27.8 C
Nicosia
Thursday, April 18, 2024

The role of expectations in economics and investment

Must read

Ο ρόλος των προσδοκιoν στην οι κονομΙα και στις επενδyσεις

“Expectations” are the set of assumptions people make about what will happen in the future. They are based on retrospective information from the past and estimates for the future.

Our daily lives are a daily struggle of different estimates and expectations. The variables of expectations are constantly included in our economic everyday life. An entrepreneur's forecast of his organization's turnover may prompt him to hire more staff or to reduce them.

FORMATION OF POSITIVE EXPECTATIONS

The formation of positive expectations in the economy also affects the consumption behavior of households. The more optimistic a person sees the future financial course of his household, the more he is willing to consume from now on, either by “eating from the ready”, or even by borrowing. The Consumer Confidence Index is a tool that reflects the level of confidence consumers have about economic well-being. Through this index one can trace the expectations of the average consumer about the business conditions, income and work environment they expect.

People's guesses about what will happen in the future affect many economic variables. .

CONSUMER SPENDING ADJUSTMENT

Expectations of worsening inflationary pressures and rising prices, whether true or not, are eventually confirmed, creating a vicious cycle of inflation.

Investors, based on their information, increase demand, therefore their value. Consumer spending adjusts to the disposable income that consumers expect to have. Of course, expectations also determine much more, such as for example the political decisions of the competent authorities.

An investor does not only make decisions based on past data but also based on how it will all play out in the future. For this reason, many analysts use ratios based on their own forecasts of an organization's future financial performance, even if this includes the risk of error.

BASELINE SCENARIO CONFIGURATION

In practice, when an analyst proceeds with future index predictions, he should have formulated a base case scenario for:

–              How will the A.E.P. move? of the country, the course of domestic demand in the specific sector, how international parameters will fluctuate, costs, interest rates, etc.

–   &nbsp ;          The competitive environment

–              The possible institutional changes that can affect the economic situation of the country or at the international level

All these elements are subject to change and at regular intervals need to be reviewed and readjusted.

Economic expectations they also affect the entire course of the economy. An increase in demand in one industry undoubtedly positively affects a number of other related activities as well. The expected implementation of a large project in an area, upgrades several elements of the specific area in advance.

THE ECONOMY IS NOT MAINTAINED BY EXPECTATIONS

The current expectations about the future of the economy affect the behavior of households in terms of consumption, investment and general behavior from now on, and of businesses. However, the economy cannot be sustained and fed only by expectations.

Businesses, investors and households periodically review the situation and often vary both the intensity and the direction of their expectations. Thus, the cultivation of excessively bullish or bearish expectations

The constant effort that people make to predict the future and guard against it is a crucial phenomenon of economic life. Their expectations usually set market chain reactions in motion. Therefore, expectations play a critical role in economics, macroeconomics, monetary and fiscal policy.

From the February Insider magazine

Source: www.philenews.com

- Advertisement -AliExpress WW

More articles

- Advertisement -AliExpress WW

Latest article