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CPA BEC > BEC 1 - Economic Concepts & Strategy > Flashcards

BEC 1 - Economic Concepts & Strategy Flashcards

1
Q

Economics

A

The study of how scarce resources are allocated to satisfy unlimited wants.

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2
Q

Microeconomics

A

The study of descisions related to the allocation of scarce resources by small, individual economic agents, such as households or firms. Buyers in the economy provide the demand for the products & sellers provide the supply of products/services.

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3
Q

Demand

&

Demand Curve

A

Demand - The amount of a product/service that a market will consume at a given price, assuming all other factors remain constant.

Demand Curve - a graph showing the inverse relationship between price & quantity of a product/service that a group of consumers are willing & able to buy at a particular time.

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4
Q

Demand Curve Shifts

What causes Demand to Shift Upward? (4)

What causes Demand to Shift Downward? (2)

A

Demand Curve Shifts - Changes in the quantity demanded of a product/service for reasons other than price.

Direct Relationship - Shift Upward or “to the right” (Increase):

  • Price of a substitute good - For example, an increase in the price of hamburgers will increase the demand for hot dogs.
  • Expectations of price changes - consumers are more likely to buy now if they think prices will increase in the future.
  • Income
    • Increases for normal goods
    • Decreases for inferior goods
  • Extent of Market - new consumers in the market.

Inverse Relationship - Shift Downward or “to the left” (Decrease):

  • Price of a complement good (increases)
  • Income
    • Decreases for normal goods
    • Increases for inferior goods
  • Consumer boycotts

Changes in Consumer Tastes - May affect demand whether increases or decreases.

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5
Q

Elasticity

A

A measure of the sensitivity of Supply or Demand to a change in a determinant , such as price, which normally has a direct relationship with supply & an inverse relationship with demand.

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6
Q

What are the three types of Elasticity for Demand?

A
  1. Price Elasticity of Demand (likely tested)
  2. Income Elasticty of Demand
  3. Cross Elasticity of Demand
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7
Q

Price Elasticity of Demand (ED)

(ED>1, ED<1, ED=1)

TESTED

A

The ratio of change in demand compared to a change in price measured as the change in demand. To determine if a good is either a necessity or not.

ED = % Change in Qty Demand / % Change in Price

  • ED > 1* = Elastic (many subs); Revenue declines
  • “Qty increases proportionally more than the Price declines”
  • ED < 1* = Inelastic (necessity); Revenue increases
  • “Price increases proportionally more than the Qty declines”
  • ED = 1* (Unit Elastic)
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8
Q

Income Elasticity of Demand (EI)

(EI>1, EI<1,)

A

The ratio of change in demand compared to a change in income measured as the change in demand. To determine if a good is either Normal or Inferior.

EI = % Change Qty Demanded / % Change in Income

EI > 0 = Normal Good

EI < 0 = Inferior Good

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9
Q

Cross-Elasticity of Demand (Exy)

(EXY>1, EXY<1)

A

A measurement comparing the change in demand for one product (X) to change in price of another (Y) to determine if the producs are substitutes or compliments.

Exy = % Chng Qty Demand in X / % Chng in Price of Y

Exy > 0 = Comliments

Exy < 0 = Substitutes

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10
Q

Supply

&

Supply Curve

A

Supply - A graph showing the amount of a product/service that will be provided at any price, assuming all other factors remain constant.

Supply Curve - a graph showing the direct relationship between price & quantity of a product/service that suppliers are willing to supply at a particular time.

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11
Q

Supply Curve Shifts

What causes Supply to Shift Outwards? (4)

What causes Supply to Shift Inwards? (2)

A

Supply Curve Shifts - Changes in the quantity supplied of a product/service for reasons other than price.

