The linear regression model

The linear regression model
In the linear regression model, the dependent variable is assumed to be a linear function of one or more independent variables plus an error introduced to account for all other factors: In the above regression equation, y_i is the dependent variable, x_i1, ...., x_iK are the independent or explanatory variables, and u_i is the disturbance or error term. The goal of regression analysis is to obtain estimates of the unknown parameters Beta_1, ..., Beta_K which indicate how a change in one of the independent variables affects the values taken by the dependent variable.
Applications of regression analysis exist in almost every field. In economics, the dependent variable might be a family's consumption expenditure and the independent variables might be the family's income, number of children in the family, and other factors that would affect the family's consumption patterns. In political science, the dependent variable might be a state's level of welfare spending and the independent variables measures of public opinion and institutional variables that would cause the state to have higher or lower levels of welfare spending. In sociology, the dependent variable might be a measure of the social status of various occupations and the independent variables characteristics of the occupations (pay, qualifications, etc.). In psychology, the dependent variable might be individual's racial tolerance as measured on a standard scale and with indicators of social background as independent variables. In education, the dependent variable might be a student's score on an achievment test and the independent variables characteristics of the student's family, teachers, or school.
The common aspect of the applications described above is that the dependent variable is a quantitative measure of some condition or behavior. When the dependent variable is qualitative or categorical, then other methods (such as logit or probit analysis, described in Chapter 7) might be more appropriate.

The Product Life Cycle

A new product progresses through a sequence of stages from introduction to growth, maturity, and decline. This sequence is known as the product life cycle and is associated with changes in the marketing situation, thus impacting the marketing strategy and the marketing mix.

Positioning

As Popularized by Al Ries and Jack Trout
In their 1981 book, Positioning: The Battle for your Mind, Al Ries and Jack Trout describe how positioning is used as a communication tool to reach target customers in a crowded marketplace. Jack Trout published an article on positioning in 1969, and regular use of the term dates back to 1972 when Ries and Trout published a series of articles in Advertising Age called "The Positioning Era." Not long thereafter, Madison Avenue advertising executives began to develop positioning slogans for their clients and positioning became a key aspect of marketing communications.
Positioning: The Battle for your Mind has become a classic in the field of marketing. The following is a summary of the key points made by Ries and Trout in their book.

Game Theory

Game theory analyzes strategic interactions in which the outcome of one's choices depends upon the choices of others. For a situation to be considered a game, there must be at least two rational players who take into account one another's actions when formulating their own strategies.
If one does not consider the actions of other players, then the problem becomes one of standard decision analysis, and one is likely to arrive at a strategy that is not optimal. For example, a company that reduces prices to increase sales and therefore increase profit may lose money if other players respond with price cuts. As another example, consider a risk averse company that makes its decisions by maximizing its minimum payoff (maxmin strategy) without considering the reactions of its opponents. In such a case, the minimum payoff might be one that would not have occurred anyway because the opponent might never find it optimal to implement a strategy that would make it come about. In many situations, it is crucial to consider the moves of one's opponent(s).
Game theory assumes that one has opponents who are adjusting their strategies according to what they believe everybody else is doing. The exact level of sophistication of the opponents should be part of one's strategy. If the opponent makes his/her decisions randomly, then one's strategy might be very different than it would be if the opponent is considering other's moves. To analyze such a game, one puts oneself in the other player's shoes, recognizing that the opponent, being clever, is doing the same. When this consideration of the other player's moves continues indefinitely, the result is an infinite regress. Game theory provides the tools to analyze such problems.
Game theory can be used to analyze a wide range of strategic interaction environments including oligopolies, sports, and politics. Many product failures can be attributed to the failure to consider adequately the responses of competitors. Game theory forces one to consider the range of a rival's responses.

Price Elasticity of Demand

The price elasticity of demand measures the responsiveness of quantity demanded to a change in price, with all other factors held constant.
Definition
The price elasticity of demand, Ed is defined as the magnitude of:
proportionate change in quantity demanded /proportionate change in price

Porter's Five Forces

The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure.
Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

Marketing Mix

The marketing mix is generally accepted as the use and specification of 'the four Ps' describing the strategic position of a product in the marketplace.One version of the origins of the marketing mix starts in 1948 when James Culliton said that a marketing decision should be a result of something similar to a recipe. This version continued in 1953 when Neil Borden, in his American Marketing Association presidential address, took the recipe idea one step further and coined the term 'Marketing-Mix'. A prominent marketer, E. Jerome McCarthy, proposed a 4 P classification in 1960, which would see wide popularity. The four Ps concept is explained in most marketing textbooks and classes.

SWOT Analysis

SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors.

