Economic Concepts Flashcards
1
Q
Identify the “X” axis and “Y” axis of a graph.
A
“X” axis is the horizontal line; “Y” axis is the vertical line. (To help remember, the “Y” has a vertical element to it.)
2
Q
What are the major types (extremes) of economic systems?
A
- Command Economic System; 2. Market (Free-enterprise) Economic System.
3
Q
What is macroeconomics?
A
The economic activities and outcomes of a group of entities taken together, typically of an entire nation or major sectors of a national economy.
4
Q
What is a time-series graph?
A
A graph showing changes in a variable over time. Commonly, time is considered the independent variable and plotted on the horizontal “X” axis.
5
Q
What are the characteristics of a Command economic system?
A
Government largely determines the production, distribution and consumption of goods and services (e.g., Communism and Socialism).
6
Q
What does “ceteris paribus” mean, as used in economics?
A
Assumption that any influences other than the variable(s) being considered are held constant. Literally, “all else being equal.”
7
Q
What is the meaning of a graphed plot with a positive slope?
A
The two variables move in the same direction (i.e., the dependent variable increases as the independent variable increases).
8
Q
Define “economics”.
A
Study of the allocation of scarce economic resources among alternative uses.
9
Q
What is the meaning of a graphed plot with a negative slope?
A
The two variables move in opposite directions (i.e., the dependent variable decreases as the independent variable increases).
10
Q
Identify the major divisions of the field of economics.
A
- Microeconomics; 2. Macroeconomics; 3. International economics.
11
Q
Identify the “Intercept” on a graph.
A
The point at which the plotted line intersects the “Y” axis (i.e., at the zero point on the “X” axis).
12
Q
What are the characteristics of a Market (free-enterprise) economic system?
A
Distinct entities determine production, distribution and consumption in an open market (e.g., Capitalism).
13
Q
What is microeconomics?
A
The economic activities of distinct decision-making entities, including individuals, households and business firms.
14
Q
What is the role of graphs in economics?
A
Graphs show the relationship between two variables, usually referred to as the independent and the dependent variables.
15
Q
What is international economics?
A
Economic activities that occur between nations and outcomes that result from those activities.
16
Q
What determines “price”?
A
The supply of and demand for the commodity being priced.
17
Q
In an economic context, what makes up compensation?
A
Payments to individuals as: 1. Wages, salaries and profit sharing for labor; 2. Interest, dividends, rental and lease payments for capital; 3. Rental, lease and royalty payments for natural resources.
18
Q
List the types of economic resources.
A
Acquired from individuals as: 1. Labor: human work, skills, and similar human effort; 2. Capital: financial resources (e.g., savings) and man-made resources; 3. Natural Resources: land, minerals, timber, water, etc.
19
Q
List the characteristics of a free-market economy.
A
- Interdependent relationship between individuals and business firms; 2. Production depends on preferences of individuals with ability to pay for goods and services; 3. Production depends on availability of economic resources, level of technology, and how business firms choose to use them; 4. Production depends on sale price being at least equal to production cost.
20
Q
Describe the relationship between economic resources and compensation in a free-market economy.
A
Business firms acquire economic resources from individuals (labor, capital and natural resources), who receive compensation in return (wages/salaries, rents, interest, dividends, etc.); individuals use this compensation to acquire goods and services produced by businesses.
21
Q
Define “demand”.
A
Desire, willingness and ability to acquire a commodity.
22
Q
Describe the income effect as it applies to individual demand.
A
A given amount of income buys more units at a lower price.
23
Q
Define “market demand”.
A
The quantity of a commodity that will be demanded by all individuals (and other entities) in the market at various prices during a specified time, ceteris paribus.
24
Q
What are the factors that change market demand?
A
- Size of market; 2. Income or wealth of market participants; 3. Preferences of market participants; 4. Change in prices of other goods and services.
25
Describe the substitution effect as it applies to individual demand.
Lower-priced items will be purchased as substitutes for higher-priced items.
26
Define "individual demand".
The quantity of a commodity that will be demanded by an individual (or other entity) at various prices during a specified time, ceteris paribus.
27
Distinguish between a change in quantity demanded and a change in demand.
A change in quantity demanded is movement along a given demand curve as a result of change in price only. A change in demand is a shift in a demand curve as a result of changes in variables other than price.
28
Distinguish between a change in quantity supplied and a change in supply.
A change in quantity supplied is movement along a given supply curve as a result of change in price only. A change in supply is a shift of a supply curve as a result of changes in variables other than price.
29
Define "supply".
Supply is the quantity of a commodity (good or service) that will be provided at alternative prices during a specified time.
30
Describe the principle of increasing cost.
Production costs increase in the short-run as the quantity produced increases, because new resources are not used as efficiently as the resources used previously .
31
What are the variables that change aggregate supply?
Changes in: 1. Number of providers; 2. Cost of inputs; 3. Government taxation or subsidization; 4. Technological advances.
32
Define an "individual supply schedule".
A schedule that shows the quantity of goods that an individual producer is willing to provide (supply) at various prices during a specified time.
33
What is the slope of a normal supply curve?
A normal supply curve has a positive slope: at a higher price, a greater the quantity will be supplied.