Shift Outwards (Supply Increases) Examples:

  • Number of Producers (increases)
  • Government Subsidies (additional funding)
  • Price Expectations (high prices = more supply)
  • Reductions in cost of Production & Tech Advances

Shift Inwards (Supply Decreases) Examples:

  • Increases in Production Costs (eg. production taxes)
  • Prices of Other Products (different products are more profitable, shift of production)
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12
Q

Price Elasticity of Supply (ES)

(ES>1, ES<1, ES=1)

A

The ratio of change in supply compared to a change in price measured as the change in supply.

ES = % Change in Qty Supply / % Change in Price

  • ES > 1* = Elastic
  • ES < 1* = Inelastic/Same
  • ES = 1* (Unit Elastic)
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13
Q

Opportunity Cost

A

The value of the best alternative that is not selected when resources can be applied to more than one purpose, such as the salary associated with a job offer that was rejected in order to accept a more desirable alternative. (The forgone benefit from alternatives NOT selected)

Example: Worker accepts a job paying $60K instead of another offer of $50K, the $50K is the opportunity cost.

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14
Q

What are two Gov’t actions that may affect equilibrium?

(Price Ceiling & Price Floor)

A

Price Ceiling = Shortage of Goods - Is a maximum legal price at which a product or service may be sold, usually imposed by governments.

  • Example: Rent Control

Price Floor = Surplus of Goods - Is a minimum legal price at which a product or service may be sold, usually imposed by the government.

  • Example: Minimum wage, airline tickets
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15
Q

Changes in Equilibrium Price Scenarios

D↑ & S↑

D↓ & S↓

D↑ & S↓

D↓ & S↑

(TESTED)

A
  • D↑ & S↑ = EqPrice is Uncertain, Qty Purchase Increases
  • D↓ & S↓ = EqPrice is Uncertain, Qty Purchase Decreases
  • D↑ & S↓ = EqPrice is Increase, Qty Purchase is Uncertain
  • D↓ & S↑ = EqPrice is Decreases, Qty Purchase is Uncertain
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16
Q

Law of Diminishing Marginal Utility

A

The theory that the more of a resource is consumed, the lower the marginal utility (satisfaction) will be for the next unit.

  • Example: The marginal utility of a second cookie, for example is greater than the marginal utility of a third cookie.
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17
Q

Indiference Curve (IC)

A

A graphic representation of the various combinations of two resources that will provide equal value such that a consumer will be indifferent as to which combination of the resources was to be aquired.

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18
Q

Marginal Propensity to Consume (MPC)

vs.

Marginal Propensity to Save (MPS)*

1 = MPC + MPS

A

Marginal Propensity to Consume (MPC) is the percentage of the next dollar of income that the consumer would be expected to spend.

MPC = Chng in Spending / Chng in Disposable Income

Marginal Propensity to Save (MPS) is the percentage of the next dollar that the consumer would be expected to save.

MPS = Chng in Savings / Chng in Disposable Income

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19
Q

Production Cost

(FC, VC, TC)

A

Production Costs - over short period of time & limited ranges of production, firms have costs that include both fixed & variable costs.

  • Fixed Cost (FC) - costs that wont change even when there is a change in the level of production.
    • AFC = FC/# Units Produced
  • Variable Cost (VC) - costs that rise as production rises.
    • AVC = VC/# Units Produced
  • Total Cost (TC) - the sum of VC + FC.
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20
Q

Returns to Scale

A

Returns to Scale - are the increase in units produced/output resulting from an increase in production cost incurred, input is measured by the ratio.

RTS = % Increase in Output / % Increase in Input (costs)

RTS > 1, Increasing returns to scale (Increased Efficiency)

RTS < 1, Decreasing returns to scale (Deacreased Efficiency)

RTS = 0, Constant returns to scale

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21
Q

What are the four market structures?

