
goods to produce the goods sold.

For example, if there is a sales tax:

Producer's price + sales tax = market price

¢ Êf taxes and subsidies have not already been computed

as part of GVA, we must compute GDP as:
GDP = GVA + Taxes on products - Subsidies on
products
 1,
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¢ Ên this most things produced are produced for sale, and

sold. Therefore, measuring the total expenditure of
money used to buy things is a way of measuring
production. This is known as the expenditure method
of calculating GDP. (Note that if you knit yourself a
sweater, it is production but does not get counted as
GDP because it is never sold.)

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¢ 
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4 =  +  +  + 1 6 
  
  

¢ Another way of measuring GDP is to

measure total income. Êf GDP is calculated
this way it is sometimes called Gross
Domestic Êncome (GDÊ), or GDP(Ê). GDÊ
should provide the same amount as the
expenditure method provides. A common
one is:
¢ p
  
u      

u       
u
       u 

 u
¢ 
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 + 
m +  + , 7  - m, 7 

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4
Both FDÊ and FÊÊ are part of foreign capital
formation.

FDÊ occurs when an entity or investor from

one country (home country e.g. Êndia) obtain or
acquires the controlling interest in an entity in
another country (host country e.g. USA) and
then operates and manages the entity and its
assets as part of the multinational business of
the investing entity.
¢ FÊÊ: foreign institutional investor ² its category of
investment instrument that are more easily traded ,
may be less permanent , and do not represent a
controlling stake in an enterprise , these include
investment via equity instrument (stocks) or debt
(bonds) of a foreign enterprise which does not
necessarily represents a long term interest.

Their main intention is to make capital gain.

¢ For e.g. if any FÊÊ bought GDR ( global
depository receipt ) or any instrument which
used by non citizen of Êndia of reliance
company at 90 US dollar and after some time
share price touch 150 US dollar say after 2 day
than he will immediately will sell that share to
make capital gain.
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o Total value of stock in world·s stock market rises
from  ;)$to ';"$in last 10 years.

o Share of total world capitalization by m m



m [umped from
to %
.

o Trading in share market in emerging markets

with respect to world·s total climbed from %
to
)
.
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o Êncrease in GDP.
o Growth of per capita income.
o Sound purchasing power.
o Higher Foreign Direct Ênvestment.
o Higher liquidity.
o Better infrastructure.
o Competition in the market.
%$m, m$  $
< $ $
m
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o Technical aspect/analysis

o Sentiments/perception

o Government plans/policies.
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o The emerging markets have attracted the
interest of international investors.

o Stock markets affect economic activity through

the h
m

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o liquidity can lead to more m  m.

o More investment leads to more mm

 m.
 Does the rapid
fluctuation in stock
market affects the
Economic Growth?
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o Stock market and Economic growth have

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o Êt is an 

 of Economic growth

o Êgnoring the *5 2&+&*#.

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ENDOGENOUS ECONOMÊC GROWTH MODEL

¢ Present theories of endogenous growth identify two

ma[or factors driving economic growth:
— Human capital
— Technological progress (innovations)

¢ Both of these forces may depend on the depth, the

structure and the functioning of the financial
system.
Now in order to establish the theoretical link
between financial deepening, productivity and
economic growth, let us assume that we have a
closed economy featured by an aggregate
production function where output Y(t) is
produced during period t by only one factor, K(t):

Then,
‡Y(t) = F(K(t)) (i)

Where, K(t) is the aggregate capital stock including

physical and human capital.

Differentiating:

˜Y(t) = ˜F dK(t) (ii)

˜t
Dividing the two terms of equation (2) by Y(t) gives
the growth rate of economy:



u

u


 u

u (iii)
i.e

u 










u 










u
u (iv)
u u




u

Ên this closed economy without government,

the financial market equilibrium supposes the
equality between savings and investment.
However, we could envisage the hypothesis of a loss
of resources during the intermediation process such
that in equilibrium only a fraction of saved
resources S(t) is channelled to investment Ê(t) as
follows:

'mu  Êu

The amount of savings absorbed by the

financial system is then

' mu

and the higher the ', the lesser the capital

accumulation in the economy.
Combining this latter equation with the
growth rate of the economy, we have:

g = F·(K(t)) ' [S(t) / Y(t)]

Êt appears then from this simple model that

the development of financial market may
affect the growth process through three
things:
o First, the improvement of capital productivity with
better resource allocation toward their most
productive use. Ên the final equation, this
corresponds to an increase in

u

o Second, the channelling of more savings to

investment by avoiding the loss of funds during the
intermediation process through a rise in the fraction
'

o Finally, through an increase of the saving rate

muu
(or also the investment rate) by using economic
policies affecting directly the determinants of
private saving behaviour.
DO STOCK MARKETS AND ECONOMÊC
REFORM HAVE AN EFFECT ON ECONOMÊC
GROWTH AND, ÊF SO, HOW?
On the 0*! side, a well functioning stock market may
help the development process in an economy through the
following channels:

(i) Growth of savings

(ii) Efficient allocation of investment resources
(iii) Better utilization of the existing resources.