34
Define "market supply schedule".
A schedule that shows the quantity of a commodity that will be supplied by all providers in the market at various prices during a specified time.
35
Describe the results of a change in market supply (only) on equilibrium.
1. Increase in market supply = Supply curve shifts down and to the right; Decrease in market supply = Supply curve shifts up and to the left; 2. Increase in market supply w/no change in demand = Decrease in equilibrium price and increase in equilibrium quantity; 3. Decrease in market supply w/no change in demand = Increase in equilibrium price and a decrease in equilibrium quantity.
36
Describe the results of a change in market demand (only) on equilibrium.
1. Increase in market demand = Demand curve shifts up and to the right; Decrease in market demand = Demand curve shifts down and to the left; 2. Increase in market demand w/no change in supply = Increase in both equilibrium price and equilibrium quantity; 3. Decrease in market demand w/no change in supply = Decrease in both equilibrium price and equilibrium quantity.
37
What causes a market shortage?
A market shortage is created when actual price (AP) of a commodity is less than the equilibrium price; therefore, quantity supplied is less than quantity demanded at AP (e.g., rent controls).
38
How can government directly influence market equilibrium?
1. Taxation increases the cost and shifts the market supply curve up and to the left; tax decreases have the opposite effects; 2. Subsidization decreases the cost and shifts the market supply curve down and to the right; decreases in subsidization have the opposite effects; 3. Rationing reduces demand, thus shifting the demand curve downward and to the left, thus lowering the equilibrium quantity and price.
39
What causes a market surplus?
A market surplus is created when actual price (AP) of a commodity is more than the equilibrium price; therefore, quantity supplied is more than quantity demanded (e.g., minimum wage).
40
Define "market equilibrium price".
1. Price at which the quantity of a commodity supplied is equal to the quantity of that commodity demanded; 2. The intersection of the market demand and supply curves.
41
Define "elasticity" (as used in economics).
Measures the percentage change in a market factor as a result of a given percentage change in another market factor.
42
What does "demand is elastic" mean?
If demand is elastic, the percentage change in demand is greater than the percentage change in price, the elasticity coefficient is greater than 1 and total revenue will change in the opposite direction as the change in price.
43
Define "elasticity of supply".
The percentage change in the quantity of a commodity supplied as a result of a given percentage change in the price of the commodity.
44
Identify four measures of elasticity.
1. Elasticity of Demand; 2. Elasticity of Supply; 3. Income Elasticity of Demand; 4. Cross Elasticity of Demand.
45
Define "elasticity of demand".
The percentage change in quantity of a commodity demanded as a result of a given percentage change in the price of the commodity.
46
What is represented by an indifference curve?
Various quantities of two commodities that give an individual the same total utility as plotted on a graph.
47
Define "utility", as used in economics.
Satisfaction derived from the acquisition or use of a commodity.
48
Define "utils", as used in economics.
Hypothetical unit of measure used to measure satisfaction derived from a commodity.
49
Define the "law of diminishing marginal utility".
Decreasing utility (satisfaction) is derived from each additional (marginal) unit of a commodity acquired.
50
Define "marginal utility".
The utility derived from each (additional) marginal unit (i.e., from the last unit acquired).
51
Which short-run average cost curves have a "U" shape?
Average variable cost, Average total cost and Marginal cost curves have a "U" shape. Average fixed cost has a continuously downward-sloped curve.
52
Give three examples of variable cost.
1. Raw materials; 2. Most labor; 3. Electricity.
53
Identify and describe the time periods of analysis used in economics.
1. Short-run time period: At least one input to the production process cannot be varied (i.e., and at least one input is fixed.); 2. Long-run time period: Quantity of all inputs to the production process can be varied.
54
Define the "law of diminishing returns".
The point at which the quantity of variable inputs begins to overwhelm the fixed factors, resulting in inefficiencies and diminishing return on marginal units of variable inputs.
55
Give three examples of fixed cost.
1. Property taxes; 2. Contracted rent; 3. Insurance.
56
Identify and describe the kinds (types) of cost that make up total cost.
1. Total Fixed Cost (FC): Costs which cannot be changed with changes in the level of output; 2. Total Variable Cost (VC): Costs for variable inputs which will vary directly with changes in the level of output; 3. Total Cost (TC) = FC + VC.
57
Describe economies of scale (also called increasing return to scale).
The long-run average cost curve is decreasing, reflecting that the quantity of output is increasing in greater proportion than the increase in inputs, largely due to specialization of labor and equipment.
58
What are the three major kinds (types) of cost used in short-run economic analysis?
1. Total Cost = Total Fixed Cost + Total Variable Cost; 2. Average Cost = Cost per-unit of commodity produced; 3. Marginal Cost = Cost of the last acquired unit of an input.
59
What are the four market structures normally considered in economic analysis?
1. Perfect competition; 2. Perfect monopoly; 3. Monopolistic competition; 4. Oligopoly.
60
Describe the point of short-run profit maximization for a firm in perfect competition.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost; total revenue will exceed total costs by the greatest amount at that point.