A
  1. Perfect/Pure Competition
  2. Pure Monopoly
  3. Monopolistic Competition
  4. Oligopoly
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22
Q

Pure/Perfect Competition (5)

A

An industry would be perfectly competitive if:

  • Includes a large number of sellers, with each too small to affect the overall market price
  • All firms sells a homogeneous product
  • NO non-price competition (e.g. advertising)
  • NO barriers to entry (easy entry/exit)
  • NO price controls (ceiling/floor)
  • Demand Curve = Stright Line Across (elastic)
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23
Q

Pure Monopoly (3)

A

An industry would be a pure monopoly if:

  • Only one producer/seller
  • No substitute products
  • Blocked Entry (Govt law or patent)
  • Demand Curve = Almost Vertical (Inelastic)
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24
Q

Monopolistic Competition (4)

A

An industry would be monopolistically competitive if:

  • Includes a large number of sellers
  • Firms sells heterogeneous products
  • MANY non-price competition (e.g. advertising)
  • NO barriers to entry (easy entry/exit)
  • Demand Curve = Downward Sloping (normal)
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25
Q

Oligopoly/Oligopolistic Competition (4)

A

An industry would be an Oligopoly if:

  • A small number of Large sellers
  • There ARE barriers to entry (large costs or patents)
  • Non-price competiton exists (e.g. advertising)
  • Rival actions are observed (e.g. oil cartel)
    • Game Theory Model - Actions by one firm are likely to affect the decisions of other firms
  • Demand Curve = Kinked
26
Q

There are 4 laws that have been passed to reduce anticompetitive market prices, what are they?

TESTED

Sherman Act 1980, Clayton Act 1914

Robinson-Patman Act 1936, Celler-Kefauver Act 1950

A

The Sherman Act 1980 - Prohibited price fixing, boycotts, market division, & restricted resale agreements among suppliers.

The Clayton Act 1914 - Prohibited stock mergers that reduced competition, price discrimination, & common directorships among competing firms.

The Robinson-Patman Act 1936 - Prohbitied discounts to large purchasers not based on cost differentials.

The Celler-Kefauver Act 1950 - Prohibits aquisition of the assets of a competitor if it reduces competition.

27
Q

Strategic Planning

A

Strategic Planning - Involves organization’s efforts to identify their long-term goals & to determine how best to reach those goals. To develop business strategies, managers commonly engage in formal analysis of SWOT. Involves several steps:

  1. Creating a Mission Statement
  2. Set its Goals & Objectives
  3. Determine what Actions should be taken to meet their Goals & Objectives.
  4. Monitor & Control if goals & objective were met.
28
Q

SWOT Analysis

A

Formal definition & analysis of an organization’s (SWOT) Strength, Weaknesses, Opportunities, & Threats. This is part of strategic planning, in which an organization attempts to identif its long-term goals & determine how to best reach those goals.

29
Q

Mission Statement

A

A statement outlining the long-term purpose of an organization, the reason for existence. This is the first step in strategic planning.

30
Q

What are the two commonly classified Business Strategies?

(Product Diff & Cost Leadership)

A

Product Differentation Strategies - Involves in developing a range of slightly different products that are more attractive to one’s targe markets or simply to ensure that they differ substantially from competitor’s offering. Products may differ ways such as:

  • Physical difference
  • Perceived difference (image, brand, name)
  • Customer support differences (return policies, technical support)

Cost Leadership Strategies - Involves in concentrating on cutting the cost of producing, selling & distributing a firm’s range of product. The strategies include:

  • Process reengineering (re-designs improvements)
  • Lean Manufacturing
  • Supply Chaing Management
31
Q

Macroeconomics

What are the 3 key concerns?

A

Macroeconomics is the study of the economy as a whole. Key concerns are unemployement, inflation, & long-term growth.

Economic systems may be generally classified as:

  • Capitalism “Free Enterprise”
  • Communism (Socialism)
  • Mixed Economies
32
Q

What are the five important measures & indicators of economic conditions?