In SWOT, strengths and weaknesses are internal factors. For example:A strength could be:
Your specialist marketing expertise.
A new, innovative product or service.
Location of your business.
Quality processes and procedures.
Any other aspect of your business that adds value to your product or service.
A weakness could be:
Lack of marketing expertise.
Undifferentiated products or services (i.e. in relation to your competitors).
Location of your business.
Poor quality goods or services.
Damaged reputation.
In SWOT, opportunities and threats are external factors. For example: An opportunity could be:
A developing market such as the Internet.
Mergers, joint ventures or strategic alliances.
Moving into new market segments that offer improved profits.
A new international market.
A market vacated by an ineffective competitor.
A threat could be:
A new competitor in your home market.
Price wars with competitors.
A competitor has a new, innovative product or service.
Competitors have superior access to channels of distribution.
Taxation is introduced on your product or service.
A word of caution, SWOT analysis can be very subjective. Do not rely on SWOT too much. Two people rarely come-up with the same final version of SWOT. TOWS analysis is extremely similar. It simply looks at the negative factors first in order to turn them into positive factors. So use SWOT as guide and not a prescription.

Consumer price index ( CPI )

A consumer price index (CPI) is a measure of the average price of consumer goods and services purchased by households. It is one of several price indices calculated by national statistical agencies. The percent change in the CPI is a measure of inflation. The CPI can be used to index (i.e., adjust for the effects of inflation) wages, salaries, pensions, or regulated or contracted prices. The CPI is, along with the population census and the National Income and Product Accounts, one of the most closely watched national economic statistics.

Gross National Product (GNP)

The Gross National Product (GNP) is the total dollar value of all final goods and services produced for consumption in society during a particular time period. Its rise or fall measures economic activity based on the labor and production output within a country. The figures used to assemble data include the manufacture of tangible goods such as cars, furniture, and bread, and the provision of services used in daily living such as education, health care, and auto repair. Intermediate services used in the production of the final product are not separated since they are reflected in the final price of the goods or service. The GNP does include allowances for depreciation and indirect business taxes such as those on sales and property.
The Gross Domestic Product (GDP) measures output generated through production by labor and property which is physically located within the confines of a country. It excludes such factors as income earned by U.S. citizens working overseas, but does include factors such as the rental value of owner-occupied housing. In December 1991, the Bureau of Economic Analysis began using the GDP rather than the GNP as the primary measure of United States production. This figure facilitates comparisons between the United States and other countries, since it is the standard used in international guidelines for economic accounting.

Evaluating A Company's Management

Most investors realize that it's important for a company to have a good management team. The problem is that evaluating management is difficult - so many aspects of the job are intangible. It's clear that investors can't always be sure of a company by only poring over financial statements. Fallouts such as Enron, Worldcom and Imclone have demonstrated the importance of emphasizing the qualitative aspects of a company. There is no magic formula for evaluating management, but there are factors to which you should pay attention. In this article we'll discuss some of these signs.




The Job of ManagementA strong management is the backbone of any successful company. This is not to say that employees are not also important, but it is management that ultimately makes the strategic decisions. You can think of management as the captain of a ship. While not physically driving the boat, he or she directs others to look after all the factors that ensure a safe trip. Theoretically, the management of a publicly traded company is in charge of creating value for shareholders. Management is to have the business smarts to run a company in the interest of the owners. Of course, it is unrealistic to believe that management only thinks about the shareholders. Managers are people too and are, like anybody else, looking for personal gain. Problems arise when the interests of the managers are different from the interests of the shareholders. The theory behind the tendency for this to occur is called agency theory. It says that conflict will occur unless the compensation of management is tied together somehow with the interests of shareholders. Don't be naive by thinking that the board of directors will always come to the shareholders' rescue. Management must have some actual reason to be beneficial to shareholders. Stock Price Isn't Always a Reflection of Good ManagementSome say that qualitative factors are pointless because the true value of management will be reflected in the bottom line and the stock price. There is some truth to this over the long run, but strong performance in the short run doesn't guarantee good management. The best example is the downfall of dotcoms. For a period of time, everybody was talking about how the new entrepreneurs were going to change the rules of business. The stock price was deemed as a sure indication of success. The market, however, behaves strangely in the short term. Strong stock performance alone doesn't mean you can assume the management is of high quality.Length of TenureOne good indicator is how long the CEO and top management has been serving the company. A great example is General Electric whose former CEO, Jack Welch, was with the company for around 20 years before he retired. Many herald him as being one of the best managers of all time. Warren Buffett has also talked about Berkshire Hathaway's superb record of management retention. One of Buffett's investment criteria is to look for solid stable managements that stick with their companies for the long term. Strategy and Goals Ask yourself, what kind of goals has the management set out for the company? Does the company have a mission statement? How concise is the mission statement? A good mission statement creates goals for management, employees, stockholders and even partners. It's a bad sign when companies lace their mission statement with the latest buzz words and corporate jargon.Insider Buying and Stock Buybacks If insiders are buying shares in their own companies, it's usually because they know something that normal investors do not. Insiders buying stock regularly show investors that managers are willing to put their money where their mouths are. The key here is to pay attention to how long the management holds shares. Flipping shares to make a quick buck is one thing; investing for the long term is another. A great example is Bill Gates: although he sells to diversify, a large portion of his wealth is held in Microsoft stock.The same can be said for share buybacks. If you ask management of a company about buybacks, it will likely tell you that a buyback is the logical use of a company's resources. After all, the goal of a firm's management is to maximize return for shareholders. A buyback increases shareholder value if the company is truly undervalued. Compensation High-level executives pull in six or seven figures per year, and rightly so. Good management pays for itself time and time again by increasing shareholder value. But knowing what level of compensation is too high is a difficult thing to determine. One thing to consider is that managements in different industries take in different amounts. For example, CEOs in the banking industry, like Citibank's Sandy Weill, take in more than $20 million per year, whereas the CEO of Krispy Kreme Doughnuts, Scott Livengood, "barely" makes $1 million. As a general rule you want to make sure that CEOs in the same industries have similar compensation. You have to be suspicious if a manager makes an obscene amount of money while the company suffers. If a manager really cares about the shareholders in the long term, would this manager be paying him/herself exorbitant amounts of money during tough times? It all comes down to the agency problem. If a CEO is making millions of dollars when the company is going bankrupt, what incentive does he or she have to do a good job?You can't talk about compensation without mentioning stock options. A few years back, many praised options as the solution to ensuring that management increases shareholder value. The theory sounds good, but doesn't work as well in reality. It's true that options tie compensation to performance, but not necessarily for the benefit of long-term investors. Many executives simply did whatever it took to drive up the share price so they could vest their options to make a quick buck. Investors then realized the books had been cooked, so share prices plummeted back down while management made out with millions. Also, stock options aren't free, so the money has to come from somewhere, usually the dilution of existing shareholder's stock. (For further reading, see Lifting The Lid On CEO Compensation.)As with stock ownership, look to see whether management is using options as a way to get rich or if it is actually tied to increasing value over the long run. You can sometimes find this in the notes to the financial statements. (For more on this, see Footnotes: Start Reading The Fine Print.) If not, take a look in the EDGAR database for a Form 14A. The 14A will list among other factors background information on the managers, their compensation (including options grants) and inside ownership.ConclusionThere is no single template for evaluating a company's management, but we hope the issues we've discussed in this article will give you some ideas for analyzing a company.Looking at the financial results each quarter is important, but it doesn't tell the whole story. Spend a little time investigating the people who fill those financial statements with numbers.

