Economic Concepts and Analysis Flashcards
1
Q
On a graph, what depicts a positive relationship?
A
Dependent variable moves in same manner or direction as independent variable.
2
Q
On a graph, what depicts a neural relationship?
A
Dependent variable does not change as independent variable changes.
3
Q
Concurrent with a significant downturn in the economy, the sale of electronics decreases most likely caused by:
A
The decline of market participant income
4
Q
What does the demand curve reflect?
A
The impact that price has on the amount of product purchased. The curve shows the quantity of a commodity that will be demanded at various prices during a specified time.
5
Q
Describe the theory of derived demand.
A
Demand for a good or service that results because it is an input needed in order to provide another good or service for which there is demand. The demand for a good or service is derived from the demand for another good or service.
6
Q
What are factors that change market demand?
A
- size of market
- income or wealth of market participants
- preferences of market participants
- change in prices of other goods or services
7
Q
Distinguish between a change in quantity demanded and a change in demand.
A
- a change in QD is movement along a given demand curve as a result of change in price only.
- a change in demand is a shift in a demand is a shift in a demand curve as a result of changes in variables other than price
8
Q
Draw a supply and demand curve.
A
See notes.
9
Q
Draw a price ceiling and describe the potential affects.
A
See notes.
Actual price is set below equilibrium price. The equilibrium price is the “ceiling.” This will create a market shortage where quantity demanded will be greater than quantity supplied.
10
Q
Draw a price floor and describe possible affects.
A
See notes.
Actual price is set above equilibrium price causing a market surplus. Quantity supplied is greater than quantity demanded.
11
Q
Describe what happens when demand is the causes of change in market equilibrium.
A
Equilibrium quantity and price will change in the same direction as demand.
12
Q
Describe what happens when supply is the causes of change in market equilibrium.
A
Equilibrium quantity will change in the same direction as supply but equilibrium price will change in the opposite direction.
13
Q
What is the relationship between the marginal revenue curve and the demand curve of a perfect monopoly and why?
A
The marginal revenue curve is below the demand curve and the curves diverge as quantity increases. Facing a downward sloping demand curve, the firm must continuously lower its prices in order to sell more units.
14
Q
List examples of reasons why monopolies exists.
A
- Control of raw materials or processes
- Government granted franchise (exclusive right)
- Increasing return to scale (natural monopolies)
15
Q
What are the characteristics of a perfect monopoly?
A
Limited substitutes, barriers to entry, single seller (the DMV)
16
Q
Characteristics of monopolistic competition.
A
- Large number of sellers.
- Firms sell a differentiated product or service (similar, but identical) for which there are close substitutes.
- Firms can enter and leave the market easily.
- Demand curve is downward sloping and highly elastic due to the amount of substitutes.
- Profits only in the short-run (no long-term profits)
17
Q
A group of firms that conspires to make price and output decisions for a produce or service is called a what?
A
Cartel. This is collusion and illegal in the US.
18
Q
What is the pricing policy called when a group of oligopolistic firms conspire to set a price at which a good or service is provided?
A
Collusive pricing. Normally, pricing will be established at price higher than competitive price for a given industry. This is illegal in the US.
19
Q
What type of collusion is legal in the US? And provide an example.
A
Tactic collusion. Example: An air route between two cities is only served by 3 airlines. Every week, the largest of the 3 airlines posts their prices online and the other two airlines match the posted prices for future bookings.
20
Q
Oligopolistic firms are less likely to collude when?
A
The economy is recessionary because demand is lower.
21
Q
How do oligopolistic firms make a profit?
A
Long run if costs are below market price. They will continue to make profit because access to the market is restricted.
22
Q
Characteristics of oligopoly?
A
- Few sellers exist.
- Firms either sell a homogeneous product (standardized o) or a differentiated product (differentiated o).
- Entry into market is restricted.
Collusion among firms is more likely to happen.
23
Q
What type of market structure normally avoids price competition in order to avoid a price war? And why?
A
Oligopoly. Since there are few firms - actions of one firm are more likely to affect another firm. If one firm lowers their prices, another firm will most likely follow which could cause a chain reaction.
