Chapter 2 Flashcards
What does the economic environment refer to?
External factors and broader economic trends that impact a business
What are the two classifications of the economic environment?
- Microeconomic
- Macroeconomic
Define microeconomics
The study of the behavior of an individual and a firm
Define macroeconomics
The study of the economy as a whole, concerned with national income, economic growth, inflation, and employment
What is the focus of the chapter?
Macroeconomic factors analyzed on the basis of economic indicators
What is the economic cycle?
The natural fluctuation of the economy between periods of growth and recession
What factors help determine the current stage of the economic cycle?
- GDP
- Interest rate
- Level of unemployment
- Consumer spending
What indicates economic growth?
When national income increases from one year to the next
What indicates economic recession?
When national income falls from one year to the next
Fill in the blank: Micro means _______.
small
Fill in the blank: Macro means _______.
large
True or False: Macroeconomics is concerned with the behavior of individual firms.
False
What are the four phases of the economic cycle?
- Prosperity
- Recession
- Recovery
- Trough
What are the four phases of the business cycle?
- Recovery/Upturn 2. Expansion 3. Trough/Depression 4. Recession/Downturn
The business cycle phases describe the fluctuations in economic activity over time.
What characterizes the Recovery/Upturn phase of the business cycle?
Increasing GDP, Low unemployment, Increasing levels of demand and consumption
This phase signifies a transition from recession to growth.
What is observed during the Expansion phase of the business cycle?
High GDP, High employment, Increasing general price level
Expansion is marked by economic growth and increased consumer confidence.
Describe the Trough/Depression phase of the business cycle.
Low GDP, High unemployment, Low levels of demand and consumption
This phase represents the lowest point of economic activity before recovery begins.
What happens during the Recession/Downturn phase?
Decreasing GDP, Increasing unemployment, Decreasing levels of demand and consumption
Recession indicates a decline in economic activity across the economy.
What are leading economic indicators?
Indicators that change just before the economy starts to follow a particular phase.
They are used to forecast future economic trends.
List three examples of leading economic indicators.
- Average weekly hours of labor-force * Manufacturer’s new orders for capital goods * New building permits for private housing
These indicators help predict future economic activity.
What defines coincident economic indicators?
Indicators that show where an economy is at the same time a particular economic trend occurs.
They reflect current economic performance.
Name four coincident economic indicators.
- Number of workers in employment * Aggregate personal incomes * Industrial production index * Manufacturing and trade sales
These indicators help assess the current state of the economy.
What are lagging economic indicators?
Indicators that change after the economy has entered into a particular phase.
They confirm trends but do not predict them.
Provide three examples of lagging economic indicators.
- Average duration of unemployment * Inventory-to-sales ratio * Consumer Price Index (CPI)
These indicators help assess economic conditions that have already occurred.
True or False: The level of interest rates decreases during the Trough/Depression phase.
True
Lower interest rates often accompany economic downturns to stimulate growth.
What is GDP/National Income (NI)?
An aggregate market value of all final goods/services produced within the boundaries of a country in a given period.
What does GDP measure?
It measures the economic performance of a country and allows for comparison with various periods and other countries.
What are the components of the GDP calculation?
GDP = C + I + G + (X - M)
C = Private consumption of goods and services, I = Private investment in long-term assets, G = Government spending, X = Exports, M = Imports.
What is the aim of government economic policy?
To achieve economic growth, nearly full employment, stable prices, and a sustainable balance of payments.
What is the crowding-out effect?
An increase in government spending (G) can increase aggregate demand (AD) or national income (NI), but may reduce consumption (C) and investment (I) if funded by higher taxation.
What limits the rate of increase in national income annually?
A country does not have the resources to grow in ‘real terms’ above a certain rate.
What happens when total spending increases faster than the economy can grow?
The inevitable result is price inflation.
What are nominal GDP and real GDP?
Nominal GDP is evaluated at current prices and includes inflation; real GDP is inflation-adjusted and deemed a more accurate indicator of economic growth.
What was the GDP growth estimate for Pakistan in FY21?
The provisional estimates of GDP growth were 3.9 percent for the full year.
What is inflation?
Inflation is a continuous or persistent increase in price levels over time.
Inflation is typically measured using price indexes like the consumer price index or retail price index.
How is the rate of inflation expressed?
As a percentage increase in price levels compared to the prior year.
This can be calculated using various price indexes.
What was the CPI inflation rate in Pakistan in June 2021?
9.70% on a year-on-year basis.
This was an increase from 8.60% the previous year.