A

The most imporant bechmarks to measure economic activity are:

  • GDP (“nominal GDP”)
  • Real GDP
  • Potential GDP
  • GNP
  • NAIRU
33
Q

Gross Domestic Product (GDP)

(Income & Expenditure approach)

A

GDP - Also known as the Nominal GDP, is the final market value of all goods & services produced by domestic residents of a country within one year, calulated using the income approach, or the expenditure approach.

  • Income Approach - sums all income earned in the production of all final goods & services, such as wages, interests, rents, business profits, plus adjs for indirect taxes & economic depreciation.
  • Expenditure Approach - sums all expentitures to purchase final goods & services by household (personal consumption), business (gross private inv), government, & foreign sector (exports), minus imports.

NOTE: Correct! Gross domestic product (GDP) is the sum of consumption, investment, government spending, and net exports. Household income and household consumption, which includes both consumption and savings, is not a component of GDP.

34
Q

GDP (Nominal GDP)

Real GDP

Potential GDP

Gross National Product (GNP)

NAIRU

A

GDP (Nominal GDP) - The total dollar value, at current (nominal) market prices, of all final goods/services produced within a county’s boarders during a period of time. Calculated using the output approach, income approach or the expenditure approach.

Real GDP - The total dollar value of all the final goods & services produced less inflation. (Real GDP = Nominal GDP minus inflation​)

Potential GDP - Total dollar value which helps to estimate the degree to wich the economy is either underutilizing resources or “over heating.”

  • If actual GDP is lower than Potential GDP, the economy is underutilizing its resources.
  • If actual GDP is greater than potential GDP then it is “overheating,” boom conditions.

GNP - The total dollar value of all the final goods & services produced by a country’s residents regardless of whether they were produced within or outside of a country’s borders.

NAIRU (Non-accelerating-inflation rate of unemployment) - A concept/guideline of economic growth/contraction, where if actual unemployment rate falls below NAIRU, boom conditions follow in the short term & problems such as higher inflation eventually follow.

35
Q

Inflation

Deflation

Hyperinflation

Stagflation

A

Inflation - defined as the percentage rate of increase in the price level of goods & services.

Deflation - a general decline in the price level or negative inflation rate.

  • Solution to Deflation - Increase money supply in the economy.

Hyperinflation - similar to inflation, except the value of the currency is decreased at a much faster rate, so prices increases more rapidly.

Stagflation - Correct! HIGH Unemployment far above NAIRU and HIGH Inflation (in double digits) qualify as stagflation. Twelve percent is a historically high rate of inflation in the U.S. Also, if actual output exceeds potential output, unemployment would be below NAIRU. Finally, deflation involves an inflation rate below 0%.

36
Q

What are the common measures of Price Inflation?

(CPI, PPI, GDP Deflator)

A
  • The Consumer Price Index (CPI) - 3 Steps
    1. Base @ Current Year = CY Prices / CY CPI Index
    2. Base @ Prev Year = PY Prices / PY CPI Index
    3. (CY Base - PY Base) / PY Base = Change
  • The Producer Price Index (PPI)
  • The GDP Deflator
37
Q

Demand-Pull Inflation

vs.

Cost-Push Inflation

A

Deman-Pull Inflation - An increase in prices caused by an increase in aggregate demand at a faster pace than the increase in aggregate supply, shifting the demand curve to the right.

Cost-Push Inflation - An increase in prices caused by an increase in the cost of goods & services for which no suitable substitue are available, such as oil.

38
Q

Multiplier Effect

A

Multiplier Effect - The disproportionate increase in economic activity (GDP) in response to an inital change in activity (change in spending). In a simplified economic model, the size of the multiplier effect depends on the percentage of increased income that consumers are likely to spend.

**Increase in (GDP) Output = Change in Spending / MPS

Example: If those making up the economy overll are likely to consume/spend 75% of increased income & save the other 25%, then a change in spending of $300 will raise the GDP by $1,200.

$1,200 = $300/25%

39
Q

What are the 4 terms used in connection with the Business Cycle?