61
List the characteristics of perfect competition
1. A large number of independent buyers and sellers, each of which is too small to separately affect the price of a commodity; 2. All firms sell homogeneous products or services; 3. Firms can enter or leave the market easily; 4. Resources are completely mobile; 5. Buyers and sellers have perfect information; 6. Government does not set prices.
62
What is a "price taker" firm?
The assumption that a firm in a perfectly competitive market must accept ("take") the price set by the market and can sell any quantity of its commodity at that price. Thus, the demand curve faced by a single firm in perfect competition is a straight horizontal line at the market price.
63
What is the shape of the demand curve for a firm in perfect competition?
The demand curve faced by a single firm in a perfectly competitive market is a straight horizontal line originating at the price set by the market (of all firms).
64
How are long-run profits determined for a firm in perfect competition?
There are no long-run profits possible in a perfectly competitive market. If profits are made in the short-run, more firms will enter the market and increase supply, thus decreasing market price until all firms just break even.
65
What is the shape of the demand curve for a firm in perfect monopoly?
Downward sloping (and, since the firm is the only firm in the industry, it is also the industry demand curve).
66
In the long-run, how may a monopoly firm increase its profits?
A monopoly firm may increase its profits in two ways: 1. Reduce cost by changing the size if its operations; 2. Increase demand through advertising, promotion, etc.
67
List the characteristics of a perfect monopoly.
1. A single seller 2. A commodity for which there are no close substitutes; 3. Restricted entry into the market.
68
Describe the point of short-run profit maximization for a firm in perfect monopoly.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost. The price charged at that quantity will depend on the level of the demand curve.
69
List examples of reasons why monopolies exist.
1. Control of raw materials or processes; 2. Government granted franchise (i.e., exclusive right); 3. Increasing return to scale (i.e., natural monopolies).
70
Under monopolistic competition, what determines whether or not a firm makes a profit?
The relationship between the price (P) that can be charged and the firm's average total cost (ATC). If ATC P).
71
How are long-run profits determined for a firm in monopolistic competition?
There are no long-run profits possible in a monopolistic competition. If profits are made in the short-run, more firms will enter the market and lower the demand for each firm until each just breaks even.
72
Describe the point of short-run profit maximization for a firm in monopolistic competition.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost (provided price \> average total cost).
73
What is the shape of the demand curve for a firm in monopolistic competition?
Downward-sloping and highly elastic (because there are close substitutes for the good or service offered).
74
List the characteristics of monopolistic competition.
1. A large number of sellers; 2. Firms sell a differentiated product or service (similar but not identical), for which there are close substitutes; 3. Firms can enter or leave the market easily.
75
In what ways do firms in an oligopoly market compete?
Firms in an oligopoly market compete based on quality, service, distinctiveness, etc., but not on price, which might incite a "price war."
76
Distinguish between overt collusion and tacit collusion.
1. Overt Collusion = Firms conspire to set output, price or profit; illegal in the U.S.; 2. Tacit Collusion = Firms follow price charged by the price leader in the market; not illegal in the U.S.
77
How are long-run profits determined for a firm in an oligopoly industry?
A firm in an oligopoly industry will make profits in the long-run if average total cost is less than market price, and can continue to do so because entry into the market is restricted.
78
Describe the point of short-run profit maximization for a firm in an oligopoly industry.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost (provided price \> average total cost).
79
List the characteristics of an oligopoly.
1. A few sellers 2. Firms sell either a homogeneous product (standardized oligopoly) or a differentiated product (differentiated oligopoly); 3. Restricted entry into the market.
80
Describe a market structure that includes only a few providers.
Oligopoly market. In an oligopoly market, there are few providers of goods or services. In a monopoly there is only one provider; in perfect competition or monopolistic competition there are many providers.
81
In which form of market structure is a "price war" most likely possible?
Oligopoly, because each firm in the industry is aware of the actions of other firms in the industry.
82
Describe the least likely market structure in the U.S. economy.
Perfect Competition. A market or industry with all of the criteria of perfect competition is virtually nonexistent in the U.S. economy. Monopoly, monopolistic competition and oligopoly markets are common.
83
Describe the justification for natural monopolies.
A monopoly exists where there is a single provider of a commodity for which there are no close substitutes and where entry into the market is difficult. Natural monopolies exist where there is increasing return to scale of operations and is justified by a single entity being able to satisfy demand at a lower cost than two or more firms. Public utilities have been cited traditionally as examples of natural monopolies.
84
Describe the nature of the market structure in the U.S. economy.
The U.S. economy is a mix of market structures with different commodities/industries operating in different market structures.
85
In a macroeconomic free-market flow model, what are "leakages?"
Leakages are the purposes for which individual income is used other than for domestic consumption expenditures. These leakages include amounts of income that go for taxes, savings and payments for imports.
86
Identify the five major sectors (or elements) of a macroeconomic free-market flow model.
1. Individuals; 2. Business entities; 3. Governmental entities; 4. Financial entities; 5. Foreign entities.
87
In a macroeconomic free-market flow model, what are "injections?"
Injections are the sources of amounts added to domestic production that are do not result from domestic consumption expenditures. These injections include amounts that come from government spending and subsidies, investment spending and amounts received for exports.
88
Define "nominal gross domestic product (nominal GDP)".
Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), without adjustment for changing price levels.