However, this also means that oligopoly is at risk for collusion.
24
Q
Which market structure is lease likely to be found in the US, and why?
A
Perfect Competition. Perfect competition assumes that goods and services are homogenous, such that there is no differences in size, quality, style or other features. Therefore, there is no reason to advertise or compete.
25
Are there any market structures that could have profit in the short run?
No. No firm is guaranteed profit in the short run.
26
Price discrimination is accomplished most effective in markets with what type of characteristic?
Fairly distinct segment of customers. An example is pharmaceutical companies. They charge different prices to for the same drug to different geographic market segments. Which is why Europeans only pay about half what Americans do for medications.
27
What is an example of a legal, natural monopoly?
Utility companies.
28
Describe the nature of the US economy's market structure.
Mix of market structures with different commodities/industries. Monopoly, monopolistic competition, and oligopoly markets are most common. Perfect competition really doesn't exist in the US Market.
29
In a macroeconomics free market model, what is a leakage?
Leakages result when income is used for purposes other than domestic consumption. I.e. savings and taxes.
30
Identify the 5 major sectors of a macroeconomic free market model?
1. Individuals
2. Business Entities
3. Government Entities
4. Financial Entities
5. Foreign Entities
31
What is a consumer's marginal propensity to consume?
Measures the change in consumption spending as the percentage of change in disposable income.
32
How is the marginal propensity to consume calculated?
(Change in Spending)/(Change in Disposable Income)
33
When is the multiplier effect used?
When you need to determine a change in spending.
34
What is the multiplier effect formula?
Multiplier effect = Initial change in spending X [1/(1-MPC)].
35
An increase in the value of a foreign currency (I.e. the Chinese currency) relative to US currency means what?
Chinese goods are more expensive in the US and US goods less expensive in China. Therefore, it would result in increased aggregate demand of in the US (of US goods).
36
A rise in the country's exports of a country would most likely cause what immediate effect?
The aggregate demand curve would shift outward.
37
What is the Keynesian Supply Curve?
"Kink" in the supply curve. The curve is horizontal up to the point of the assumed level of output at full employment, and then it slopes upward.
38
If Keynesian Supply Curve is assumed, what would an increase in aggregate demand result in?
(Draw this out)
| Results only in more output until output at full employment, at which point output and price level both increase.
39
If Keynesian Supply Curve is assumed, what would an increase in aggregate supply result in?
(Draw this out)
| Will not affect the price level unless aggregate demand intersects supply where it is positively sloped.
40
What is the natural rate of unemployment?
Measured as the sum of frictional, structural, and seasonal unemployment and normally occurs at the peak of a business cycle.
41
What is potential GDP a measure of?
Measure of the maximum amount of goods and services an economy can produce at a given time, assuming available technology and full utilization of economic resources, including labor.
42
What is the national income?
Total payments for economic resources included in the production of all goods and services. (Wages, rents, interest, profits)
43
When potential national income exceeds actual nation income, this represents a recessionary phase in the business cycle. Explain why.
PNI is greater than actual NI because there is decreased demand, which is a characteristic of a recessionary phase, which results in decreased payments for goods and services (which is NI).
44
What is the expenditure approach for determining GDP?
Sum of spending by:
1. Individuals
2. Businesses
3. Governments
4. Net imports and exports
45
What is the income approach for determining GDP?
Sum of:
1. Compensation
2. Rental Income
3. Proprietors and Corporate Income
4. Net interest
5. Taxes on production and inputs
6. Depreciation and Miscellaneous other items
46
How is net domestic product measures?
GDP - Depreciation
47
What is structural unemployment?
Unemployment because prior type of job greatly reduced or eliminated. Usually due to technology.
48
What is cyclical unemployment?
Unemployment due to a downturn in the economy.
49
What is frictional unemployment?
Transition between jobs.
50
There can be official full employment during which kinds of unemployment?
Structural, frictional, and seasonal. Only cyclical unemployment is considered in the official measure of full unemployment.