A

Business Cycle - a fluctiation in aggregate economic output that my last from a few months to several years, beginning when the economy is at the peak of a period of expansion & ending when it is at the lowest point in a period of contraction (or vice versa).

The four terms are:

  1. Expansion
    • Increased economic production
    • Higher rates of Inflation
    • High Spending = Positive shift in Demand
    • Tech Advances = Positive shift in Supply
  2. Recession (contraction)
    • Two quarters of negative growth in GDP
    • Okun’s Law - Decreased GDP = Increase in unemployement rate
  3. Depression (long lasting recession)
  4. Recovery (early stages of expansion)
40
Q

What are the three Economic Indicators to gauge, evaluate, & predict current & future economic conditions?

A

Economists track many indicators to gauge, evaluate & predict current & future economic conditions (Tells us which part of the business cycle the economy is in). Indicators may be classified as:

  • Leading Indicators - To predict whether expansions/recession are likely to occur within the next few months. Includes:
    • Stock marker prices
    • Avg hours worked per week
    • New orders of durable goods
    • New private housing starts
    • New building permits
  • Coincident Indicators - Factors that move simultaneously with, and in the same direction as the overall economy. Examples:
    • Industrial production
    • Manufacturing
    • Trade sales
  • Lagging Indicators - factors that begin to move after the beginning of a period of expansion/contraction. Examples:
    • Avg prime rate for bank loans,
    • Duration of unemployment
    • Unemployment rate
41
Q

What are the four Types of Unemployment?

(Frictional,Structural,Cyclical,Institutional)

A
  1. Frictional Unemployment - Normal turnover
  2. Structural Unemployment - Due to changes in demands & services, which becomes obsolete
  3. Cyclical Unemployment - Due to fluctions in business cycle
  4. Institutional Unemployment - Caused by restrictions on the workplace resulting from government regulations

NOTE: “Natural” Unemployment Rate = Frictional + Structural

42
Q

What are the 5 Types of Interest Rates?

(Nominal,Real,Risk Free,Federal Funds,Prime)

A

Interest Rates - The cost of borrowing money.

  • Nominal Rate - are those quoted by financial Instituions
  • Real Interest Rate - rates adjusted for inflation. Typicall it is Nominal rate plus Inflation rate.
  • Risk Free Rate - absolute certainty, US Treasury securities
  • Federal Funds Rate - Fed rates to the banks
  • Prime Rate - Rates bank charges to the most credit worthy customers
43
Q

Economic Policies

Fiscal

vs.

Monetary (3)

(Reserve Req’s,Discount Rate,Open Market Operations)

A

Govenments are very likely to continue to regularly intervene in many aspects of the economy through two economic policies:

  • Fiscal Policy - Actions by the government related to revenues & spending (taxes, govt spending) that impacts the economy.
  • Monetary Policy - Actions by the Federal Reserve that impact the economy (reserve ratio, discount rate, open market operations) which may be expansionary by increasing money supply or may be designed to contract the economy by decreasing the supply of money.
    • Reserve Requirements - Feds tell the banks how much funds to hold.
    • Discount Rate - Changing rate it charges banks
    • Open Market Operations - buying & selling US Treasury bills
44
Q

Six Economic Theories

Classical

Keynesian

Monetarist

Supply-Side

New Keynesian

Austrian

A
  • Classical Economic Theory
    • NO govt. intervention
  • Keynesian Theory (Fiscal policy)
    • Lower taxes & increase govt spending
  • Monetarist Theory (Monetary policy)
    • Use of interest rates, central banks should target rates of growth in money
  • Supply-Side Theory
    • Reduce/Lower Taxes
  • New Keynesian Theory
    • Use of both fiscal & monetary policies
  • Austrian Theory
    • Provides some insights as to how monetary policies contribute to formation of bubbles & boom-bust cycles
45
Q

Laffer Curve

An application of which Economic Theory?

