Economic and Business Cycles, Measures, and Indicators Flashcards
T/F: economics is about people and the choices they make
True; macroeconomics is the study of the economy as a whole
What are business cycles?
they refer to the rise and fall of economic activity relative to long-term growth trends; although the economy tends to grow over time, the growth in economic activity is not stable; rather, economic activity is characterized by fluctuations, and these fluctuations are known as business cycles
because business cycles refer to the rise and fall of economic activity, it is important to first examine how economic activity is measured; the most common measure is GDP as it is the total market value of all final goods and services produced within the borders of a nation in a particular period
it excludes used goods that have been resold; it includes all goods and services produced within the country’s borders regardless of who owns the resources, so U.S. GDP includes the output of foreign-owned factories in the U.S. but excludes the output of U.S. owned factories operating abroad
What are the different business cycles?
expansionary - characterized by rising economic activity and growth
peak - a high point of economic activity and marks an end of the expansionary phase
contractionary - characterized by falling economic activity and growth and follows the peak
trough - a low point of economic activity and marks an end of the contractionary phase
recovery - economic activity begins to increase and return to its long-term growth trend and follows a trough
What is a recession?
it occurs when the economy experiences negative economic growth for two consecutive quarters of falling national output; firms profits tend to fall and may firms incur losses; firms are likely to have excess capacity and resources (including labor) are likely to be underutilized and unemployment is likely to be high
What is a depression?
a very severe recession; characterized by a relatively long period of stagnation in business activity and high unemployment rates; firms experience significant excess capacity and due to significant reduction in the demand for goods and services, it is likely that many firms will go out of business
What are economic indicators?
statistics that historically have been highly correlated with economic activity
leading indicators - tend to predict economic activity and change before the economy starts to follow a certain trend
lagging indicators - tend to follow economic activity and change after a given economic trend has already started
coincident indicators - change at approximately the same time as the whole economy, thereby providing information about the current state of the economy
What is perfect/pure competition?
no individual firm can influence the market price of its product or shift the market supply sufficiently to make a good scarcer or more abundant
there is a large number of suppliers and customers act independently; firms are small relative to the industry; there are no barriers to entry because firms exert no influence over the market or price; there is very little product differentiation; firms are price takers as price is set by the market; firms control only the quantity produced and can sell as much or as little as it wants at the given market price; demand is perfectly elastic; because there are no barriers to entry, the entry and exit of new firms ensures that economic profits are zero in the long run which means firms earn a normal rate of return
strategies include maintaining the market share and responsiveness of the sales price to market conditions
What is monopolistic competition?
sellers compete to sell a differentiated product in a market into which the entry of new sellers is possible (think brand name products)
there are numerous firms with differentiated products and firms are small relative to the industry; few barriers to entry exist; firms exert some influence over the price and market through differentiation but have more control over quantity produced than over price; differentiation results in a highly elastic but downward-sloping demand curve; because there are few barriers to entry, in the long run, firms will earn zero economic profits; if profits are positive in the short run, more firms will enter and drive down profits to zero; if firm profits are negative in the short run, firms will exit and drive up profits to zero
strategies include maintaining market share and most likely include a plan for enhanced product differentiation and extensive allocation of resources to advertising, marketing, product research, etc.
What is an oligopoly?
a market structure in which few sellers (ex. Big 3 of U.S. auto manufacturers) dominate the sales of a product and entry of new sellers is difficult or impossible
relatively few firms with differentiated products and the firms are large relative to the industry; there are fairly significant barriers to entry; products are differentiated and firms have control over both the quantity produced and the price charged; firms are strongly interdependent; these companies face a kinked demand curve because firms match price cuts of competitors but ignore price increases; this causes the demand cures to have different slopes above and below the prevailing price; because of high barriers to entry, economic profits are positive in the long run
strategies include focusing on market share and calling for the proper amount of advertising (to ensure appropriate product differentiation) and ways to properly adapt to price changes or required changes in production volume
What is a monopoly?
represents concentration of supply in the hands of a single firm (ex. utility company)
there is a single firm with a unique product; insurmountable barriers to market entry exist; these firms are price setters as opposed to firms in perfect competition which are price takers; the firm sets both output and prices; there are no substitute products which makes demand inelastic; because of insurmountable barriers to entry, economic profits are positive in the long run
strategies include ignoring market share and focusing on profitability from production levels that maximize profits
T/F: regardless of the model that represents the industry, the firm will operate best when marginal revenue equals marginal cost (MR = MC)
True
Fact: expansionary fiscal policy entails more government spending and/or reductions in taxes; when the government puts more money into the hands of consumers, overall spending increases and this stimulates economic growth
contractionary fiscal policy, which includes reduced government spending and /or increases in taxes, is designed to slow economic growth and reduce inflation
What is monetary policy?
it is used by a nation’s central bank (Federal Reserve in the U.S.) to affect the money supply, interest rates, and credit available in the economy; is is designed to promote stable prices, maximum employment, moderate interest rates, and long-term economic growth
open market operations - involves the government buying and selling government securities; buying increases the money supply and expands the economy while selling does the opposite
discount rate - an increase in this (which is the interest rate the Federal Reserve charges its member banks for short-term loans) increases interest rates, discourages borrowing, and reduces the money supply which in turn slows the economy; the opposite holds true
required reserve ratio - this dictates how much money a bank is required to hold in its vault or on deposit with a Federal Reserve bank; a higher required reserve ratio decreases the money supply which contracts the economy; the opposite holds true
What are regulations?
rules established by a government that guide how an industry and its entities can operate; the general purpose is to provide protections to individuals and employees, to hold entities accountable for their actions, and to safeguard the environment; companies may incur significant costs to ensure that they are abiding by established regulations and often need to prove compliance under audit scrutiny; more restrictive regulations make it more difficult for small and midsize companies to operate because they may not have the necessary resources to comply with the regulations
What are trade controls?
they restrict transactions and transfers of goods, services, software, and technology; they are put in place to protect domestic industries by reducing foreign competition
tariffs - taxes on imports which increase the prices of foreign goods and make them less competitive relative to domestic goods; they also provide a source of revenue for the imposing government
quotas - limits on the quantity of a good that can be imported over time; help protect specific industries that may be relatively new or vulnerable to foreign competition; absolute quotas set a maximum limit on the amount of a good that can be imported and tariff-rate quotas add an additional tax when the limit is reached
embargoes - prohibit the importing or exporting of certain goods from a specific country
tariffs and quotas may help to prevent “dumping” which occurs when foreign firms want to enter a specific market or when they want to sell off excess goods; these firms sell their goods below FMV and below the prices that domestic producers charge
trade controls can protect specific industries and workers, give new or struggling domestic industries an opportunity to be successful, and shield industries that are crucial to national defense; disadvantages to trade controls are the potential detriment to the world economy, limitations on free trade, and potential restrictions on foreign entities that operate more efficiently than their domestic counterparts