51
What are the phases of the business cycle in order starting with peak?
Peak, recession, trough, recovery
52
Why is the change of unemployment a lagging indicator of a change in the business cycle?
Unemployment lags behind the change in a business cycle. Unemployment is a result of changes in the business cycle - not a direct cause.
53
What are leading indicators of business cycles and some examples?
Measures of economic activity that occur before the change in the business cycle.
- consumer expectations
- weekly manufacturing hours
- stock prices
- building permits
- new orders for consumer goods
- new orders for manufactured capital goods
- real money supply
54
What are lagging indicators of business cycles and some examples?
Measures of economic activity associated with changes that occur after changes in the business cycle.
- changes in labor per unit of output
- ratio of inventories to sales
- duration of unemployment
- commercial loans outstanding
- consumer credit to personal income
55
How do you calculate what an amount is worth after inflation?
(Principal + Interest)/1.02. (if the interest was 2%)
56
What is the Gross Domestic Product Deflator and how is it calculated?
Relates nominal GDP to Real GDP. (Nominal GDP/Real GDP) x 100
57
What is demand pull inflation?
levels of aggregate spending for goods/services that exceed productive capacity at full employment
58
What is supply induced (cost push/supply push) inflation?
Increases in the cost of inputs to the production process (RM, labor, taxes, etc) - and is passed on to the final buyer with higher prices.
59
What is the consumer price index (CPI)?
Measures changed in price over time as a representative "basket" of goods and services purchased by consumers, not by companies. The products a company buys should be different from what a consumer buys.
60
What is the percentage change formula?
(Current - Prior) / Prior
61
Describe the income velocity of money using the following figures - Nominal GDP = $20B; M2 Money Supple = $15B
Income Velocity of Money = Nominal GDP/Money Supply
20B/25B = 1.33
Means that each dollar in the money supply chain exchanged hands 1.33 times.
62
What is included in the M1, M2, and M3 money supplies?
M1 - paper currency, coins, check writing deposits
M2- M1 + savings deposits, money markets, COD < $100K
M3 - M2 + COD > 100K, institutional owned money market mutual funds
63
When the economy is in a state of deflation, what is one of the best corrective policies?
Increasing the money supply (for ex. by lowering the reserve requirement or, in most circumstances, lowering the discount/interest rate), will stimulate demand and increase general price levels.
64
What is the best example of an expansionary policy by the Federal Reserve?
Expansionary policy would serve to increase spending, d demand, employment, and other economic measures.
By purchasing federal securities, the Fed would put more cash into the economy. Also, lowering the discount rate would reduce the cost of borrowing by banks.
65
What is comparative advantage?
ability of a country (or individual/business) to product a product/service at a lower opportunity cost than the opportunity cost of of producing a good or service in another country.
66
What is dumping as it relates to foreign sales? And provide and example:
Sale of a product in a foreign market at a price that is either lower than is charged in the domestic market or lower than firm's production cost. Example:
Avg. Production Cost = $60
Mill Price to Domestic = $56
Mill Price to Foreign = $59
The price to foreign customers is more than it is to domestic consumers, but lower than the average production cost.
67
What are the three accounts of the US Balance of Payments Statement and provide a brief description of each:
1. Current Account - Net dollar amounts earned from export of goods and services, amounts spent on import of goods and services, and government grants to foreign entities
2. Capital Account - Net dollar amount of inflows from investments and loans by foreign entities, amount of outflows from investments and loans U.S. entities made abroad, and the resulting net balance
3. Financial Account - Net dollar amount of U.S.-owned assets abroad and foreign-owned assets in the U.S.
68
What is the direct exchange rate?
US Price of one unit of foreign currency.
| 1 Euro = $1.10
69
What is the indirect exchange rate?
Foreign price of one unit of a foreign currency. ($1.00 = .909 Euro)
70
Describe currency appreciation.
Value of currency increases (becomes stronger) relative to another currency. So, it takes less domestic (US currency) to buy foreign currency or goods sold in the foreign currency.
71
Describe currency depreciation.
