Economics Basics Flashcards
(105 cards)
1
Q
What is the business cycle?
A
Expansion - Peak - Contraction - Trough - Recover (“Every peak contracts through recovery”)
2
Q
What is GDP?
A
measurement of economic output WITHIN a country’s borders. All FINAL goods AND services
3
Q
What measures economic growth?
A
change in real GDP over time
4
Q
What helps predict business cycles?
A
leading, lagging, and coincident indicators
5
Q
What influences LRAS?
A
factors of productions ONLY. NOT price level
6
Q
What heavily influences shift in the SRAS curve?
A
profit opportunity
7
Q
Real GDP
A
= nominal GDP/ GDP deflator x 100
8
Q
Multiplier Effect
A
= change in REAL GDP resulting from an increase in spending
9
Q
Multiplier
A
= 1/(1-MPC) or 1/MPS
a higher MPC will result in a larger multiplier… more consumption has larger effect on GDP
10
Q
How can we measure GDP?
A
Expenditure approach or Income Approach
11
Q
What are the economic indicators/measures?
A
- Real GDP
- Unemployment Rt
- Inflation Rt.
- Interest Rt
12
Q
Unemployment Rate
A
= Unemployed (seeking past 4 weeks)
___________________________________
Total Labor (seeking, >16, non-institutional)
13
Q
Expenditure Approach to GDP
A
= Government spending + Gross Investment + Household Spending + Net Exports (GICE)
14
Q
National Income (NI)
A
- Gross National Product (GNP) - economic depreciation - Indirect business tax
- Net national product (NNP) - indirect business tax
15
Q
Disposable income
A
Personal income - income taxes
16
Q
Income Approach to GDP
A
Income of proprietors + profits of corporations + interest + rental income + adjustments for net foreign income and misc + taxes + employee comp (wages) + depreciation (IPIRATED)
17
Q
Natural rate of unemployment
A
structural (skills), frictional (temp overturn/ job seeking), seasonal (change in demand)
@ natural rt. when economy is at POTENTIAL GDP
18
Q
Full Employment
A
No cyclical (a result of BUSINESS CYCLE and recession/ decrease in real GDP)
19
Q
Stagflation
A
low GDP
high unemployment
inflation
20
Q
Measurement of inflation
A
% change in the consumer price index
21
Q
Causes of inflation
A
- Demand pull (good) : increase in AD
2. Supply push (bad): decrease in SRAS
22
Q
Philips Curve
A
Shows that inflation and unemployment have an inverse relationship (except in stagflation)
23
Q
Fed Monetary Policy
A
- Open market operations (buy/sell securities)
- Change the discount rate (charged to commercial bank)
- Changing the reserve ratio
24
Q
Gov’t Fiscal Policy
A
Taxes (revenue) and Spending (expenses)
25
How the gov't finances spending
1. Taxes (revenue)
2. issuing debt (borrowing)
3. printing money (inflation)
26
Surplus/Deficit and GDP
```
Surplus = decrease in GDP
Deficit = Increase in GDP (expenditure approach to measuring GDP)
```
27
M1
Currency, coins, CHECKing accounts, travelers CHECK
28
M2
M1 + savings, money market, mutual funds, CDs < $100k
29
Elasticity
% change in Qd / % change in P (slope formula)
> 1 = elastic
< 1 = inelastic
1 = unit elastic
30
Cross Price Elasticity
% change in Qdx / % change in Py
Positive = substitute goods
Negative = complementary goods
31
Income Elasticity
% change in Qd/ $ change in Income
Positive = normal goods
Negative = inferior goods
32
Major cost functions
1. Marginal Cost
2. Average Total Cost
3. Average Variable Cost
4. Average Fixed cost
33
Marginal Cost
= change in TC/ change in Q (slope formula)
- intersects ATC and AVC at lowest points
- produce where MC = MR
34
SWOT Analysis
- used to develop appropriate strategic plan
- SW (internal)
- OT (external)
35
Factors of production
CELL
1. capital goods
2. entrepreneurial talent
3. land
4. labor
36
SCOR Metrics
1. responsiveness
2. agility
3. reliability
4. cost
4. assets (ROA...)
