Economic Concepts and Strategy Flashcards
appreciate/depreciate currencies of stable/unstable economies
During financial crises, the currencies of stable countries appreciate relative to those of other countries.
lower inflation leads currencies to
appreciates
higher interest rate leads currencies to
appreciates
Trade surpluses lead currencies to
appreciates
difficulties in macroeconomic management
- Economists do not have reliable estimates of the effects of various policy tools on macroeconomic goals (e.g., if we reduce interest rates by x, unemployment will fall by y, within z months)
- Many policy tools impact the macroeconomy with lags that are long and variable
- The effects of some policy tools may help reach some macroeconomic goals (unemployment), but make it harder to reach other macroeconomic goals (inflation)
IMF
international monetary fund
- IMF does not have a blanket recommendation for types of exchange rate systems.
- IMF charges relatively-low interest rates.
Perfectly competitive markets are characterized by
No single trader or traders can have a significant impact on market prices
the inability of individual buyers and sellers to influence the market price.
For any single trader, prices are perfectly elastic and any attempt to sell a good or service at a price above the market price will result in no buyers.
WTO
world trade organization
to impose countervailing duties legally under WTO rules
the other country must have disobeyed a WTO panel that told it to correct a problem
country A can legally impose countervailing duties against country B, once a WTO panel rules against country B, and if country B still refuses to remove the subsidies
With technological advances, companies will
increase production, and given the same demand, they will reduce prices.
if market is in equilibrium
- price ceilings would not be binding (or effective)
- quantity supplied equals quantity demanded
- no surpluses and there no shortages
For a price control to have no effect,
it must not be binding,
e.g., a price floor set lower than equilibrium price, or a price ceiling set higher than equilibrium price.
Opening markets to foreign investment tends to lead to
- increase in investment growth rates.
- increases the interconnectivity of local and world markets, thus changing the volatility of emerging stock market returns
- Local firms’ cost of capital tends to decrease because of the greater supply of providers of capital.
marginal propensity to consume (MPC)
percentage of dollar of income the consumer is expected to spend
=change in consumption(spending)/change in disposable income
Opportunity cost is
the forgone value of the next best use of an asset.
Price elasticity of demand is defined as:
% Change in Quantity Demanded/% Change in Price
measure how responsive the quantity demanded is to change in price
= (change in quantity demanded/avg quantity demanded) DIVIDED BY
(change in price/avg price)
When demand for a product is significantly elastic
greater than 1
the increase in quantity demanded is proportionally more than the decrease in price.
Product differentiation strategies seek to
make the demand for a firm’s products more inelastic.
Seek to make a firm’s products less responsive to changes in competitor’s prices
Inflation is characterized by
price levels rising over a period of time.
Hyperinflation
refers to extremely sharp increases in price levels over a period of time.
Deflation is characterized by
declining price levels.
lower interest rate
Recession refers to
an overall contraction in economic production
inventory increases as consumer spending drops
wages grow slowly
unemployment increases
business investment in plants and equipment drop
profits fall
interest rates fall
stocks prices fall
potential income exceeds actual income
economy is typically considered in recession following two consecutive quarters of negative GDP growth
Dumping
is the practice of selling product below its cost, generally, in an effort to reduce competition
In international trade, this involves a manufacturer exporting a product at an unjustifiably low price that harms domestic producers in the importing country
Predatory pricing
involves companies attempting to eliminate competitors by charging prices that are lower than competitors’ production costs
Consumers benefit from lower prices in the short term. Consumers, however, may suffer from higher prices in the long term
New Keynesians
favor a more active role for the government in both monetary and fiscal policy
worry less about the long-term effects of excessively-loose monetary policy
monetarists
favor simply advocate stable growth in the money supply
Monetarists recognize that prices and wages may fail to be flexible
Monetarists argue for stable monetary growth, which permits interest rates to rise during expansions (along with loan demand) and fall during recessions (along with loan demand).
stagflation
Unemployment far above NAIRU
high inflation (in double digits)
if actual output exceeds potential output,
unemployment would be below NAIRU
deflation involves
an inflation rate below 0%
SWOT stands for
strengths, weaknesses, opportunities, and threats and is used in industry analysis.
structural unemployment
Structural unemployment represents a mismatch between the skills of workers and the needs of the labor market.
