Legal, Economic, and Regulatory Issues Flashcards
Is a promise or an agreement that the law recognizes as establishing a duty of performance. It is enforceable by applying a remedy for its breach.
Contract
The basic elements of a contract are:
1) Mutual Assent
2) Consideration,
3) Capacity, and
4) Legality
May require that some contracts be in writing to be enforeceable.
Statute of frauds
Is the principal measure of national economic performance. It is the total market value of all final goods and services produced within the boundaries of a country, whether by domestic or foreign-owned sources, during a specified period of time (usually a year).
Gross domestic product (GDP)
Calculates GDP as the sum of all expenditures in the economy.
Personal consumption expenditures + Investment expenditures by business + Governmental expenditures for goods & services + Net exports (Total exports - Total imports)
Expenditures approach GDP
Arrives at the same total GDP as the expenditures approach through a different calculation
Salaries & Wages + Rental income + Interest income + Profits of corporations, proprietors, and partnerships = National Income + Indirect business taxes + Net Income of foreigners = Net Domestic Product (NDP) + Depreciation (consumption of fixed capital)
Income approach
Involves adding the total market value of all final goods & services in current dollars
Nominal GDP
= Nominal GDP divided by Price index (in hundredths)
Real GDP
The overall trend of growth is periodically interrupted by periods of instability. This tendency toward instability within the context of overall growth is termed
The business cycle
The economy is at full employment and produces maximum output for the current level of resources and technology.
Peak
Is defined as a period during which real GDP falls and unemployment rises.
Recession
Economic activity reaches its lowest ebb.
Trough
Output and employment rise.
Recovery
Are variables that in the past have had a high correlation with the change in GDP. Forecast changes in economic activity.
Economic indicators
Types of economic indicators.
1) Leading economic indicator
2) Lagging indicator
3) Coincident indicator
Is a forecast of future economic trends.
Leading economic indicator
Changes after the change in the economic activity has occurred.
Lagging indicator
Changes at the same time as the change in the economic activity
Coincident indicator
Is an increase in the general level of prices in the economy.
Inflation
An inflation in currency is a
Decrease in the purchasing power of that currency.
Is a measure of the price of a market basket of goods and services in 1 year compared with the price in a designated base year.
Consumer price index (CPI)
= (Cost of market basket in current year divided by Cost of market base in base year) x 100
Consumer price index (CPI)
Is calculated by comparing the change in the 2 years’ consumer price indexes.
Rate of inflation
= (Current-year price index minus Prior-year price index) divided by Prior-year price index
Rate of inflation
Unemployment can be categorized as:
1) Frictional unemployment
2) Structural unemployment
3) Cyclical unemployment
4) Full employment
Is the amount of unemployment caused by the normal operation of the labor market.
Frictional unemployment
Results when the composition of the workforce does not match the need. It is the result of changes in consumer demand, technology, and geographical location.
Structural unemployment
Is directly related to the level of an economy’s output. As consumers slow their spending, entities cut back production and lay off workers.
Cyclical unemployment
The natural rate of unemployment consist of the sum of frictional and structural unemployment.
Full employment
A change in the money supply affects the economy by changing the
Interest rate
Stimulates investment spending by businesses and increases GDP.
An increase in the money supply (expansionary monetary policy) decreases the interest rate in the economy.
A fall in investment spending reduces GDP, which decreases the price level and reduces inflation.
A decrease in the money supply (tight monetary policy) increases the interest rate in the economy
A nation’s central bank has the following three main tools of monetary policy:
1) Open-Market operations
2) Changes in the Required reserve ratio
3) Changing the Discount rate
Is the most valuable tool. The central bank can either purchase government securities from, or sell them to, commercial banks.
Open-market operations
Are used less frequently. A commercial bank must have a certain percentage of its total deposits on reserve. Is the percentage of deposits that must be kept on hand.
Required reserve ratio
Rate at which banks can borrow money from the central bank.
Changing the discount rate
Countries can mutually benefit from international trade due to
Comparative advantages
A country has a comparative advantage in the production of a good when it has a
Lower opportunity cost than another producer
Is any measure taken by a government to protect domestic producers.
Protectionism
Protectionism takes many forms, such as:
1) Tariffs
2) Import quotas
3) Domestic content rules
Are consumption taxes designed to restrict imports.
Tariffs
Set fixed limits on different products.
Import quotas
Require that at least a portion of any imported product be constructed from parts manufactured in the importing nation.
Domestic content rules
Set one unit of currency equal to a given number of units of another currency by law.
Fixed exchange rates
Allow the market to determine the exchange rate of two currencies.
Floating exchange rates
When the demand for a foreign country’s product rises, demand for its currency
Also rises
The following factors affect currency exchange rates:
1) Relative income levels
2) Relative interest levels
3) Relative inflation rates
Citizens with higher incomes look for new consumption opportunities in other countries, driving up the demand for those currencies.
Relative income levels
When the interest rates in a given country rise relative to those of other countries, more investors purchase the high-interest country’s currency to make investments, driving up the demand for this currency.
Relative interest rates
When the rate of inflation in a given country rises relative to the rates of other countries, the countries, the products of that country become relatively expensive and the demand for that country’s currency falls.
Relative inflation rates
Tax rate structures include:
1) Progressive
2) Proportional
3) regressive
Higher income persons pay a higher percentage of their income in taxes
Progressive
At all levels of income, the percentage paid in taxes is constant.
Proportional
As income increases, the percentage paid in taxes decreases.
Regressive
Is the rate applied to the last unit of taxable income.
Marginal tax rate
Is the total tax liability divided by the amount of taxable income.
Average tax rate
Is the total tax liability divided by total economic income
Effective tax rate
Addresses quality of life issues that are difficult for market forces to remedy, such as workplace and product safety, pollution, and fair employment practices.
Social regulation
One purpose, is to provide complete and fair disclosure to potential investors in the initial issuance of securities.
Securities law
Restraints of trade in domestic or foreign commerce may be prohibited by
Antitrust law
A government agency may help to maintain the safety of drugs, food, cosmetics, etc., and may also enforces laws requiring the labeling of hazardous substances.
Consumer protection laws
An agency may be created to centralize environmental control functions of the national government.
Environmental protection