Is stock market a barometer of country’s economy?

Yes, Stock market is correlated with economy of the country. The stock market performance is directly

affected by the economic decisions of the country.

We cannot say that a short term crash of stock market leads to decrease in country’s economy.

For example, the stock market crash of 1987 didn’t cause any lasting economic damage. (Though it did

influence monetary policy, UK cut interest rates in fear the stock market crash would cause a recession.

Instead, low interest rates caused a boom).

Where as we look in to the case of London stock market worth USD $ 3.266 trillion, collapse of stock in

1929 affected the economy and people of London, it is the key factor of 1930’s great depression.

Companies issue shares to fulfill their financial needs, it is the easy way of capital formation for the

companies, rise in the price of shares depends on the profits of the company, if the company is in profits

then the stock market value increases which intern increases the flow of investments in to the stock

market leads to capital formation and increased production capacity. As organization have good capital

and profits they expands which leads to creation of high employment opportunities, increased standard of

living .the share holders wealth gets increased and they get good amount of share in profits of the

company as dividend lead to increase the per capita income, increases the G.D.P of the country.

If the share market collapse then the money poured by the share holders into share market evaporates. The

wealth of Investors decreases, leads to economic recession, many banks also suffer losses as organizations

may go bankrupt. This leads to economic depression.

FDI is thought to be growth. Enhancing mainly through the capital, technology know how that it brings

into the recipient country also show effect on the economy.

As we know that when the economy develops the stock market will be bullish, while economy shrinks the

stock market will be bearish. But in abnormal phenomenon that china stock market remains bearish

despite the country’s rapid economic growth.

Data from National board of statistics in 2004 the G.D.P of china reached 13.5 million Yuan (us $1.65

million) rising 9.5% year on year, while the composite index of shanghai stock exchange dropped

15.15%. This gave rise to a big question among those who argue that stock markets are barometer of

economy.

According to economic laws, fluctuation in the stock market is inevitable, but it should basically in synch

with the situation of macro economy china’s stock market is far from being a barometer, as the market

value of tradable shares accounts for less than 20% of the country’s G.D.P , such a small proportion

cannot make the stock market a barometer.

China’s market downfall has been dramatic and painful for the investors involved. But so far there has

been little immediate impact on the rest of the world, because China tightly limits foreign investment in

mainland stocks.

In conclusion we can say that effect of stock market doesn’t limit only to the particular country’s

economy where as a stock crash or boom may also affect global economy.

The effect of stock market differ from country to country, percentage of market value of shares to the

G.D.P of the country.

BY,

U.Manohar Reddy