What is cost-push inflation?
Inflation that occurs when prices rise due to persistent increases in the cost of production while demand remains constant.
This includes increases in the prices of raw materials and labor.
What is demand-pull inflation?
Inflation that occurs when aggregate demand for goods persistently exceeds their supply.
This usually occurs in a full employment situation.
What are the implications of high inflation?
- Increased taxes
- Increased government spending
- Risk of economic recession
- Increased interest rates
High inflation can lead to undesirable economic outcomes.
What is inflationary expectation?
The rate of inflation that businesses and individuals expect in the future.
High inflation rates can increase inflationary expectations, influencing wage demands and pricing decisions.
True or False: High inflation leads to a redistribution of income between lenders and borrowers.
True
Lenders receive less value while borrowers pay less value in real terms.
How does high inflation affect households on fixed incomes?
The real value of their income decreases, making it harder for them to maintain their standard of living.
This is particularly impactful for pensioners.
What happens to the exchange rate of a country’s currency during high inflation?
There is typically a fall in the exchange rate.
This can lead to exports becoming expensive and imports becoming cheaper.
Fill in the blank: An inflationary spiral occurs when wage demands increase, leading to _______.
a wage-price spiral.
This is a cycle where rising wages lead to higher prices, which in turn lead to further wage demands.
What can happen to the balance of trade during periods of high inflation?
It may suffer as exports become more expensive and imports become relatively cheaper.
This can affect employment in export/import industries.
What is unemployment?
Unemployed is that part of a population available for work and actively searching
Unemployment signifies individuals who are not currently employed but are seeking employment.
What are some impacts of high levels of unemployment?
- Loss of output and National Income (NI)
- Burden on government for social security benefits
- Social costs (e.g. depression, suicide, crimes)
- Shortage of skilled labor
High unemployment can lead to widespread economic and social issues.
How can a shortage of skilled labor be overcome?
By moving jobs to other countries where there is a better supply of skilled labor
Skilled labor shortages can hinder economic growth and productivity.
What is economic stagnation?
Economic stagnation occurs when economic activity is at a much lower level than it could be
This can lead to prolonged periods of low growth and high unemployment.
What are some consequences of economic stagnation?
- Countries become poorer relative to those enjoying economic growth
- Households may live in relative poverty
- Increased migration to countries with greater economic wealth
Economic stagnation can create significant challenges for affected populations.
What is protectionism?
Protectionism is the economic policy of restraining trade between states against foreign competition by government
This policy uses methods such as tariffs and quotas to protect domestic industries.
What are methods of protectionism?
- Imposition of tariffs (high import taxes)
- Setting quota limits on the amount of goods that can be imported
- Embargo (ban on imports) of some types of goods
- Political campaigns advocating domestic consumption
These methods aim to shield local industries from foreign competition.
True or False: The World Trade Organisation (WTO) promotes protectionism.
False
The WTO attempts to promote free trade internationally.
What happens when the world economy is not growing?
Any increase in a national economy has got to be at the expense of other national economies
This situation creates competitive pressures among nations.
What is the impact of protectionism on economic growth?
Largely negative, although specific industries and groups may benefit
Protectionism can lead to inefficiencies and higher prices for consumers.
What is a consequence of trade wars and protectionism?
Firms might struggle to find suitable people due to very low levels of unemployment
This can push up the cost of wages and salaries.
What is fiscal policy?
Government policy on government spending to influence aggregate demand or encourage long-term economic growth.
What are the tools through which fiscal policy works?
- Taxation
- Borrowing
- Government spending
What is the main objective of monetary policy?
To influence aggregate demand or national income.
What is the role of a national government in economic policy?
To achieve economic growth.
What does the balance of payments (BOP) measure?
Financial transactions made between consumers, businesses, and the government.
What is included in the current account of the balance of payments?
Payments for international trade of goods and services.
What is a trade deficit?
A situation where a country imports more than it exports.
What is the capital account in the balance of payments?
It records movements of capital between countries.
What does a surplus/deficit on trade indicate?
Net outflow or inflow of capital.
True or False: A country with a large trade deficit is likely to import much.
True
What can policymakers use BOP data for?
To examine market potential of a country, especially in the short term.
Fill in the blank: The main elements of international payments are _______.
[flows of money between different countries]
What might be necessary to achieve some economic targets?
Stable exchange rate or low rate of inflation.
How can the central bank influence interest rates?
By controlling short-term interest rates.
What is one of the objectives of fiscal policy?
Keeping the inflation rate within limits.