Value of currency decreases (becomes weaker) relative to another currency. So, it takes more domestic (US currency) to buy foreign currency or goods sold in that currency.
72
What are the consequences of currency appreciation? (Value of US dollar becomes stronger in comparison to foreign currency)
Foreign goods become cheaper for domestic buyers. Makes it harder for domestic producers to compete.
73
What are the consequences of currency depreciation? (Value of US dollar becomes weaker in comparison to foreign currency)
Domestic goods becomes cheaper relative to foreign goods, which increases exports. Increased exports = increased domestic employment. On the flip side, imported goods become more expensive and it also makes vacationing in Europe more expensive.
74
Example:
A company manufactures goods in the US for the sale to consumers in Europe. Currently, the economy in the US is booming and imports are rising. Europe is experiencing an economic recession and its imports are declining. How will the dollar $$ react with respect to the Euro?
While the US economy was booming, the dollar was strong compared to the Euro. However, now the US currency will begin to decline with respect to the Euro.
Because Europe's imports are declining, there is a decreasing demand in Europe for the dollar. Since the US now has an increased demand for the Euro, more units of the dollar will bet required to buy each unit of Euro currency.
Since it takes more units of the $ to purchase the Euro, the value of the $ relative to Euro will decline.
75
What happens when a foreign country's currency becomes weaker compared to the US dollar?
It takes more of the foreign currency to purchase US dollars. US dollar will exchange for more Euros. So dollars buy more of the European competitor's goods - giving the foreign companies will have an advantage in the US market.
US dollar is strong = less US dollars for the Euro
76
What would the central bank typically do to moderate the speculative rise in the WW value of the US (or any domestic) currency?
This is a sign of foreign currency weakening and therefore it will take more foreign currency to purchase US dollars. So, they would sell the domestic currency on the foreign exchange market. The sale would increase the supply and therefore dampen the rising value.
77
What would a country do if it had a higher nominal interest rate versus another that it wants to do business in or with?
Sell at a forward discount relative to the currency of the other county.
78
What is transaction risk as it relates to currency exchange risks?
Unfavorable impact of changes in currency exchange rates on transactions that are denominated in foreign currency. (Risk of decreased dollars collected from a receivable and risk of increased dollars paid to satisfy a payable.)
79
Example of Transaction Risk using a Receivable:
Firm buys goods on 10/15 and agrees to pay 500,000 Euros in 60 days.
Exchange Rate at 10/15 - 1 Euro = $0.72
Exchange Rate at 12/14 - 1 Euro = $0.75
10/15 - 500,000 x $0.72 = $360,000
12/14 - 500,000 x $0.74 = $375,000
FX Transaction Loss = $15,000
80
What are three options to mitigate transaction risk?
Matching - incur equal payable/receivable to offset gain/loss
Pay earlier/later
Hedging - Offsetting or contra transaction so that loss on one would affect gain on another or vise versa.
81
Transaction Risk Hedging Example: A/R is denominated in Euros. The Euro will be received when receivable is collected in the future. The dollar value of the Euro collected may be less than now due to a change in exchange rates. What type of hedging contract would be entered into in this situation?
Forward Contract - enter into a contract now to sell Euros when its received at a price or rate set now so that the Euro will be received in future is fixed and no money is lost when the dollar value decreases.
82
What is translation risk as it relates to foreign currency exchange risks?
Unfavorable changes in the foreign exchange rate on financial statements when converting from foreign currency to US dollar (or vice versa).
83
What are three ways to mitigate translation risk?
Reduce the amount of assets/liabilities that need to be converted
Create offsetting assets/liabilities
Borrow FX in amount that will offset G/L
84
What is economic risk at it relates to foreign currency exchange risks? And how can it be mitigated?
Changes in exchange rates that will alter the value of future revenue and costs. Mitigated by distributing productive assets and liabilities in different countries with different currencies.
85
What is a foreign currency option contract?
Give the right (the option) to buy or sell a specified amount of a foreign currency for a specified time at a specified rate.
86
Why would a US based company decide to invest capital in an emerging market operation that has a lower expected rate of return?