89
Define "national income (NI)".
The total payments for economic resources included in all production (but not including taxes as a payment).
90
Identify important gross measures used in macroeconomics.
Measures of total activity or output in an economy including: 1. Nominal Gross Domestic Product (GDP); 2. Real Gross Domestic Product; 3. Potential Gross Domestic Product; 4. Gross National Product (GNP); 5. Net National Product; 6. National Income; 7. Personal Disposable Income.
91
Define "gross national product (GNP)".
Total output of all goods and services produced world-wide using economic resources of U.S. entities.
92
Define "net national product (NNP)".
Total output of all goods and services produced worldwide using economic resources of U.S. entities, but only including the cost of investment in new capital (excludes depreciation).
93
Define "personal disposable income".
Amount of income that individuals have available for spending, defined as total personal income after taxes are deducted.
94
Define "potential gross domestic product (potential GDP)".
The maximum final output that can occur in the domestic economy at a point in time, without creating upward pressure on the general level of prices in the economy.
95
Define "real gross domestic product (real GDP)".
Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), measured at constant prices.
96
Define "official full employment".
Officially, full employment exists where there is no cyclical unemployment. When there is official full employment, there could still be frictional, structural and/or seasonal unemployment.
97
Identify characteristics that exclude individuals from the labor (or work) force.
The following are not included in the labor force: 1. Those less than 16 years old; 2. The retired; 3. Those not actively seeking work; 4. Those who are institutionalized; 5. Military members on active duty.
98
Define "structural unemployment".
Unemployment in which members of the labor force are not employed because their prior types of jobs have been greatly reduced or eliminated, and/or because they lack the skills needed for available jobs.
99
Define "cyclical unemployment".
Unemployment in which members of the labor force are not employed because a downturn in the business cycle has reduced the current need for workers.
100
Define "seasonal unemployment".
Unemployment in which members of the labor force are not employed because their work opportunities regularly and predictably vary by the season of the year.
101
Define "frictional unemployment".
Unemployment in which members of the labor force are not employed because they are in transition between jobs or have imperfect information about job opportunities.
102
What are the factors that determine the level of imports?
1. Relative levels of income and wealth; 2. Relative values of currencies; 3. Relative price levels; 4. Import and export restrictions and tariffs; 5. Relative inflationary rates.
103
What is the effect of interest rate on investment spending?
1. Higher interest rates _ lower levels of investment; 2. Lower interest rates _ higher levels of investment.
104
Define "aggregate demand".
Total spending of individuals, businesses, governmental entities, and net foreign spending on goods and services at different prices at the macroeconomic (economy) level.
105
Define "average propensity to consume" and "average propensity to save".
1. APC = Percent of disposable income spent on consumption goods; 2. APS = Percent of disposable income saved; 3. APC + APS = 1 (i.e., Disposable Income).
106
Give at least three examples of investment spending.
1. Residential construction; 2. Nonresidential construction; 3. Business durable equipment; 4. Business inventory.
107
List the significant factors that cause a negatively-sloped demand curve.
1. Interest rate factor; 2. Wealth-level factor; 3. Foreign purchasing power factor.
108
Define the "consumption function".
The relationship between consumption spending and disposable income.
109
Define "discretionary fiscal policy".
Intentional changes by the government in its tax receipts and/or spending to increase or decrease aggregate demand. (e.g., to close a recessionary gap - increase demand;-to close an inflationary gap - reduce demand.)
110
What are the factors that influence investment spending?
1. Interest rate; 2. Demographics; 3. Consumer confidence; 4. Consumer income and wealth; 5. Current vacancy rates; 6. Level of capacity utilization; 7. Technological advances; 8. Current and expected sales levels.
111
Define "marginal propensity to consume" and "marginal propensity to save".
1. MPC = Change in consumption as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be spent). 2. MPS = Change in savings as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be saved). 3. MPC + MPS = 1 (i.e., the change in disposable income).
112
What is the slope of a Conventional aggregate supply curve?
It is a continuously positive slope, with steeper slope beginning at the level of full employment; supply increases with price, but requires proportionately higher prices at full employment.
113
What is the slope of a Keynesian aggregate supply curve?
It is horizontal up to the level of output at full employment, then slopes upward to the right; supply increases with no change in price until the economy is at full employment.
114
What is the slope of a Classical aggregate supply curve?
It is completely vertical; supply remains unchanged at various price levels.
115
What factors will cause a change in the level of a supply curve?
1. Resource availability; 2. Resource cost; 3. Technological advances. 4. But NOT the Price of the item supplied, which causes a movement along a given Supply Curve.
116
Define "aggregate supply".
Total output of goods and services at different price levels at the macroeconomic (economy) level.
117
What factors determine the effect of a change in aggregate supply (alone) on aggregate equilibrium?
Two factors: 1. Which Aggregate Supply Curve is assumed; 2. Direction of change in the Aggregate Supply Curve.
118
What is the effect on aggregate equilibrium of an increase in aggregate demand (only) when a Keynesian supply curve is assumed?
Since the Keynesian supply curve is horizontal up to the point of full employment, as Aggregate Demand increases, there will be an increase in supply (quantity) with no change in price until the level of full employment is reached, at which point both quantity and price increase.