This usually occurs due to technological advances that change or eliminate the need for the specific skills many workers possess.
Cyclical unemployment is caused
by variations in the business cycle
Frictional unemployment
is caused by workers changing jobs or those who are new to the workforce
The discount rate is
the rate that the Federal Reserve (the Fed) charges to commercial banks for short-term loans of reserves
reserves: money bank has to keep on hand
increase in discount rate
tend to raise the fixed interest rates on mortgages
Short-term interest rates will likely increase
As interest rates increase, consumer spending and corporate profits generally decrease
The concentration ratio
is a measure of the total output of an industry by a certain number of firms in that industry, such as the 4 largest
The Herfindahl index
is a measure of the size of firms within an industry.
the game theory model
focuses on payoffs of multiple courses of actions among a small group of competitor
inferior product
their sales fall when incomes rise
When consumer incomes fall, consumers purchase more of those products
Quantitative easing
involves the Fed buying securities to add liquidity to the economy, when short-term interest rates are already close to zero
Gross domestic product (GDP) is the value of all goods and services produced by a domestic economy for a year at current market prices
GDP = Consumption by households \+ Investment \+ Government spending \+ Net exports
When the dollar depreciates,
additional dollars are required to buy the same amount of foreign currency required to pay for imports.
To reduce inflationary pressures, fed reserve will
likely adopt policies that are designed to reduce spending
done by contractionary monetary policies, such as decreasing the money supply, which reduce the amount of money circulating in the economy
Increasing margin requirements, for example, reduces the amount of borrowed funds an investor can use to buy securities, thereby reducing the funds the investor has available for investing and spending
At the peak of the business cycle,
output is at maximum and unemployment is as low as possible—or at the “natural” rate.
when unemployment rates fall particularly low,
wages tend to rise
inflation rates tend to increase more quickly
Globalization
is a process that has been ongoing for many decades. It has many aspects, including more savers having more internationally diversified portfolios (i.e., reduced home bias), more firms operating internationally, and increased international trade occurring within companies
strategic planning
process that an organization uses to identify its long-term goals and determines the best approach to achieve those goals
process is used to establish the general direction of the organization.
Full employment
implies that theres frictional and structural unemployment
Implies that the cyclical component of unemployment equals zero
full employment unemployment rate is the lowest rate that can be sustained without having repercussions on the overall economy and is not affected by changes in the composition of employment opportunities.
laffer curve
if tax rates are high, lowering tax rates might increase tax revenue.
ex: people will work less if tax is at 100%, rather than 50%.
The Federal Reserve attempting to fight inflation
through higher interest rates
transfer pricing
Transfer pricing is the process for setting prices that are charged for the transfer of goods or services between related parties such as departments of a large entity.
In international trade, it refers to the price charged by one entity to a related entity as goods or services are transferred across international borders.
Transfer pricing is the amount used to measure the cost of goods transferred between entities that are part of a related group of entities
The Phillips Curve implies that,
in the short term, policies resulting in higher inflation may also reduce unemployment.
An effective price floor would cause
quantity supplied to exceed quantity demanded.
pure competition market
products are all same
many firms
prices are lower and quantity higher
Competitors in a monopolistically competitive industry
Competitors in a monopolistically competitive industry attempt to differentiate their products from each other, greater variety
The monopolistically competitive industry produces a greater variety of products at a higher cost per unit
many firms sell slightly different versions of similar products
expansionary policy
reduce discount rate so more banks can loan out money, increasing money in circulation
buy federal securities. fed use cash to buy back securities, increasing money in circulation.
assets that appreciate in high inflation
precious metals like gold and silver
If actual GDP exceeds potential GDP,
economic growth is not sustainable and eventually prices and wages will be bid up, resulting in inflation.
GDP
gross domestic product
total dollar value of FINAL goods and services within one country.