Management expects the US dollar to decline in value relative to the foreign location's currency. Therefore, currency of that foreign currency will convert to more dollars.
87
What is the percentage change on a $20m investment when the exchange rate at the time of the investment is 2.57 Euros to $1 and the exchange rate after the investments is 3.17 Euros to $1?
20M x 2.57 = 51,400,000 Euros
Then, you must convert the initial investment in Euros back to US dollars when the exchange rate changes. (an investments is different from a receivable or payable)
51,400,000 Euros/3.15 = $16,317,400.
Therefore, there is a 18.4% decrease in the investment.
The dollar strengthened in this example compared to the foreign currency. It costs more of the foreign currency to purchase one dollar, and therefore the investment decreases in value.
88
What is a transfer price?
Amount at which goods and services are transferred between affiliated entities.
89
What is the main objective for transfer pricing?
Minimize income taxes
90
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Example: If the objective of transfer pricing is to minimize transfer pricing, what should the following company do?
Tax Rates in each of its Affiliates:
Global - 22%
Engo - 18%
Gerco - 20%
```
Since Engo has the lowest tax rate, the lowest income tax would be achieved by the highest income reported by Engco.
So, this can be achieved if Engo has the lowest cost, so minimize transfer price from Gerco to Engo and if Engo has the highest sales price, so maximize the transfer price from Engo to Globalco.
91
What are three common bases for for establishing transfer price between affiliated entities?
Costs incurred by selling affiliate, FV based on price of market, price negotiated between affiliates.
92
Why is costs incurred by the buying affiliate on a basis for establishing transfer price between affiliated entities?
Transfer price would constitute an element of cost in determining total costs incurred by the buying affiliate. Costs to the buying affiliate would not establish the transfer price paid by the buying affiliate.
93
Why would the transfer price preferred by a manager of a foreign subsidiary be different than the price that maximizes profits?
Because unit profits are often used to evaluate performance.
94
What 3 crises would the International Monetary Fund address?
Currency, Banking, and Debt
95
What is the objective of the World Bank?
Objective is to promote general economic development, especially in developing countries, primarily by lending for infrastructure, agriculture, education and similar needs.
96
What is foreign direct investment?
Investments in non-monetary items (such as PP&E)
Would not include foreign bonds
97
What is GATT's primary purpose?
Liberalizing and encouraging international trade by eliminating tariffs, subsidies, import quotas, and other trade barriers to harmonize intellectual property laws and to reduce transportation costs.
98
How have imports and exports changed in the US over the last 50 years?
Both have risen.
99
How does arbitration in the contract with a foreign supplier hep mitigate risk associated with outsourcing?
Provides a pre-determined mechanism for resolving differences with a buyer
100
What value to weight ratio is most suitable for importing goods?
Goods with a high value to weight ratio.
101
How can a company reduce the potential loss from expropriation of a foreign subsidiary by the local government?
Financing the subsidiary with local country capital (I.e. borrowing from the local bank)
102
What is repatriation?
Movement of funds from a foreign country to the home country of an entity. Restriction on repatriation by a foreign country may limit the desired flow of cash from foreign operations to parent - so this is the primary consideration of a company's cash flow analysis.
103
What is the first step in the strategic planning process?
Formulating a mission statement.
104
What are the three generic strategies identified by Porter?
Cost leadership, differentiation, focus.
105
What are the steps in the strategic planning process?
1. Establish the entity's mission, values, and goals (formulate a business statement)
2. Assess the entity and the environment in which it operates (environmental scanning)
3. Establish objectives
4. Formulate strategies
5. Implement strategies
6. Evaluate and control strategic activities.
106
What is the macro-environmental analysis?
Concerned with the analysis of a country or region.
107
What does PEST analysis stand for?
Political Factors, Economic Factors, Social Factors, Technological Factors
108
What does the PEST EL analysis stand for?
4 factors of the original PEST analysis plus environmental factors and legal factors.
109
What would Labor Law fall under for the PEST Analysis??
Political Factors
110
What are Michael's Porters Five Forces for determining the operating attractiveness and likely long-run profitability of an industry?