What is the significance of SBP’s foreign exchange reserves?
Indicates the financial health and stability of a country’s currency.
What are the two main accounts that make up the balance of payments?
- Current account
- Capital account
What is the effect of raising short-term interest rates on borrowing?
Decreases borrowing
Higher borrowing costs cause individuals and companies to be less willing to borrow.
How do higher long-term investment rates affect the stock market?
Decreases stock market returns
This is due to falling market values of shares and bonds.
What is the KSE-100 index?
The most recognized index of Pakistan Stock Exchange
It represents 85% of all market capitalization of the exchange.
How is stock market performance measured?
Through stock market indices
Performance is reflected in indices like the All Share Index.
What does market capitalization represent?
Market value of a publicly traded company’s outstanding shares
It reflects what investors are willing to pay for its stock.
What is the base value of the KSE-100 as of November 1991?
1000
This base value is used for calculating the index.
What are the two methodologies for calculating stock market indices mentioned?
- Full-cap
- Free-Float
Full-cap includes all shares; Free-Float considers only shares available for trading.
What impact does the stock market have on consumption?
Decreases consumption
Consumers feel less wealthy when stock market performance declines.
What is the formula for calculating the stock market index?
Share price multiplied by the number of shares outstanding
This reflects the company’s market valuation.
Does the stock market’s performance influence business decisions?
Yes
Companies consider stock performance when making decisions related to issuing shares and mergers.
Fill in the blank: The stock market is considered one of the leading indicators of _______.
[economic performance]
What happens to inflationary pressures when the stock market performs well?
Decreases some inflationary pressures
This can lead to an overall improvement in the economy.
True or False: The Free-Float methodology includes all shares held by controlling directors.
False
It excludes shares held by controlling directors, sponsors, and locked shares.
What should a company review to improve its strategic position?
The company should review its strategic position, make plans about the future and consider redundancies
This involves assessing current strategies and workforce needs.
How can companies respond to higher costs due to increased interest rates?
Companies might try to pass on some of the higher costs to customers by raising the prices of their products or services
They may also consider borrowing less, but this might take time.
What is the impact of higher taxation on individuals?
Higher taxation means less after-tax earnings for spending
Individuals must either reduce their consumption or find ways to increase their income.
What might companies do when the government raises interest rates?
Companies may react by borrowing less or attempting to increase prices
Additionally, they may reduce spending and adjust their financial strategies.
What is one potential effect of an increased value of the Pak Rupee?
May spend less on imported goods, as they are relatively more expensive
A stronger currency can make imports cheaper and exports more expensive.
What can happen when the value of the Pak Rupee decreases?
May spend more on imported goods, as they are relatively cheap
This can also lead to increased demand for exports as they become cheaper for foreign buyers.
What is a possible business response to decreased interest rates?
May increase spending, as there is less incentive to save
Lower interest rates typically encourage consumer spending and investment.
What might businesses do in response to increased unemployment?
May reduce product sizes but leave the price unchanged, increasing the profit margin
This practice is known as shrinkflation.
True or False: An increase in stocks’ value may generate interest for new products or businesses.
True
Increased stock value can provide companies with the capital needed to innovate and expand.
What could be a consequence of a fall in stock value for companies?
A fall can lead to funding problems
Companies may struggle to secure financing if their share prices decline significantly.
Fill in the blank: The government increases interest rates from 4% to _______.
5%
This change can significantly impact borrowing costs for companies.
What might companies do to target new international markets?
May launch bigger versions of products to charge higher prices
This strategy can help capture market share in competitive environments.
List the questions in the Tucker model used to assess value.
- Is it profitable?
- Is it legal?
- Is it fair?
- Is it right?
- Is it sustainable?
These questions help evaluate the ethical implications of a decision.
What types of values are considered in ethical decision-making?
- Market values
- Legal values
- Social values
- Personal values
- Environmental values
These values contribute to a comprehensive understanding of ethical considerations.
What is Utilitarianism or End-Point Ethics?
An approach that focuses on the consequences of actions to determine right or wrong
It seeks to maximize benefits for the greatest number of stakeholders.
What is Rule Ethics?
An ethical approach that follows duties and norms relevant to the problem
Decisions are assessed based on laws and professional codes of ethics.
What is the key principle of the Egoism approach?
Best for me / self-interest
This contrasts with the stakeholder-focused approach of Utilitarianism.
How is excellence described in the context of ethical decision-making?
A continuous process and not an accident
This indicates that achieving ethical standards requires ongoing effort and commitment.
