B5 Flashcards
Gross domestic product (GDP)
- The total market value of all final goods and services produced within the borders of a nation in a particular period
- includes all final goods and services produced within a country, regardless of who owns the resources
Nominal GDP
-Measures the value of all final goods and services in current prices (not adjusted for inflation)
Real GDP
-Measures the value of all final goods and services in constant prices (adjusted for inflation)
-Calculated as:
(Nominal GDP/GDP Deflator)*100
Expansionary phase
- rising economic activity (GDP)
- firm profits increase
- increased workforces (unemployment down)
- prices likely to rise
Peak phase
- high point of economic activity
- marks the end of an expansionary phase and the beginning of a contractionary phase
- firms likely to face capacity constraints and input shortages
- leads to higher costs and higher price levels
Contractionary phase
- falling economic activity and growth
- falling economic activity (GDP)
- decreased workforces (unemployment up)
- firm profits fall
Trough phase
- low point of economic activity
- significant excess production capacity
Recovery phase
-economic activity begins to increase and return to its long-term growth trend
Recession
- economy experiences negative real economic growth
- two consecutive quarters of falling national output
- GDP falls
- profits fall
- unemployment rises
Depression
- very severe recession
- relatively long period of stagnation in business activity and high unemployment rates
Leading indicators
- tend to predict economic activity
- change before the economy starts to follow a certain trend
- examples include: average new unemployment claims, building permits for residences, average length of the workweek, and the money supply.
Lagging indicators
- tend to follow economic activity
- measured to confirm or dispute previous forecasts and the effectiveness of policy directives
- examples include: prime rate charged by banks, average duration of unemployment, consumer debt-to-income ratio
Coincident indicators
- change at approximately the same time as the whole economy
- provide info on the current state of the economy
- examples include: industrial production and manufacturing and trade sales
Expenditure approach components (GICE)
Government purchases of goods and services
gross private domestic Investment
personal Consumption expenditures
net Exports (exports-imports)
Income approach components (I PIRATED)
Income of proprietors Profits of corporations Interest (net) Rental income Adjustments for net foreign income and misc. items Taxes (indirect business taxes) Employee compensation (wages) Depreciation
Comparison of the expenditure approach and the income approach
- the aggregate expenditures approach is a flow of product approach (at market prices)
- the income approach is a flow of earnings and other resources that generate domestic income
Net domestic product (NDP)
GDP minus depreciation
Gross national product (GNP)
The market value of final goods and services produced by residents of a country in a given time period. GNP differs from GDP because GNP includes goods and services that are produced overseas by U.S. firms and excludes goods and service that are produced domestically by foreign firms
Net national product (NNP)
GNP minus economic depreciation
National income
NNP less business taxes
Personal income
Income received by households and non-corporate businesses
Disposable income
Personal income less personal taxes
Unemployment rate
(number of unemployed/total labor force)*100
Frictional unemployment
Normal unemployment resulting from workers routinely changing jobs or from workers being temporarily laid off
Structural unemployment
Occurs when jobs available in the market do not correspond to the skills of the workforce; and unemployed workers do not live where the jobs are located
Seasonal unemployment
The result of seasonal changes in the demand and supply of labor
Cyclical unemployment
The amount of unemployment resulting from declines in real GDP during periods of contraction or recession or in any period when the economy fails to operate at its potential
Natural rate of unemployment
the normal rate around which the unemployment rate fluctuates due to cyclical unemployment. The sum of frictional, structural, and seasonal unemployment.
Holding monetary assets during a period of deflation
Purchasing power gain
Holding a monetary asset during a period of inflation
Purchasing power loss
Holding a monetary liability during a period of deflation
Purchasing power loss
Holding a monetary liability during a period of inflation
Purchasing power gain
Monetary assets and liabilities
Fixed or denominated in dollars regardless of changes in specific prices or the general price level
Non-monetary assets and liabilities
Fluctuate in value with inflation and deflation.
The Phillips curve
Illustrates the inverse relationship between the rate of inflation and the unemployment rate
Nominal interest rate
The amount of interest paid measured in current dollars
=real interest rate-inflation rate
Real interest rate
The nominal interest rate minus the inflation rate, a measure of the purchasing power of interest earned or paid
M1
Money that is used for purchases of goods and services. Includes coins, currency, checkable deposits, and travelers checks. Does not include savings accounts or CDs
M2
M1 plus liquid assets that cannot be used as medium of exchange but that can be converted easily into checkable deposits or other components of M1. Includes CDs of less than $100,000, money market deposit accounts at banks, mutual fund accounts, and savings accounts.
M3
Includes all items in M2 as well at time certificates of deposit of $100,000 or more.
