Macroeconomic_Principles_Efficient_Market_Hypothesis,_Increase_in_Wages,_Savings_Effect_on_Living_Standards.

Macroeconomic Principles: Efficient Market Hypothesis, Increase in wages, Savings effect on living standards. Principles explained using these 3 pointers: 1. Describe the efficient market hypothesis and give a piece of evidence consistent with this theory. 2. The cleaning service firm CleanAll plc increased its worker’s wages by 4%, and it experienced an increase in its profits. How can this have happened' 3. Does an increase in savings lead to a higher standard of living' Why' Why might a politician prefer not try to introduce measures to increase the rate of saving' 1. The efficient market hypothesis is a theory that states the market outcome is impossible to predict. In this case stocks are valued according to all the publicly available information about the asset. This means that the value of the asset is rationally valuated concerning all known knowledge disregarding future speculation about the asset. This causes stocks to follow a random walk style whereby it is impossible to predict what fluctuations are going to occur in the stock price due to the unpredictability of future news. In this scenario no stock is better or worse than any other stock because if it is impossible to predict what can happen then any share could possible rocket or plunge at any time. In any case you are better off putting your investment in a diversified portfolio. Evidence to back up the efficient market hypothesis is Tracker trusts. These are investment funds set up to purchase all the shares in a given stock index (an example of diversified portfolios). When compared with a British firm over a 20 year investment period the Tracker trusts outperformed these financial investors in 80% of the investments. This showed that even so called professionals could not properly predict what would happen to the shares. This illustrates that having a diversified portfolio of stocks and that having random stocks has a far better chance of having a return than trying to predict the shares development. 2. The increase in wages could be said to have had a psychological impact and a physiological impact on the workers. The increase in wages could have spurred the workers on to work harder by giving them a felling that they hard work is recognised by the company and it has caused and increase in their wages. This alone could have incurred in an increase in productivity and efficiency. On the other hand by increasing their wages by 4% they could have made their workers well being better off. By doing this they may well have had a positive impact on the health of their workers by them being able to purchase better food or release stress of debt. This would have made a stronger workforce positively effecting efficiency and productivity. The overall increase in profits outweighed the cost to the company by increasing the wages of their employees. However the increase could be to help the workers wages catch up with inflation which has already been reflected in the company’s prices for its goods and services. So the company may seem to be receiving higher profits but this will be because of inflation. 3. An increase in Living standards is usually as a result of a countries productivity increasing. Savings can be said to both increase a countries productivity thus incurring a higher standard of living but also hinder it. It can firstly increase countries productivity because of financial markets. People who are saving money are ‘investors’ in banks who will concurrently use the money as loans to people and businesses. This investment by savers lets people who need the money have access to it to improve their standards of living. Also this allows businesses to borrow money to help improve their assets to have a positive impact on efficiency and productivity. Both examples lead to an increase in productivity of living standards, however saving can also hinder living standards. One of the main reasons a government changes interest rates is to make people change between saving their money or to encourage spending of their money. A politician might not want to encourage savings because this will hinder the progress of an economy. Encouraging people to spend their money puts money back into the economy stimulating growth. This in turn will cause more investment into the economy stimulating further growth and so on. This continued stimulation in an economy will have a positive impact of the living standards of a country. This is why a politician would be reluctant to increase savings as it might hold the economy back.