119
What is the effect on aggregate equilibrium of a decrease in aggregate demand (only) when a Conventional supply curve is assumed?
Since the Conventional supply curve has a continuous positive slope, as Aggregate Demand decreases, both supply (quantity) and price will decrease.
120
What is the effect on aggregate equilibrium of an increase in aggregate demand (only) when a Classical supply curve is assumed?
Since the Classical supply curve is completely vertical, an increase in Aggregate Demand (alone) will increase price with no change in the quantity supplied.
121
What determines aggregate equilibrium for an economy?
The level of output and price at which aggregate demand and aggregate supply are equal.
122
Define "leading indicators of business cycles".
Measures of economic activity that occurs before a change in the business cycle.
123
Define "business cycles".
Cumulative fluctuations in aggregate real GDP which last at least two years.
124
Give examples of lagging indicators (of the business cycle).
1. Changes in labor cost; 2. Ratio of inventory to sales; 3. Duration of unemployment; 4. Commercial loans outstanding; 5. Ratio of consumer installment credit to personal income.
125
Identify and describe the elements of business cycles.
1. Peak: Point that marks the end of rising aggregate output and the beginning of a decline in output; 2. Trough: Point that marks the end of a decline in aggregate output and the beginning of an increase in output; 3. Economic Expansion or Expansionary Period: Periods during which aggregate output is increasing; 4. Economic Contraction or Recessionary Period: Periods during which aggregate output is decreasing.
126
Define "lagging indicators of business cycles".
Measures of economic activity associated with changes that occur after changes in the business cycle.
127
Give examples of leading indicators (of the business cycle).
1. Consumer expectations; 2. Initial claims for unemployment; 3. Weekly manufacturing hours; 4. Stock prices; 5. Building permits; 6. New orders for consumer goods; 7. Real money supply.
128
What causes supply-induced (or cost-push or supply-push) inflation?
Results from increases in the cost of inputs to the production process which are passed on to the final buyer in the form of higher prices.
129
What causes demand-induced (or demand-pull) inflation?
Results when aggregate spending for goods and services exceeds the productive capacity of the economy at full employment.
130
What are the consequences of inflation?
1. Lower current wealth and lower future real income; 2. Higher interest rates; 3. Uncertainty of economic measures.
131
Define "inflation" and "deflation".
1. Inflation = the rate of increase in the price level. 2. Deflation = the rate of decrease in the price level. In the U.S., most commonly measured by the CPI-U.
132
Identify three common price indices.
1. Consumer Price Index (CPI); 2. Wholesale Price Index (WPI); 3. Gross Domestic Product (GDP) Deflator.
133
Define "price indexes (or indices)".
Factor that converts prices of each period to what those prices would be in terms of prices of a specific prior (or subsequent) reference period.
134
Identify the major components of the United States banking system.
A central banking system, the Federal Reserve System, consisting of: 1. Board of Governors: Policy-making body; 2. Federal Open Market Committee: Implements monetary policy through open-market operations to affect the money supply (M1); 3. Federal Reserve Banks: Twelve district banks, each responsible for a specific geographical area of the U.S.
135
Define "monetary policy".
Management of the money supply so as to achieve national economic objectives (e.g., economic growth and price level stability).
136
Identify and define the various measures of money used by the Federal Reserve.
1. M1: Paper and coin currency held outside banks and check-writing deposits. 2. M2: Includes M1 items plus savings deposits, money-market deposit accounts, certificates of deposit (less than $100,000), individual-owned money-market mutual funds, and certain other deposits. 3. M3: Includes M2 items plus certificates of deposit ($100,000 and greater), institutional-owned money-market mutual funds, and certain other deposits.
137
What functions does money serve?
1. A medium of exchange; 2. A measure of value; 3. A store of value.
138
What are the methods used by the Federal Reserve to regulate the money supply?
1. Reserve-requirement changes (percent of loan amounts that must be held by bank); 2. Open-Market Operations (buying and selling U.S. Treasury debt obligations); 3. Discount Rate (rate of interest banks pay when borrowing from Federal Reserve Banks).
139
Identify some of the reasons for comparative advantage between countries.
Differences in availability of economic resources, including: 1. Natural resources; 2. Labor; 3. Technology.
140
Identify three major reasons for international economic activity.
1. To develop new markets for the sale of goods and services; 2. To obtain commodities not otherwise available domestically; 3. To obtain goods and services at lower costs than available domestically.
141
What are the four broad national attributes (factors) identified by Michael Porter as promoting or impeding the creation of competitive advantage by a country?
Porter's four factors are: 1. Factor endowments - the factors of production; 2. Demand conditions - nature of domestic demand; 3. Relating and supporting industries - the international competitiveness of related industries; 4. Firm strategy, structure and rivalry - how companies are created, organized, managed and compete.
142
Define "absolute advantage".
Absolute advantage is the ability of a country, business, individual or other entity to produce a particular good or service more efficiently (with fewer resources) than another entity.
143
Define "comparative advantage".
Comparative advantage is the ability of a country, business, individual or other entity to produce a particular good or service at a lower opportunity cost than the opportunity cost of producing the good or service by another entity.