A

An application of the Supply-Side economic theory. The Laffer Curve shows that reductions in very high tax rates may result in higher tax revenues.

46
Q

Quantitative Easing

A

Quantitative Easing (QE) is a type of monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply.

47
Q

What are 3 common obstacles to International Trade?

(Tarifs, Import Quotas, Embargoes)

A

Tarifs - Taxes on imported goods.

Import Quotas - limitations of quantity of goods that may be imported during a period of time.

Embargoes - Total bans on importing certain goods.

48
Q

World Trade Organization (WTO)

G-20

North American Free Trade Agreement (NAFTA)

European Union (EU)

International Monetary Fund (IMF)

A
  • WTO is an international organization that 1) Provides a forum to continue to negotiate greater liberalization of international trade policies. 2) Provides a forum to resolve international trade disputes. 3) Seeks to help prevent trade wars & growth of other trade barriers.
  • G-20 - Is the main forum that governments of the leading countries of the world use to discus global economic & financial stability.
  • NAFTA - US, Mexico, & Canada impose far lower trade restrictions on one another than on other countries.
  • EU - “monetary union” between 27 countries in Europe.
  • IMF - an international organization that seeks to aid in the coordination of countrie’s economic policies. Does so by funding at relatively low interest rates.
49
Q

Price Dumping

Dual Pricing

Collusive Pricing

Predatory Pricing

Transfer Pricing

A
  • Price Dumping - sells product at a low price to another country to eliminate competition.
  • Dual Pricing - sells products in new markets at lower prices to introduce them to their products, or charging customers in countries with more elastic demand cures lower prices.
  • Collusive pricing results when competing suppliers agree that they will not compete on the basis of price, setting a uniform price to be charged by all suppliers. This enables the suppliers to establish higher than market prices.
  • Predatory pricing involves one supplier lowering prices, often below cost, to shift demand from a competitor with the intention of inflicting damage.
  • Transfer pricing is the amount used to measure the cost of goods transferred between entities that are part of a related group of entities.
50
Q

Balance of Payments (BoP)

A

Summarizes a country’s transactions with other countries during a period of time. Its two key components are the current account (flow of goods & services) & the capital account (flow of investements & financal assets).

51
Q

Repatriation

(Foreign Exchange)

A

The process of converting a foreign currency into your own country’s currency, at the current exchange rate.

52
Q

What are some 5 factors that affect foreign exchange rates?

TESTED

(Inflation,Interest Rates,BoP,Govt Intervention,LT Economic Stability)

A
  1. Inflation - ​Currency with higher inflation rates tend to depreciate (weaken; less purchasing power) relative to others.
  2. Interest Rates - Currencies from countries with higher interest rates appreciates relative to others. (Demand for these currencies rise)
  3. Balance of Payments - Currencies from countries that are NET exporters appreciates (since there is a demand for the countries products/currency).
  4. Government Intervention
  5. Long-term Economic Stability
53
Q

What would be likely to cause the currency of country A to depreciate relative to the currency of country B.

A

Correct! During financial crises, the currencies of stable countries appreciate relative to those of other countries. Lower inflation leads currencies to appreciate. Higher real interest rates lead currencies to appreciate. Trade surpluses lead currencies to appreciate.

54
Q

Exchange Rate Systems

What are the 3 different types of Exchange Rate Systems that countries use to manage the value of their currencies relative to other countries?

A

Countries use a variety of exchange rate systems to manage the value of their currencies relative to those of other countries:

  1. Floating Exchage Rates
    • Country’s central bank never buys or sells foreign currencies. INSTEAD the currency’s exchange rates are set by the supply & demand of the currency by private parties (for travel, international trade) as well as by the actions of other foreign central banks.
  2. Fixed Exchange Rates
    • Country’s central bank stands ready to buy or sell foreign currencies to maintain its exchange rate at a “fixed” rate.
  3. Managed Exchange Rates
    • In between floating & fixed, where a country may buy or sell foreign currencies depending on the situation.
55
Q

What are the 2 types of Foreign Exhange (currency) Risk?

