4: macroeconomics/international business Flashcards
what are leakages?
when income is used for purposes other than domestic consumption (savings, taxes, and imports)
what are injections?
sources of amounts added to domestic production that do not result from domestic consumption expenditures (gov spending, gov subsidiaries, investment spending)
what is GDP
gross domestic product is the total market value of all final goods and services produced within the borders of a nation in a particular period. note that GDP includes the output of foreign owned factories in the US but excludes the output of US owned factories operating abroad
what is nominal GDP
nominal GDP measures the value of all final goods and services produced within the borders of a nation in terms of current dollars
what is real GDP
real GDP measures the value of all final goods and services produced within the borders of a nation in terms of constant prices.
real GDP=nominal GDP/GDP deflator x 100
deflator is the price index used to adjust nominal GDP for changes in overall prices of goods and services.
how is GDP calculated under the expenditure approach
Government purchases of goods and services
gross private domestic investment
personal consumption expenditures
net exports (exports-imports)
how is GDP calculated under the income approach
income of proprietors profits of corporations interest rental income adjustments for net foreign income taxes employee compensation depreciation
what is cyclical unemployment
downturn in business cycle
what is frictional unemployment
transition or imperfect information
what is structural unemployment
jobs they had previously have been greatly reduced or eliminated. resulting from technological advances or because lack is skills available for job
what is unemployment rate
unemployment/size of labor force
what is natural rate of unemployment
all unemployment except cyclical/size of labor force
In the macroeconomic context, investment includes spending on
- Residential construction;
- Nonresidential construction;
- Business durable equipment;
- Business inventory
list the factors that shift aggregate demand
changes in wealth, changes in real interest rates, changes in expectations about the future economic outlook, changes in exchange rates, changes in gov spending, changes in consumer taxes
list the factors that shift short run aggregate supply
changes in resource costs
resource availability
technological advances
what is the definition of a business cycle
business cycles are defined as the ride and fall of economic activity relative to its long term growth trend
phases of a typical business cycle
expansionary phase: rising growth in economic activity (real GDP)
peak: high point of economic activity
contractionary phase: declining growth in economic activity
trough: low point of economic activity
recovery phase: economic activity starts to increase and return to its long term trend
how is a recession defined
a recession is defined as a period during which real GDP is falling for at least two consecutive quarters. recessions are characterized by falling real output and rising unemployment
what are the characteristics of depression
a depression is a very severe recession. a depression is characterized by a sustained period of falling real GDP and high rates of unemployment.
economists generally agree that business cycles result from what
shifts in aggregate demand and aggregate supply
What happens to price levels and purchasing power during inflation
During a period of inflation, the general level of prices is increasing, or the purchasing power of the dollar is decreasing. increase rates increase
what is the consumer price index and its purpose
The Consumer Price Index for All Urban Consumers (published monthly) relates the prices paid by all urban consumers for a “basket” of goods and services during a period to the price of the “basket” in a prior reference period.
commonly used to measure deflation/inflation
purpose is to measure and compare prices over time
(current-prior)/prior
what are the causes of demand pull inflation and cost pull inflation
demand pull inflation is caused by increases in aggregate demand. spending for domestic goods exceeds productive capacity of economy
cost push inflation: caused by reduction in short run aggregate supply
list the three ways the federal reserve could increase the money supply
purchase government securities on the open market
lower the discount rate
lower the required reserve ratio
explain the relationship between interest rates and the money supply
an increase in money supply leads to a decrease in interest rates and viseversa
what is the likely impact of a decrease in the money supply on interest rates, real GDP, and the overall price level
increase interest rates, decrease real GDP, decrease overall price level
name the motivations for developing international business operations
comparative advantage
imperfect markets: barriers to trade
product cycle: establishment of foreign subsidiaries to more efficiently capitalize on foreign demand for domestic products
identify three inherent risks of international business operations
exchange rate fluctuation
operating in foreign economies
political risk
what are import quotas and import tariffs
import quotas: restricts quantity that can be imported
import tariffs: tax on imported goods
three main accounts USA reports international activity
current, capital. financial
Average propensity to consume (APC):
Average propensity to save (APS):
Average propensity to consume (APC): Measures the percent of disposable income spent on consumption goods. APC = CS/DI
Average propensity to save (APS): Measures the percent of disposable income not spent, but rather saved. APS = S/DI
APC + APS = 1
what is inflation and deflation
Inflation (or inflation rate) is the annual rate of increase in the price level; deflation (or deflation rate) is the annual rate of decrease in the price level.
Transfer pricing?
Transfer pricing is the determination of the amounts at which transactions between affiliated entities will be recorded. The issue of transfer pricing has special significance when the affiliated entities are located in different countries.
name the factors influencing exchange rates
trade related factors; relative inflation rates, relative income levels, government controls
financial factors: relative interest rates, capital flows
identify the three categories of exchange rate exposure
transaction risk: balances from prior transactions
economic risk: alter value of future transactions
translation risk: conversion of FS
what is Globalization
The movement toward a more integrated and interdependent world economy, evidenced by the increased mobility of goods, services, labor, technology and capital throughout the world.
what type of crisis is addressed by international monetary fund
- Currency crisis—When speculation in the exchange value of a currency causes a dramatic depression in its value
- Banking crisis—When a loss in confidence in the banking system of a country leads to a run on banks
- Financial debt crisis—When a country cannot meet its foreign debt obligations
what is the objective of the world bank
The objective of the World Bank is to promote general economic development, especially in developing countries, primarily by leading for infrastructure, agricultural, education, and similar needs.
what is a frequently used statistical measure of globaliztion
world trade expressed as a percentage of GDP
what is meant by a shift in economic balance of power
the ability of the worlds emerging nations to contend with the economies of the industrialized world for power, resources, influence, ect. is a change or shift in the economic balance of power from previous decades.