37
SCOR Model
Plan --> Source --> Make --> Deliver --> Return
38
Oligopoly Kinked Demand
MATCH price cuts and IGNORe price increase
39
Nominal Interest rate
= REAL time value of money Interest + inflation
40
Recession
2 successive quarters of shrinkage in the economy (decrease in GDP)
41
Business Process Management
"Plan Do Check Act (PDCA) Model
- fully ALIGN resources to achieve customer satisfaction as efficiently as possible, emphasizing continuous quality improvement
- INCREMENTAL change
42
Rational Assessment Plan
1. Strategic Gap analysis (industry v. us)
2. Review of Competitive priorities
3. Review of Production objectives
4. Selection of Improvement program
43
Business Process Reengineering
Radical changes, often driven by technology
44
TQM
org commitment to customer-focused performance emphasizing quality and CONTINUOUS improvement (included quality circles/ collaboration)
45
Quality Costs
Conformance: Prevention and Appraisal
Nonconformance (failure): Internal and External failure
- inverse relationship between the two
46
Demand flow Performance Improvement
use customer demand as the basis for resource allocation (v. sales forecasts or master schedule)
47
Six Sigma
- rigorous metrics of evaluation of goal achievement (CONTINUOUS quality- improvement program requiring SPECIALIZED training)
- emphasis on COST REDUCTION (DMAIC & DMADV)
- DMAIC = define, measure, analyze, improve, control (sustain)
48
Project Life Cycle
Authorize (charter and statement of work docs) --> Plan --> Implement --> Monitor --> Close
49
Project Deliverable Criteria
Smart, Measurable, Attainable, Relevant, Timely (SMART)
50
Executive Steering Committee
Overall strategic guidance and approve deliverables
51
Measuring globalization
% of World Trade / GDP
52
Motivation for globalization
comparative advantage, imperfect markets, product cycle
53
Developed Nations (G7)
US, Japan, UK, France, Germany, Italy, Canada
| -Usually trade deficits (net imports)
54
Emerging Nations (BRIC)
Brazil, Russia, India, China
| -Usally trade surpluses (net exports)
55
Required Rate of Return
Nominal Interest (real + inflation) + Maturity risk (interest rate) + liquidity premium + default premium
56
Perpetuity Value
Dividend/ Required Return
57
Gordon Growth (Constant)
D1/ ( r - g)
58
Leading PE Ratio
P0/ E1
59
PEG Ratio
PE Ratio / (Growth rt x 100)
60
Price to Sales Ratio
P0/ S1
61
Price to Cash Flow
P0/ CF1
62
EBOCA
Control Environment Principles:
1. Ethics
2. Board Oversight
3. Org Structure (structure, authority, responsibility)
4. Commitment to competence
5. Accountability
63
COSO Internal Control Objective
To provided reasonable assurance that an entity will achieve its stated objectives (ORC)
64
Components of ERM
1. Internal Environment
2. Setting Objectives
3. Event ID
4. Assess Risk
5. Respond to risk
6. Activities (control)
7. Information and communication
8. Monitoring
65
Change control Process
Control baseline --> change identification --> change management --> change update
66
Total Factor Productivity
Output
_________
Total Prime Cost
67
Partial Factor Productivity
Output
___________
Specific Quantity (Material OR Labor
68
Internal Performance Benchmarks
control charts, pareto diagrams, cause & effect (fishbone diagram)
69
FIFO Costing
Current Cost
________________
Beg. Inv. to complete + Started and Completed + End %
70
Weighted Average Costing
Beg. WIP Cost + Current Cost
________________________
Units Completed + End %
71
ABC Service Cost Allocation
Direct or Step - down
72
Byproduct Selling Price
Apply to main produce as reduction of COGS or misc income
73
Abnormal spoilage
period expense in COGS
74
Profitibility Index
PV of future CF/ initial investment
75
Degree of Operating Leverage
% Change in EBIT
_______________
% Change in Sales
76
Degree of Financial Leverage
% Change in EPS
______________
% Change in EBIT
77
Degree of Combined Leverage
% Change in EPS
_______________
% Change in Sales
78
Equity Cost of Capital options
1. cost of issuing new stock
| 2. cost of retained earnings = CAPM, DCF, BYRP, (D1/P0) + g
79
Optimal Capital Structure
Lowest WACC (produces the highest valuation)
80
Aggressive WC policy
Working capital financed with ST liabilities
81
Cash Conversion Cycle
Days in AR + Days in Inventory - Payables Deferral
82
Primary source of ST financing for firm
Trade Credit
83
ROI/ ROE
Income
_______________ or Profit Margin X Total Asset Turnover
Invested Capital
84
Cost of Debt
EFFECTIVE / Market / YTM Interest
___________________________
Debt cash available
85
EVA
Residual Income method using WACC (can refine with adjustments)
86
Times interest earned
EBIT/ Total Interest Expense
87
Average Receivables
Average Daily Sales * Average Collection Pd
88
Reorder Point
Safety Stock (units) + normal consumption during lead time (reorder level)
89
Economic Order Quantity (EOQ)
(2* annual Sales*Order cost/ Carrying cost per unit) ^ 1/2
90
Breakeven Point
Total Revenue = Total Cost
91
Contribution Margin Ratio
Contribution Margin / Revenue
92
Increase in Inventory (Absorption v. Variable NI)
Absorption net income HIGHER
93
Breakeven point in Units
Fixed Cost/ CM per unit
94
Breakeven point in $
Fixed Cost/ Contribution margin ratio
95
Marginal Cost
variable cost + avoidable fixed costs
96
Special Order Decision
Accept if: SP per unit > relevant cost
97
Make v. Buy Decision
Accept if: Outside purchase price > relevant cost
98
Sell or Process Further Decision
Accept if: incremental revenue > incremental cost
99
Keep or Drop segment
Keep Segment: lost contribution margin > avoidable fixed cost
100
Margin of Safety ($)
Total Sales - Breakeven Sales $
101
Margin of Safety (%)
Margin of safety (%)
_______________
Total Sales
102
Tactical Plan length
18 months
103
Financial Scorecard for SBUs
1. Cost
2. Revenue
3. Profit
4. Investment
104
Balanced Scorecard Critical Success Factors
1. Financial
2. Internal Business
3. Customer
4. Advancement of HR
105
Balance Scorecard Characteristics
1. Accurate
2. Timely
3. Understandable
4. Specific Accountability