1. Threat of entry into market by new competitors.
2. Threat of entry into market by substitutes
3. Bargaining power of customers
4. Bargaining power of suppliers of inputs into the industry
5. Intensity of rivalry within the industry.
111
When customers most likely to affect price of a good/service?
When information about the sources of the product is widely available, customers are able to comparison shop for the lowest price.
112
What type of industry will there be a high intensity of rivalry?
In an industry with a high fixed cost structure. Producers seeks to operate at full capacity, and a low degree of product differentiation, which results in products having many substitutes.
113
What are the four parts of the SWOT analysis?
S - Strengths
W - Weaknesses
O - Opportunities
T - Threats
SWOT is concerned with both external environmental and internal characteristics.
114
Describe an S/O strategy.
Utilize and entity's strengths to take advantage of opportunities strategies.
115
Describe W/O strategy.
Pursues opportunities to overcome weaknesses.
116
Describe S/T strategy.
Utilize entity's strength to reduce entity's susceptibility to external threats.
117
Describe W/T strategy.
Pursue ways to prevent weaknesses from being overcome by external threats. (This one poses the greatest risk to the entity)
118
What are Porters' 3 generic strategies that are independent of industry or an entity?
1. Cost Leadership
2. Differentiation
3. Focus
119
Targeting a niche market always involves:
A focus strategy
120
Significant capital investment invested in production/other assets and efficient distribution are both characteristics of:
A cost leadership strategy.
121
Entities that will provide goods and services that have distinctive features (but cost doesn't matter to much) is a characteristic of:
Differentiation strategy.
122
An entity's goals should be SMART. What components make up the SMART acronym?
```
S - Specific
M - Measurable
A - Attainable
R - Relevant
T - Time-Bound
```
123
The decision on which country to operate in would most likely be based on:
Economic system, industry analysis, economic market structure.
124
Why would the entity's strategy LEAST likely be useful in deciding which country and entity should operate in?
Because strategy will most likely have to be adapted to the county an entity decides to operate in.
125
Average variable cost, average total cost, and marginal cost all have what type of curve?
U-Shape.
126
What is the product possibility curve?
Measures the maximum amounts of various goods and services an economy can produce at a given time with available technology and efficient use of all resources.
127
What is central to the nature of market structure in a free economy?
The extent of competition.
128
In the short run, when will a firm in perfect competition cease to produce?
When price is less than average variable cost.
129
In the long run, what is happening when a monopolistic firm produce at the quantity that maximizes revenue?
When the use of resources is inefficient and the monopoly price is higher than perfect competition.
130
In the short run, when will a monopolistic firm maximize profit?
Producing at the level that marginal revenue = marginal cost.
131
What are the three characteristics of a monopolistic competition?
1. Large # of sellers
2. Close substitutes for products/service
3. Ease of entry into or exit from market.
132
In a free market economy, if the cost of imported oil declined suddenly and significantly, who will most likely be the first affected?
Firms providing goods and services to individuals would most likely be impacted first. They will be able to sell more goods and services provided at lower prices.
133
What is the elasticity of supply?
% change in quantity supplied/%change in price
134
In perfect competition, price equals what?
Marginal Revenue.
135
How do you find the percentage change in expenditures when considering inflation using the following example?
YR 1 Expenditures & CPI: $72,800 ; 121.3
YR 2 Expenditures & CPI: $100,500 ; 168.5
% Change in CPI = (168.5-121.3)/121.3 = 47.2
YR 1 Expenditures adjusted for inflation = 72,800 x 1.38911 = $101,127
% Change in Expenditures = (100,500 - 101,127)/101,127 = decrease of 0.6%.
136
US travelers to Europe usually exchange dollars for Euros. Assuming the Euro supply is static, how does the currency exchange considered in isolation affect the demand of Euros?
Increases demand and increases price. (Demand curve for foreign currency shifts outward)
137
If the dollar weakens, borrowing in that foreign currency will have what effect?
The loan will cost more dollars because more dollars would be required to service and repay debt.
