Economics Basics Flashcards
What is the business cycle?
Expansion - Peak - Contraction - Trough - Recover (“Every peak contracts through recovery”)
What is GDP?
measurement of economic output WITHIN a country’s borders. All FINAL goods AND services
What measures economic growth?
change in real GDP over time
What helps predict business cycles?
leading, lagging, and coincident indicators
What influences LRAS?
factors of productions ONLY. NOT price level
What heavily influences shift in the SRAS curve?
profit opportunity
Real GDP
= nominal GDP/ GDP deflator x 100
Multiplier Effect
= change in REAL GDP resulting from an increase in spending
Multiplier
= 1/(1-MPC) or 1/MPS
a higher MPC will result in a larger multiplier… more consumption has larger effect on GDP
How can we measure GDP?
Expenditure approach or Income Approach
What are the economic indicators/measures?
- Real GDP
- Unemployment Rt
- Inflation Rt.
- Interest Rt
Unemployment Rate
= Unemployed (seeking past 4 weeks)
___________________________________
Total Labor (seeking, >16, non-institutional)
Expenditure Approach to GDP
= Government spending + Gross Investment + Household Spending + Net Exports (GICE)
National Income (NI)
- Gross National Product (GNP) - economic depreciation - Indirect business tax
- Net national product (NNP) - indirect business tax
Disposable income
Personal income - income taxes
Income Approach to GDP
Income of proprietors + profits of corporations + interest + rental income + adjustments for net foreign income and misc + taxes + employee comp (wages) + depreciation (IPIRATED)
Natural rate of unemployment
structural (skills), frictional (temp overturn/ job seeking), seasonal (change in demand)
@ natural rt. when economy is at POTENTIAL GDP
Full Employment
No cyclical (a result of BUSINESS CYCLE and recession/ decrease in real GDP)
Stagflation
low GDP
high unemployment
inflation
Measurement of inflation
% change in the consumer price index
Causes of inflation
- Demand pull (good) : increase in AD
2. Supply push (bad): decrease in SRAS
Philips Curve
Shows that inflation and unemployment have an inverse relationship (except in stagflation)
Fed Monetary Policy
- Open market operations (buy/sell securities)
- Change the discount rate (charged to commercial bank)
- Changing the reserve ratio
Gov’t Fiscal Policy
Taxes (revenue) and Spending (expenses)
How the gov’t finances spending
- Taxes (revenue)
- issuing debt (borrowing)
- printing money (inflation)
Surplus/Deficit and GDP
Surplus = decrease in GDP Deficit = Increase in GDP (expenditure approach to measuring GDP)
M1
Currency, coins, CHECKing accounts, travelers CHECK
M2
M1 + savings, money market, mutual funds, CDs < $100k
Elasticity
% change in Qd / % change in P (slope formula)
> 1 = elastic
< 1 = inelastic
1 = unit elastic
Cross Price Elasticity
% change in Qdx / % change in Py
Positive = substitute goods
Negative = complementary goods
Income Elasticity
% change in Qd/ $ change in Income
Positive = normal goods
Negative = inferior goods
Major cost functions
- Marginal Cost
- Average Total Cost
- Average Variable Cost
- Average Fixed cost
Marginal Cost
= change in TC/ change in Q (slope formula)
- intersects ATC and AVC at lowest points
- produce where MC = MR
SWOT Analysis
- used to develop appropriate strategic plan
- SW (internal)
- OT (external)
Factors of production
CELL
- capital goods
- entrepreneurial talent
- land
- labor
SCOR Metrics
- responsiveness
- agility
- reliability
- cost
- assets (ROA…)
SCOR Model
Plan –> Source –> Make –> Deliver –> Return
Oligopoly Kinked Demand
MATCH price cuts and IGNORe price increase
Nominal Interest rate
= REAL time value of money Interest + inflation
Recession
2 successive quarters of shrinkage in the economy (decrease in GDP)
Business Process Management
“Plan Do Check Act (PDCA) Model
- fully ALIGN resources to achieve customer satisfaction as efficiently as possible, emphasizing continuous quality improvement
- INCREMENTAL change
Rational Assessment Plan
- Strategic Gap analysis (industry v. us)
- Review of Competitive priorities
- Review of Production objectives
- Selection of Improvement program
Business Process Reengineering
Radical changes, often driven by technology
TQM
org commitment to customer-focused performance emphasizing quality and CONTINUOUS improvement (included quality circles/ collaboration)
Quality Costs
Conformance: Prevention and Appraisal
Nonconformance (failure): Internal and External failure
- inverse relationship between the two
Demand flow Performance Improvement
use customer demand as the basis for resource allocation (v. sales forecasts or master schedule)
