Economic & Business Cycles, Measures, & Indicators Flashcards
Helps auditors better interpret client information (example: why sales and earnings changed)
Economics
The study of economy as a whole - examines national income, unemployment, inflation, etc.
Macroeconomics
Total market value of all final goods and services produced within the borders of a nation
GDP
Characterized by rising economic activity and growth above the long-term growth trend. Firms profits are likely to be rising, employment is rising, prices are rising:
Expansionary Phase
Characterized by a high point of economic activity. Firms are likely to face capacity constraints and input shortages, leading to higher costs and higher price levels:
Peak
Characterized by falling economic activity and growth. Firm’s profits are likely to be falling
Contractionary phase
Characterized by the low point of economic activity. Firms profits are likely to be at their lowest levels. Significant excess production capacity, leading firms to reduce workforce and cut costs
Trough
Characterized by economic activity beginning to increase and return to its long-term growth trend. Firms profits typically begin to stabilize as the demand for goods and services begin to rise
Recover phase
Occurs when the economy experienced negative real economic growth for two consecutive quarters.
Recession
A very severe recession where many firms will not only incur loss, but go out of business
Depression
Predict the economic activity before the fact
Leading indicators
Indicators that happen free the face that can confirm or dispute previous economic forecasts
Lagging indicators
Indicators that happen at the same time of economic activity
Coincident indicators
Characteristic of this market:
No individual firm can influence market price
Large number of supplies, small firms, homogeneous products
No barriers to entry
Perfectly elastic demand, profits are zero in long run, normal rate of return
Perfect competition
Strategic plans include maintaining the market share and responsiveness of the sales price to market conditions:
Perfect competition market
Characteristics for this market:
Many small firms selling different products
Few barriers to entry
Firms have some influence over price, highly elastic downward sloping demand curve
In the long run, no economic profits
Monopolistic competition
Strategic plans may include maintaining the market share and also include a plan for enhanced product differentiation and allocation of resources
Monopolistic competition
Characteristics include:
Few large firms selling differentiated products
Significant barriers to entry
Firms have control over price
Kinked demand curve because firms can match price cuts but ignore price increases
Economic profits are positive in the long run
Oligopoly
Strategic plans focus on market share and call for the proper amount of advertising and ways to properly adapt to price changes
Oligopoly
Characteristics of this market: Single firm with unique product Insurmountable barriers to entry Set the price Demand is in elastic (vertical) Economic profits are positive in the long ru
Monopoly
Strategic plans will likely ignore market share and focus on profitability from production levels that maximize profits
Monopoly
Regardless of the market, the firm will operate best when:
Marginal revenues = marginal costs
Governments use of government spending and taxation to influence the economy:
Fiscal policy
Fiscal policy can be used in what two parts of the business cycle?
Contraction or expansion
Used by nations central bank (federal reserve) to affect the money supply, interest rates, and credit available in the economy. Designed to promote stable prices, maximum employment, moderate interest rates, and long term economic growth:
Monetary policy
Monetary policy can be used in what two parts of the business cycle?
Expansionary - if money supply goes up, interest rates go down, demand goes up, and GDP goes up
Contractionary - if money supply goes down, interest rates go up, demand goes down, and prices go down
When interest rates are low, what happens?
Consumers will buy on credit, therefore demand goes up and GDP goes up
Three ways to control the money supply under the monetary policy:
Open market operations
Discount rates
Required reserve ratio
Buying government securities does what to the money supply?
Selling government securities does what to the money supply?
Buying = money supply up, interest rates down, demand up Selling = money supply down, interest rates up, demand down
An increase in the discount rate (the interest rate the federal reserve charges its member banks) does what to the money supply? What does a decrease in the discount rate do?
Increase = money supply down, interest rates up, demand down (reduced inflation) Decrease = money supply up, interest rates down, demand up
An increase in the required reserve ratio (how much money a bank is required to hold in its vault or on deposit with the federal reserve) does what to the money supply? A decrease in the required reserve ratio does what?
Increase = money supply down, interest rates up, demand down (decreases inflation) Decrease = money supply up, interest rates down, demand up
Put in place to protect domestic industries by reducing foreign competition which is referred as protectionism:
Trade controls
Laws that protect trade and national security by prohibiting the unlicensed export of certain information or commodities:
Export controls
Taxes on imports that increase the price of foreign goods making them less competitive to domestic goods
Tariffs
Limits the quantity of goods that can be imported over a period of time. These help protect the domestic industry.
Quotas
Prohibit the importing or exporting of certain goods from a specific country:
Embargo
Selling goods below fair market value and below the prices that domestic producers charge is called:
Dumping