144
Define a "balance of payments deficit".
A country has a balance of payments deficit when its imports and investment outflows exceed its exports and investment inflows.
145
What is a country's balance of payments account?
A summary accounting of all of a country's transactions with other countries.
146
Identify and describe the balance of payment accounts.
1. Current Account: Net $ amounts earned from export of goods and services, amounts spent on import of goods and services, and government grants to foreign entities; 2. Capital Account: Net $ amount of inflows from investments and loans by foreign entities, amount of outflows from investments and loans U.S. entities made abroad, and the resulting net balance; 3. Financial Account : Net $ amount of U.S.-owned assets abroad and foreign-owned assets in the U.S.
147
What are some of the socio-political issues associated with international trade?
1. Domestic unemployment linked to use of foreign labor 2. Loss of manufacturing capabilities; 3. Reduction of industries essential to national defense; 4. Lack of domestic protection for start-up industries.
148
Distinguish the difference between import quotas and import tariffs.
1. Import quotas are restrictions on the quantity of goods that can be imported into a country; 2. Import tariffs are taxes imposed on imported goods as a means of reducing the quantity of goods imported into a country.
149
Define "currency exchange rate".
The price of one unit of a country's currency expressed in units of another country's currency; the rate at which two currencies will be exchanged.
150
Define "indirect (currency) exchange rate".
Currency exchange rate expressed as the foreign currency price of one unit of the domestic currency (e.g., Euro cost of one U.S. dollar).
151
Define "direct (currency) exchange rate".
Currency exchange rate expressed as the domestic price of one unit of a foreign currency (e.g., U.S. dollar cost of one Euro).
152
Define "currency exchange rate risk".
The risk of loss or other unfavorable outcome that results from changes in exchange rates between currencies.
153
Define "transaction risk" as it relates to currency exchange rates.
The possible unfavorable impact of changes in currency exchange rates on transactions denominated in a foreign currency. Exchange rates may change so that transactions to be settled in a foreign currency result in receiving fewer dollars or paying more dollars to settle.
154
Define "translation risk" as it relates to currency exchange rates.
The possible unfavorable impact of changes in currency exchange rates on the financial statements of an entity when those statements are converted from one currency to another currency. Exchange rates may change so that domestic (dollar) values of financial statement items are adversely impacted.
155
Distinguish between a foreign currency exchange contract and a foreign currency option contract.
Under a foreign currency exchange contract, the obligation to buy or sell a foreign currency is firm; the exchange must occur. Under a foreign currency option contract, the party holding the option has the right (option) to buy (call) or sell (put), but does not have to exercise that option; the exchange will occur according to a decision made by the option holder.
156
Define "foreign currency forward exchange contract".
Agreement to buy or sell a specified amount of a foreign currency at a specified future date at a specified (forward) rate.
157
Define "foreign currency risk hedging".
A risk management strategy that seeks to offset losses resulting from changes in exchange rates between currencies by using contracts, swaps and other instruments which will result in changes counter to (opposite of) changes in the currency exchange rate.
158
Identify the three specific kinds of risk associated with changes in currency exchange rates.
Kinds of risk associated with changes in currency exchange rates: 1. Transaction risk; 2. Translation risk; 3. Economic risk.
159
Define "economic risk" as it relates to currency exchange rates.
The possible unfavorable impact of change in currency exchange rates on a firm's future international earning power. Exchange rates may change so that future revenue, costs and prices are adversely impacted.
160
Define "transfer price".
Amount (price) at which goods or services are transferred between affiliated entities.
161
What significant outcomes does the setting of transfer prices impact?
1. Profit recognized by separate units; 2. Allocation of taxes between units; 3. Measures of separate unit performance.
162
In addition to minimizing total income taxes, what other savings may be accomplished by the setting of transfer prices?
In addition to income taxes, the setting of transfer prices may affect: 1. Withholding taxes, that may apply to the transfer of cash as dividends, interest or royalties; 2. Import duties, which are applied to goods based on transfer prices; 3. Profit repatriation restrictions, which limit the amounts of profits that can be transferred out of a country.
163
For U.S. income tax purposes, in setting transfer prices, the resulting income should be allocated based on what factors?
1. Functions performed by separate affiliates; 2. Risks assumed by separate affiliates.
164
Identify and describe three major bases for setting transfer prices.
1. Cost: The transfer price is a function of the cost to the selling unit; 2. Market Price: The transfer price is based on the price of the good or service in the market (if available); 3. Negotiated Price: The transfer price is based on a negotiated agreement between buying and selling affiliates.
165
Describe the primary objective of the World Bank.
The primary objective of the World Bank is to promote general economic development world-wide, focusing on lending to developing countries for infrastructure, agricultural, educational and similar projects.
166
Describe the primary objective of the International Monetary Fund (IMF)
The primary objective of the IMF is to maintain order in the international monetary system, primarily by providing funds to economies in financial crisis, including: 1. Currency crisis - dramatic decreases in the value of a country's currency; 2. Banking crisis - dramatic levels of withdrawals from a country's banks (a "run on banks"); 3. Financial debt crisis - country unable to satisfy its foreign debt obligations.
167
Identify the primary purposes of the General Agreement on Tariffs and Trade (GATT).