(Translation/Transaction)

A

Translation (Accounting) Risk - The exchange rate risk associated with companies that deal in foreign currencies or list foreign assets on their balance sheet.

Transaction Risk - The exchange rate risk associated with a business transaction denominated in a foreign currency, due to changes in the exchange rate. On Income statement/Cash Flows items.

56
Q

Types of Hedging Contracts

Options

Forwards

Futures

Currency Swaps

Money Market Hedges

A

Hedging Contracts are used to help mitigate translation & transaction risks relating to foreign exchange risk. Some examples are:

  • Options - permits, but do not require holders to buy or sell commodities or instruments at a given price until a certian date.
    • CALL- Permits the holder to BUY
    • PUT - Permits the holder to SELL
  • Forwards - specifically-negotiated contracts in which two parties agree to exchange a commodity/insturment at a future date.
  • Futures - standardized version of forward contracts that are traded & sold in exchange markets.
  • Currency Swaps - two parties agree to swap/pay currencies.
  • Money Market Hedges - involve turning transaction risk into a loan.
57
Q

How to manage these types of risks?

Interest Risk

Credit Risk

Liquidity Risk

Market Risk

Country Risk

A

Interest Risk - The risk that changes in economy-wide interest rate levels may affect thier earnings adversely. Manage risk by:

  • reduce the amount of assets with long maturities & increase liabilities with long maturities
  • reture the amount of fixed-rate LT assets
  • use interest rate derivatives

Credit Risk - The risk that the parties that one has lent to, or who owe payments may fail to pay. Manage risk by:

  • diversifying customers
  • selling fture streams of payment (discounting)
  • increase of credit standards to borrowers
  • requiring greater guarantees
  • credit default swap derivatives

Liquidity Risk - The risk that while they may be solvent on a long-term basis. Manage risk by:

  • matching maturities of asses & liablities
  • maintain large cushion of liquid assets
  • maintaing a variety of long-lines of credit

Market Risk - The risk that sales or their products or value of assets may decline. Manage risk by:

  • shift financing sources from debt to equity (don’t have to payback shareholders)
  • diversify income streams & assets held
  • use of hedging

Country Risk - Risks associated with investing in a foreign country.

58
Q

Diversification

A

Diversification can reduce the risk of labor strikes because labor strikes are typically affact a single industry or a line of business rather than an entire economy. Diversification offers less protection against high interest rates because interest rates pose systematic risks that affect all segments of the economy.

59
Q

Globalization

A

Globalization is how the economies of nearly all individual contries in the world are developing increasingly deeper connections in their markets for goods, services, labor, capital & technologies.

NOTE: Correct! Globalization has many aspects, including more savers having more internationally-diversified portfolios. Globalization is a process that has been ongoing for many decades. Under globalization, more firms operate internationally and much international trade occurs within companies rather than across companies. During the 2000s, there were substantial lending flows from developing to developed countries (e.g., the Chinese government buying US Treasuries).

60
Q

What are the 4 goals of Globalization?

A
  1. Increase foreign direct investment (FDI)
  2. Increase foreign indirect, or portfolio, investment
  3. Reduce natural & artificial barriers to international trade
  4. Increase modernization of developing countries
61
Q

The following information is available for economic activity for year 1:

In billions

Financial transactions $60

Second-hand sales $50

Consumption by households $40

Investment by businesses $30

Government purchases of goods and services $20

Net exports $10

What amount is the gross domestic product for year 1?

A

You answered correctly

Correct! Gross domestic product (GDP) is the value of all goods and services produced by a domestic economy for a year at current market prices. Based on the information given, GDP is:

GDP = Consumption by households + Investment + Government spending + Net exports

GDP = $40 + $30 + $20 +$10 = $100 billion

CPA BEC (7 decks)

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