When the stock market goes up, people feel

wealthier and because of that they will spend
more. When the stock market falls, they feel
poorer and crunched by debt run up during the
´good timesµ, so they slash their spending
(Ruggiero, 2001).
On the negative side, some analysts view stock markets as
´Casinosµ that have little positive impact and perhaps even a
negative impact on economic growth.

According to this view, dissatisfied owners sell their

shares instead of working to make the firm operate
well. According to this view, greater stock market
liquidity may hurt economic growth (Levine, 1996).

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 ark t Frictions

Ênformation costs Transaction costs

Financial mark ts Ênt rm iari s

Financial functions
Ex rt Facilitat Eas tra in of
o iliz llocat corporat risk oo s, s r ic s
sa in s r sourc s control mana m nt an contracts
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BRÊC COUNTRÊES
¢ Ên economics, 9 (typically rendered as
"the 9" or "the 9 countries") is
an acronym that refers to the fast-growing developing
economies of Brazil, Russia, Êndia, and China.
¢ The acronym was first coined and prominently used
by Goldman Sachs in 2001.
¢ According to a paper published in
2005, Mexico and South Korea are the only other
countries comparable to the BRÊCs, but their
economies were excluded initially because they were
considered already more developed.
 THE BRÊC THESÊS
¢ Goldman Sachs argues that the economic potential
of Brazil, Russia, Êndia, and China is such that they
could become among the four most dominant
economies by the year 2050.
¢ The thesis was proposed by Jim O'Neill, global
economist at Goldman Sachs. These countries
encompass over 25% of the world's land coverage
and 40% of the world's population and hold a
combined GDP of 15.435 trillion dollars. On almost
every scale, they would be the largest entity on the
global stage.
¢ These four countries are among the biggest and
fastest growing emerging markets.
STOCK EXCHANGES
¢ Brazil São Paulo Stock Exchange

¢ Russia Moscow Ênterbank Currency

Exchange
Russian Trading System
Saint Petersburg Stock Exchange

¢ Êndia Bombay Stock Exchange

National Stock Exchange of Êndia

¢ China Shanghai Stock Exchange

Shenzhen Stock Exchange
STOCK MARKET & ECONOMÊC
GROWTH
¢ Stock market development is an important wheel
for economic growth as there is a long-run
relationship between stock market development and
economic growth
¢ Short term fluctuation of stock market does not
effect economic growth
¢ Economic growth factors are labor force, GDP,
Purchasing power, Per capita income, HDÊ, Exports,
Foreign exchange reserve.
¢ Stock market has helped BRÊC countries in their
economic growth rate.

¢ The BRÊC thesis recognizes that Brazil, Russia,

Êndia and China have changed their political
systems to embrace global capitalism.
¢ Goldman Sachs predicts China and Êndia,
respectively, to be the dominant global suppliers
of manufactured goods and services while Brazil and
Russia would become similarly dominant as
suppliers of raw materials.
¢ Cooperation is thus hypothesized to be a logical next
step among the BRÊCs because Brazil and Russia
together form the logical commodity suppliers to
Êndia and China.
¢ Thus, the BRÊCs have the potential to form a
powerful economic bloc to the exclusion of the
modern-day states currently of "Group of
Eight" status. Brazil is dominant in soy and iron
ore while Russia has enormous supplies
of oil and natural gas.
¢ Goldman Sachs' thesis thus documents how
commodities, work, technology, and companies
have diffused outward from the United
States across the world.
CONCLUSÊON.
¢ As we have seen from the above analysis that all
the countries of BRÊC nations are growing at a
very fast rate, and their growth is clearly
reflected in their stock markets. Hence, we can
say that stock market are the clear indicator of
economic growth in BRÊC nations.

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¢ Wealth Effect
¢ Confidence

¢ Ênvestment
STOCK MARKET AND THE ECONOMY

¢ Business Expansion

¢ Widespread Ênvesting

¢ Êncreased Ênvestor Class

¢ Direct Jobs
EVÊDENCE FROM DEVELOPÊNG
COUNTRÊES
¢ Emerging equity markets have experienced rapid
growth.
¢ A large number of emerging economies now expound
regulatory reforms to foster capital market
development and attract foreign portfolio flows.
¢ Stock markets mobilizes savings and provides
liquidity.
¢ Studies done by LEVÊNE AND ZERVOS(1998)
examines the relationship between stock market
development and economic growth for 21 emerging
markets over 21 years
¢ Results suggest a positive relationship between
several indicators of the stock market performance
and economic growth.
STOCK MARKET VARÊABLES

¢  0?*# * This

measure equals the value of listed shares divided by
GDP.

¢ * <& *2 m  * m  This

measure equals total value of shares traded on the
stock market exchange divided by GDP.

¢ &#*! *   This ratio equals the value

of total shares traded divided by market
capitalization.
FÊNDÊNGS
¢ The data for 21 countries from 1977-1997 suggests
that stock market development is positively
associated with economic growth.

¢ Market liquidity has a positive impact on growth.

¢ Market size affect investments which, in turn, affect

growth.

¢ The results also suggest that value of shares traded

ratio (STR) is not an effective measure of stock
market liquidity.
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