1. Liberalizing and encouraging trade by eliminating trade barriers; 2. Harmonizing certain business-related laws; 3. Reducing transportation and other costs of doing international business.
168
Describe changes in U.S. international trade over the past 50 years.
Both U.S. imports and exports have grown dramatically over the past 50 years. The U.S. is by far the world's largest importer and one of the top three exporters. Imports and exports each account for about 15% of purchases and output, respectively. The U.S. exports only more agricultural products and services than it imports.
169
Identify factors that have facilitated or enabled an increased in global trade.
1. Reductions in trade barriers; 2. Increased economic integration between nations; 3. Regional trade agreements; 4. Development in communications (e.g., internet); 5. Development in the financial sector.
170
Identify special costs associated with international trade that often are critical in determining the viability of such trade.
1. Transaction costs, including costs of using letters of credit and costs of mitigating currency exchange risk; 2. Transportation costs, the extra costs of shipping goods long distances and/or using more costly transportation methods; 3. Tariff and other compliance costs, including the direct costs of tariffs and complying with other requirements; 4. Time costs, the costs associated with the extra time due to distance and other requirements.
171
Identify and describe the two major ways goods may be acquired internationally.
1. Foreign outsourcing - acquiring goods from foreign suppliers; 2. Foreign direct investment - producing goods in facilities owned or controlled by U.S. companies but located in foreign countries.
172
Identify risk encountered when engaging in foreign outsourcing.
1. Quality risk - goods/services so not meet buyer's standards; 2. Security risk - foreign provider misappropriates proprietary information; 3. Export/Import risk - trade barriers prevent transfer of goods/services; 4. Currency exchange risk - Exchange rates change unfavorably; 5. Legal risk - Home country or foreign country laws are violated.
173
Describe the Eurodollar market (Euromarket).
Eurodollars are U.S. dollars maintained outside the U.S. Investors holding these Eurodollars offer short-term and intermediate-term loans denominated in the U.S. dollar. These loans are outside the normal banking systems and, therefore, generally carry a lower cost of borrowing than conventional bank loans.
174
Identify the potential benefits of international capital markets (as compared with domestic markets) to both lenders and borrowers.
For investors, a greater range of investments is available and an increase in portfolio diversification is possible. For borrowers, a larger number of funding sources, increased levels of funding, and lower cost of borrowing are possible.
175
Briefly describe the shifts in the share of world-wide GDP (output) over the past 50 years or so.
While total world-wide output has more than tripled over the last 50 years, the growth has not been uniform among countries/regions. The most dramatic changes have been in the decline of European share of output and the increase in the Asian share of output. The European share of world-wide output has declined from about 36% to about 27% and the Asian share has increased from about 15% to about 25%. The share of output held by the U.S., Latin America and Africa/Middle East has remained fairly constant.
176
Briefly describe the shifts in the share of world-wide trade over the past 50 years or so.
The total level of world-wide trade has grown dramatically in the past 50 years. During that time the four largest export countries have been the U.S., Germany, Japan and China. The share of world-wide exports attributable (in total) to the four countries has remained fairly constant, around 30%. But, among those countries the share has changed significantly. The U.S. has lost share, from about 18% to 8%. Germany has maintained about a 9% share. Japan has increased share from about 3% to about 5% and China has increased share from about 2% to about 9%.
177
Define a "greenfield venture".
A Greenfield venture is a new, wholly-owned subsidiary established in a foreign country.
178
Identify the advantages and disadvantages of a wholly-owned (100%) foreign subsidiary.
Advantages: Gives the parent entity security of assets and proprietary information, and ability to control and coordinate activities of the subsidiary entity. Disadvantages: A costly means of undertaking international business and parent has entire cost and risk of the undertaking.
179
Identify the primary way an entity may engage in international business activity.
The alternative ways of engaging in international business activity include: 1. Importing/Exporting; 2. Foreign licensing; 3. Foreign franchising; 4. Forming a foreign joint venture; 5. Creating or acquiring a foreign subsidiary.
180
Define an entity's values and the operational role they play.
An entity's values are the underlying beliefs that govern the entity's operations. They prescribe the conduct of an entity in its relationship with other parties.
181
Define "strategic planning".
Strategic planning is the sequence of interrelated procedures for determining an entity's long-term goals and identifying the best approaches for achieving those goals.
182
Identify the major steps in a strategic planning process.
1. Establish entity's mission, values and objectives; 2. Assess the entity (internal analysis) and the environment in which it operates (external analysis; environmental scanning); 3. Establish goals; 4. Formulate strategies; 5. Implement strategies; 6. Evaluate and control strategic activities.
183
Identify the kinds of political factors that should be considered in a political, economic, social and technological analysis (PEST analysis) of a macro-environment.
1. Political stability; 2. Tax policy; 3. Labor laws; 4. Environmental laws; 5. International trade attitudes and restrictions.
184
Identify the kinds of factors that should be considered in a macro-environmental analysis.
1. Political factors; 2. Economic factors; 3. Social factors; 4. Technology factors; 5. Ecological factors; 6. Legal factors.
185
Identify the kinds of economic factors that should be considered in a political, economic, social and technological analysis (PEST analysis) of a macro-environment.