Open market transactions
The purchase and sale of government securities in the open market by the Federal Reserve
Expansionary monetary policy
Results when the Fed increases the money supply
- interest rates fall
- AD increases
Contractionary monetary policy
Results when the Fed decreases the money supply
- interest rates rise
- AD decreases
Inflation rate
(CPI this period-CPI last period)/CPI last period *100
CPI
(current year cost of market basket/base year cost of market basket)*100
Law of demand
the price of a product and the quantity demanded of that product are inversely related
Factors that shift demand curves (WRITEN)
Wealth changes Related goods (complements and substitutes) Income of consumers Tastes of consumers Expectations of consumers Number of buyers served by the market
Law of supply
price and quantity supplied are positively related
Factors that shift the supply curve (ECOST)
Expectations of changes in price of the supplying firm Costs of production Other goods--changes in price or demand Subsidies or taxes Technology--changes in production
Price ceilings
a maximum price that is established below the equilibrium price, which causes shortages to develop–rent control
Price floors
a minimum price set above the equilibrium price, which causes surpluses to develop–minimum wage
Price elasticity of demand
The percentage change in quantity demanded divided by the percentage change in price
Elastic demand
- implied elasticity greater than 1
- a price increase will cause total revenue to decrease
- a price decrease will cause total revenue to increase
Inelastic demand
- implied elasticity less than 1
- a price increase will cause total revenue to increase
- a price decrease will cause total revenue to decrease
Unit elastic demand
- implied elasticity equals 0
- total revenue remains unchanged for a price increase/decrease
Perfectly inelastic demand
- elasticity = 0
- demand curve is vertical
Price elasticity of supply
The percentage change in quantity supplied divided by the percentage change in price
Elastic supply
-implied elasticity greater than 1
Inelastic supply
-implied elasticity is less than 1
Unit elastic supply
-elasticity of supply=1
Perfectly inelastic supply
- elasticity = 0
- vertical supply curve
Cross elasticity
the percentage change in the quantity demanded of one good caused by the price change of another good
Substitute goods
-the coefficient of the cross elasticity is positive
Complement goods
-the coefficient of the cross elasticity is negative
Income elasticity of demand
measures the percentage change in quantity demanded for a product for a given percentage change in income
Positive income elasticity
-indicates a normal good
Negative income elasticity
-indicates an inferior good
Marginal product
change in total product/increase in the quantity of an input employed
Average product
total product/quantity of an input
Average fixed costs
total FC/Q
Average variable costs
total VC/Q
Average total costs
total costs/Q
Marginal cost
- the change in total cost associated with a change in output quantity over a period
- the change in total cost, resulting from a one-unit increase in quantity
- depends solely on variable costs
Economies of scale
- Companies that are able to reduce per-unit costs by using large plants to produce large amounts of output
- opportunity for specialization
- utilization of advanced tech
- mass production is normally more efficient
Diseconomies of scale
May occur when large firms become inefficient and are no longer cost productive
- bottlenecks occur
- inefficient management function
Perfect competition
- highly competitive, many firms in industry
- firms are small relative to industry
- no barriers to entry
- no differentiation in product (commodity)
- firm only has control over quantity produced, price is set by the market
- perfectly elastic demand
- zero economic profit in the long run
- strategy should focus on maintaining market share and responsiveness of sales prices to market conditions
Monopolistic competition
- highly competitive, many firms in industry
- firms are small relative to industry
- low barriers to entry
- some differentiation of product
- firm has control mostly of quantity produced, price is set by the market primarily
- highly elastic but downward sloping
- zero economic profit
- strategy should focus on maintaining market share, product differentiation, and allocation of resources to advertising, marketing, and product research
Oligopoly
- moderately competitive, few firms in industry
- firms are large relative to industry
- high barriers to entry (economies of scale)
- differentiated products
- firm has control over both the quantity produced and the price charged
- inelastic demand (kinked demand curve)
- positive economic profit
- strategy should focus on enhancing market share, proper spending on advertising, and proper adaptation to price changes and changes in production volumes
Kinked demand curve
firms will match a price cut, but ignore price increases, kink occurs at the prevailing price
Monopoly
- one firm, no competition
- insurmountable barriers to entry
- no differentiation
- firm has control over quantity and price
- inelastic demand
- positive economic profit
- strategy should be to ignore market share and focus on profitability from production levels that maximize profits
Factors that affect the competitive environment of the firm (Porter’s 5 forces)
- barriers to market entry
- market competitiveness
- existence of substitute products
- bargaining power of the customers
- bargaining power of the suppliers
SCOR model-plan
developing a way to properly balance demand and supply within the goals and objectives of the firm and prepare for the necessary infrastructure
- determine demand requirements
- assessing the ability of suppliers to supply resources
- assessing capacity concerns
- identifying viable distribution channels
- managing the product’s life cycle
SCOR model-source
- select vendors
- obtain vendor feedback
- oversee vendor payment
- oversee quality assurance
SCOR model-make
encompasses all the activities that turn the raw material into the finished product
- managing the production process
- performing quality assurance
- analyzing capacity availability
SCOR model-deliver
encompasses all the activities of getting the finished product into the hands of the ultimate consumer
- managing orders
- forecasting
- shipping