Six Sigma
- rigorous metrics of evaluation of goal achievement (CONTINUOUS quality- improvement program requiring SPECIALIZED training)
- emphasis on COST REDUCTION (DMAIC & DMADV)
- DMAIC = define, measure, analyze, improve, control (sustain)
Project Life Cycle
Authorize (charter and statement of work docs) –> Plan –> Implement –> Monitor –> Close
Project Deliverable Criteria
Smart, Measurable, Attainable, Relevant, Timely (SMART)
Executive Steering Committee
Overall strategic guidance and approve deliverables
Measuring globalization
% of World Trade / GDP
Motivation for globalization
comparative advantage, imperfect markets, product cycle
Developed Nations (G7)
US, Japan, UK, France, Germany, Italy, Canada
-Usually trade deficits (net imports)
Emerging Nations (BRIC)
Brazil, Russia, India, China
-Usally trade surpluses (net exports)
Required Rate of Return
Nominal Interest (real + inflation) + Maturity risk (interest rate) + liquidity premium + default premium
Perpetuity Value
Dividend/ Required Return
Gordon Growth (Constant)
D1/ ( r - g)
Leading PE Ratio
P0/ E1
PEG Ratio
PE Ratio / (Growth rt x 100)
Price to Sales Ratio
P0/ S1
Price to Cash Flow
P0/ CF1
EBOCA
Control Environment Principles:
- Ethics
- Board Oversight
- Org Structure (structure, authority, responsibility)
- Commitment to competence
- Accountability
COSO Internal Control Objective
To provided reasonable assurance that an entity will achieve its stated objectives (ORC)
Components of ERM
- Internal Environment
- Setting Objectives
- Event ID
- Assess Risk
- Respond to risk
- Activities (control)
- Information and communication
- Monitoring
Change control Process
Control baseline –> change identification –> change management –> change update
Total Factor Productivity
Output
_________
Total Prime Cost
Partial Factor Productivity
Output
___________
Specific Quantity (Material OR Labor
Internal Performance Benchmarks
control charts, pareto diagrams, cause & effect (fishbone diagram)
FIFO Costing
Current Cost
________________
Beg. Inv. to complete + Started and Completed + End %
Weighted Average Costing
Beg. WIP Cost + Current Cost
________________________
Units Completed + End %
ABC Service Cost Allocation
Direct or Step - down
Byproduct Selling Price
Apply to main produce as reduction of COGS or misc income
Abnormal spoilage
period expense in COGS
Profitibility Index
PV of future CF/ initial investment
Degree of Operating Leverage
% Change in EBIT
_______________
% Change in Sales
Degree of Financial Leverage
% Change in EPS
______________
% Change in EBIT
Degree of Combined Leverage
% Change in EPS
_______________
% Change in Sales
Equity Cost of Capital options
- cost of issuing new stock
2. cost of retained earnings = CAPM, DCF, BYRP, (D1/P0) + g
Optimal Capital Structure
Lowest WACC (produces the highest valuation)
Aggressive WC policy
Working capital financed with ST liabilities
Cash Conversion Cycle
Days in AR + Days in Inventory - Payables Deferral
Primary source of ST financing for firm
Trade Credit
ROI/ ROE
Income
_______________ or Profit Margin X Total Asset Turnover
Invested Capital
Cost of Debt
EFFECTIVE / Market / YTM Interest
___________________________
Debt cash available
EVA
Residual Income method using WACC (can refine with adjustments)
Times interest earned
EBIT/ Total Interest Expense
Average Receivables
Average Daily Sales * Average Collection Pd
Reorder Point
Safety Stock (units) + normal consumption during lead time (reorder level)
Economic Order Quantity (EOQ)
(2* annual Sales*Order cost/ Carrying cost per unit) ^ 1/2
Breakeven Point
Total Revenue = Total Cost
Contribution Margin Ratio
Contribution Margin / Revenue
Increase in Inventory (Absorption v. Variable NI)
Absorption net income HIGHER
Breakeven point in Units
Fixed Cost/ CM per unit
Breakeven point in $
Fixed Cost/ Contribution margin ratio
Marginal Cost
variable cost + avoidable fixed costs
Special Order Decision
Accept if: SP per unit > relevant cost
Make v. Buy Decision
Accept if: Outside purchase price > relevant cost
Sell or Process Further Decision
Accept if: incremental revenue > incremental cost
Keep or Drop segment
Keep Segment: lost contribution margin > avoidable fixed cost
Margin of Safety ($)
Total Sales - Breakeven Sales $
Margin of Safety (%)
Margin of safety (%)
_______________
Total Sales
Tactical Plan length
18 months
Financial Scorecard for SBUs
- Cost
- Revenue
- Profit
- Investment
Balanced Scorecard Critical Success Factors
- Financial
- Internal Business
- Customer
- Advancement of HR
Balance Scorecard Characteristics
- Accurate
- Timely
- Understandable
- Specific Accountability