1. Economic structure, stability and growth rate; 2. Interest rate; 3. Inflation rate; 4. Currency exchange rates.
186
Identify the kinds of technology factors that should be considered in a political, economic, social and technological analysis (PEST analysis) of a macro-environment.
1. Level of research and development activity; 2. State of automation capability; 3. Level of technology "savvy;" 4. Rate of technology change.
187
Identify the kinds of social factors that should be considered in a political, economic, social and technological analysis (PEST analysis) of a macro-environment.
1. Population growth rate; 2. Age distribution; 3. Educational attainment and career attitudes; 4. Health and safety characteristics.
188
Identify factors that would help determine the level of threat posed by substitute goods or services.
1. Availability of substitutes; 2. Ease of use of substitutes; 3. Relative price and performance of substitutes; 4. Buyers' brand loyalty; 5. Cost to buyers of switching to substitutes.
189
Define an "industry" for purposes of competitive analysis.
An industry consists of those entities that produce goods or provide services which are identical or close substitutes and which compete for the same customers.
190
Identify factors that would help determine the level of rivalry in an industry.
1. Relative size of competitors in the industry; 2. Degree of product differentiation; 3. Cost structure of the industry; 4. Strategic objectives of firms in the industry; 5. Cost to customers of switching providers; 6. Cost associated with exiting industry.
191
Identify the five forces described by Michael Porter as determining the operating attractiveness and likely long-run profitability of an industry.
1. Threat of entry into the market by new competitors; 2. Threat of substitute goods or services; 3. Bargaining power of customers of the good or service; 4. Bargaining power of suppliers of inputs used by the industry; 5. Intensity of rivalry within the industry.
192
Identify factors that would help determine the bargaining power of suppliers in an industry.
1. Extent of substitutes for the product or service; 2. Relationship between the number of users (buyers) and suppliers (sellers); 3. Ability of supplier to move downstream in the distribution/sales channel; 4. Extent to which supplier is unionized.
193
Identify factors that would help determine the extent to which new competitors are likely to enter an industry.
1. Capital investment required; 2. Access to raw materials, technology and suppliers; 3. Economies of scale required for profitability; 4. Customer loyalty and customer cost of switching providers; 5. Access to distribution channels; 6. Governmental impediments to entry.
194
Identify factors that would help determine the bargaining power of buyers in an industry.
1. Extent of product standardization; 2. Number of suppliers; 3. Extent to which there are dominant buyers of the good/service; 4. Extent to which information about the good or service is available; 5. Cost to buyers of switching suppliers.
195
Identify factors that might constitute opportunities for an entity in a market.
1. Unmet market needs (demand); 2. Development or employment of new technology/processes; 3. Reduction in legal or regulatory restrictions; 4. Reduction of international trade barriers (quotas, tariffs, etc.).
196
Identify factors that might constitute external threats to an entity in a market.
1. New substitute products or services; 2. Changes in customer preferences; 3. Increases in legal or regulatory restrictions; 4. Increases in international trade barriers (quotas, tariffs, etc.); 5. Union demands.
197
Identify the categories of factors that should be considered in a strengths, weaknesses, opportunities, and threats analysis (SWOT-type analysis) of the relationship between an entity and its environment.
1. Strengths of the entity; 2. Weaknesses of the entity; 3. Opportunities in the environment (market); 4. Threats in the environment (market).
198
Identify factors that might constitute strengths which provide an entity a relative competitive advantage in its market.
1. Ownership of patents, copyrights, etc.; 2. Favorable reputation; 3. Proprietary processes, including those that give cost advantage; 4. Exclusive or preferential access to natural resources/commodities; 5. Desirable location.
199
Define a "differentiation strategy".
Under a differentiation strategy, an entity seeks to develop and offer a product or service that has unique features for which customers are willing to pay a premium price that more than covers the extra cost of providing the product or service.
200
Define a "focus strategy".
Under a focus strategy, an entity focuses on a narrow industry segment (an industry subgroup or "niche") and seeks to achieve either: 1. a cost advantage, or 2. differentiation.
201
Define a "cost leadership strategy".
Under a cost leadership strategy, an entity seeks to be the low-cost provider for a given level of output in an industry. The strategy is intended to enable either higher gross profits than competitors or sales at a lower price to gain market share.
202
Identify the three generic strategies enumerated by Michael Porter.
1. Cost leadership; 2. Differentiation; 3. Focus (or Niche)
203
Define "(external) environmental scanning".
Environmental scanning is the assessment of the macro-environment in which an entity operates (or may operate) and the industry within that macro-environment. Thus, environmental scanning includes consideration and analysis of the economic system, economic market and industry in which an entity operates.
204
What are the major characteristics appropriate for an entity's goals?
An entity's goals should be SMART: 1. Specific; 2. Measurable; 3. Attainable; 4. Relevant; and 5. Time-bound.
205
What are appropriate components associated with the evaluation and control element in a strategic planning context?
1. Determine what characteristics (attributes) to evaluate and measure; 2. Decide acceptable values (standards) for measurable characteristics; 3. Measure targeted characteristics; 4. Compare measurements with established acceptable values; 5. Implement changes needed to correct variances.