by Investopedia Staff, (Contact Author Biography)
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including more than 1,200 original and objective articles and tutorials on a wide variety of financial topics.

From : http://www.investopedia.com/articles/02/062602.asp

What is GDP and why is it so important?

The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total. The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

From : http://www.investopedia.com/ask/answers/199.asp

The school of Economics

The Department of Economics of Xiamen University was founded in 1923. The school of Economics was established on the basis of the Economics Department in 1982, with the approval of the Ministry of Education. The Department of Economics itself was transformed from the former teaching and research branch of Political Economics. At present, the Economics Department consists of three teaching and research branches: Political Economics, History of Economic Thoughts, and Modern Economics. The Economics Department offers one undergraduate program in Economics which is one of the first National Bases for Training Talent in Economics; six master programs for secondary disciplines under theoretical economics: Political Economics, History of Economic Thoughts, Western Economics, History of Economics, Development Economics, Economics of Management (newly established specialty on its own), and Economics of Population, Resources and Environment. The theoretical economics has the right to confer doctoral degree in the primary disciplines of theoretical economics and has the post-doctoral research station in theoretical economics. Among them, Political Economics, the discipline this department collaborated with Institute of Economics, is the state’s key discipline in its field. The department has the right to enroll doctoral candidates in all secondary disciplines under theoretical economics.

The school of Economics of Xiamen University

The Department of Economics of Xiamen University was founded in 1923. The school of Economics was established on the basis of the Economics Department in 1982, with the approval of the Ministry of Education. The Department of Economics itself was transformed from the former teaching and research branch of Political Economics. At present, the Economics Department consists of three teaching and research branches: Political Economics, History of Economic Thoughts, and Modern Economics. The Economics Department offers one undergraduate program in Economics which is one of the first National Bases for Training Talent in Economics; six master programs for secondary disciplines under theoretical economics: Political Economics, History of Economic Thoughts, Western Economics, History of Economics, Development Economics, Economics of Management (newly established specialty on its own), and Economics of Population, Resources and Environment. The theoretical economics has the right to confer doctoral degree in the primary disciplines of theoretical economics and has the post-doctoral research station in theoretical economics. Among them, Political Economics, the discipline this department collaborated with Institute of Economics, is the state’s key discipline in its field. The department has the right to enroll doctoral candidates in all secondary disciplines under theoretical economics.

ADB - Japan Scholarship Program

What is the Asian Development Bank-Government of Japan Scholarship Program?
The Asian Development Bank-Japan Scholarship Program (ADB-JSP) was established in April 1988 with financing from the Government of Japan.
It aims to provide an opportunity for well-qualified citizens of ADB's developing member countries to undertake postgraduate studies in economics, management, science and technology, and other development-related fields at participating academic institutions in the Asian and Pacific Region.
Upon completion of their study programs, scholars are expected to contribute to the economic and social development of their home countries.