The economy will overheat, and inflation will eventually result.
consumer price index (CPI) measures
the rate of inflation. The CPI collects data on the cost of a market basket of CONSUMER goods and services purchased in U.S. urban areas.
compare price changes over time
measured monthly by bureau of labor statistics (BLS)
compares the price of goods in a given year to a base year
collusion pricing
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.
companies agreeing formally or informally to charge prices similarly to one another
Dual pricing occurs when
a supplier charges a different, generally lower, price to foreign customers than that charged to domestic customers
Predatory pricing
involves one supplier lowering prices, often below cost, to shift demand from a competitor with the intention of inflicting damage.
repatriation restrictions
represent restrictions on bringing money into the U.S
American depositary receipts
are negotiable instruments that represent the securities of a foreign company trading in the U.S. financial markets
A default risk premium
usually an addition to the interest rate on a note or loan, is the extra amount a borrower will pay to compensate a lender for assuming the risk of default
foreign trade decicit
more foreign imports than export
international trade increase due to
- falling information cost
- falling transportation cost
- reduction in tariffs applied to imports
invisible hand
influences of supply and demand
4 types of unemployment
- frictional
- structural
- cyclical
- institutional
frictional unemployement
normal turnover of workers between jobs or new entrants into the work place
some workers leave job to find better one
some have discontinued employment but find new one quickly
market economies unavoidable always have some frictional unemployment, even in “full employment”
structural unemployment
workers who lose job due to changes in demand for goods/services or bc of technical advances that reduce needs for their skills.
-requires retraining to meet new demands and technologies.
cyclical unemployment
job losses resulting from fluctuation in business cycle.
key concern during recessions
decreases during expansions
institutional unemployment
workers cant find work due to govt restrictions on economy (wage floors for younger workers, restriction on small business to launch)
part of NAIRU
elasticity of demand greater than 1
demand is elastic
total revenue will decline if price is increased.
elasticity of demand is less than 1
demand is inelastic
total revenue will increase if price increase
elasticity is equal to 1
unit elastic
total revenue is not sensitive to price changes
goods that are larger fraction of consumer’s budget (things that cost more)
tend to be elastic (cars)
goods that are smaller fraction of consumer’s budget (things that cost less)
tend to be inelastic (salt)
expansions
take years
recessions
last months
few exceeding 2 years
price discrimination
charging diff customers diff prices
measures of inflation
consumer price index
producer price index
gross domestic product (GDP) deflator
sometimes: the overall and core personal consumption expenditures (PCE) price index.
decreasing money supply
decrease money in circulation, therefore increasing interest rate
higher interest rates results in less spending and investment, creating deflation.
deflation is decreased level of price and goods due to less spending and investments.
key concerns of macroeconomics.
Unemployment, economic growth, and inflation
okun’s law
Provides a general rule of thumb showing how economic growth rates (faster than average) often result in reductions in unemployment.
perfect competition
Prices are higher and quantity lower than under perfect competition
monetary aggregates
M1 and M2 are most commonly computed and reported
They have become harder to predict as financial markets have become more complex
Changes in them provide a relatively poor guide to changes in output and inflation in coming months
stagflation
combination of stagnation (high unemployment) and inflation.
what should govt do during times of high unemployment
standard macroeconomic theory
- reduce taxes, to increase consumer spending
- increase govt spending, which will cause deficit.
it’s ok for govt to be in deficit during times of high unemployment
phase of business cycle
peak, recession, trough, and recovery
trough= lowest
varies in length (duration), lasting several years
varies in degree of fluctuation in the economy (intensity)
order of strategic planning process
- create mission statement
- objectives translated into goals
- create actions to achieve goals
- means of measuring the effectiveness of performance towards achieving them
NATO
deals chiefly with international defense and security issues, and with economic matters only very tangentially
international bodies that deal with international economic issues
european union (EU)
G-20
world trade organization (WTO)
Gross national product
measures the total market value of products and services produced by the entire economy
Net national product
is gross national product minus depreciation.
The law of diminishing returns
value of goods decrease as more of them are made available
business with shorter, less intense business cycle
intense = fluctuation in economy
has competitive advantage
cartel
companies agreeing to limit production so that all may charge higher prices
price war
one company seeking to gain market share through temporarily low prices
oligopolistic competition
firms compete to a large extent through non-price means, such as product differentiation
price wars
collusive pricing
cartels
opportunity cost of zero
An idle space that does not have any alternative use has no forgone benefit and the related opportunity cost of zero.
direct costing
variable
fixed cost are period cost
selling cost is always period cost under absorption and direct costing
velocity of money
velocity of money (VoM) is used to calculate the number of times each dollar in the money supply is exchanged to purchase domestically produced goods and services
=nominal GDP/money supply
