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105 Cards in this Set

  • Front
  • Back
What's transfer pricing?
Transer pricing is da process of establishing prices used btw related parties (typically divisions of da same company) for loans, sales or leases of tangible pp, licensing of intangibles & da sale of svcs. This is in effort to increase/decrease income in certain segments for tax purposes.
Explain unemployment & inflation.
ST (philips) - inverse relationship

LT - little to no relationship
What's da full employment act of 1964?
US Gov't justified entering a mkt in which mkt forces do not allocate resources efficiently.
What are da 2 prin's taxes are based on?
1. ability to pay (progressive tax system)

2. derived benefit (like prop taxes paying for trash removal)
What's intergenerational inequity?
If debt-financed expenditures have no future benefit, intergenerational inequity results. Intergenerational inequity is when one generation pays for a diff generations benefit.
Diff btw public and private sectors?
Sweater is a private good, only benefits buyer of sweater.

Law Enforcement - public good
What's a VAT?
Each entity in production & distribution chain pays tax on da diff btw its sales & purchases. Consumers ultimately bear the incidence of a VAT. Under a VAT structure, all entities pay tax, regardless of income. A VAT tax is held to encourage savings because only consumption is taxed (not consumption & savings as the case with an income tax)!
What does absolute adv mean?
Abs adv for a good exists when da cost of producing that good in one country is less than da cost of producing that good in another country.
What are da 3 types of unemployments?
Frictional - due to labor mkt mechanics, time btw jobs

Structural - aggregate demand is equal to aggregate supply, but the nature of da supply don't match da nature of da demand! Mismatch!

Cyclical - aggregate demand is less than da supply
Explain increasing returns to scale.
When inputs triple, but outputs more than triple!

As most entities expand output, avg costs of production decline due to better use, including specialization of resources: mngmt, labor & equip.
When will an entity profit from additional resources used?
To da pt at which marg rev product = marg resource cost
What's da clayton act?
Prohibits mergers if da resulting corp would tend to lessen competition. Also prohibits price discrimination & prohibits director's in common btw 2 competing corps. (1914)
What's da robinson-patman act?
Prohibits discounts that are not based on cost differences to large purchasers. (1936)
What are historical costs?
Actual expenditures made in producing a product.
What's da diminishing marginal utility prin?
Equal increments of additional consumption of a good provide smaller & smaller additional units of utility. For instance, the 1st pair of shoes provides more utility than da 101st.
What are implicit costs?
Implicit costs are amts that would have been received if resources had been used for other purposes.
What's normal profit?
Normal profit is da cost of keeping entrepreneurial skills in da org! Also called da opportunity cost of using the owner's own resources.
What are da basis for decisions?
Marginal Factors! Always what happens by increasing something by one unit!
3 kinds of returns to scale are?
Increasing - If all outputs are changed by a factor greater than the factor that changes inputs, returns to scale increases!

constant - changes are the same for both

decreasing - opposite of increasing
What's da sherman act?
Prohibits trade restraint in interstate & foreign trade, including price fixing, boycotts, agreements to divide mkts & resale restrictions. (1890)
What's da celler-kefauver anti-merger act?
Prohibits acquiring competitors assets if the result would tend to lessen competition. (1950)
Explain what happens in da mkt with shortages & surplus.
When a shortage exists, da mkt price will rise & quan demanded will decrease, eliminating the shortage. When a surplus exists, da mkt price will decrease & quan demanded will increase, eliminating da surplus.
What's economic cost?
Economic cost is da income that an entity must provide in order to attract resource suppliers.
Briefly explain da impact of shifts in demand & supply.
An increase in demand when supply don't change will increase mkt price. Decrease opposite.

If both increase, the output quantity will increase with an indeterminate effect on mkt price.

Say demand increases but supply decreases, the mkt price will increase & an indeterminate effect on output quantity.
What's economic profit?
Economic profit is total revenue less all economic costs. When economic profit is zero, the firm is earning just a normal profit or normal rate of return.
What's cross-elasticity of demand?
It measures responsiveness of demand to changes in price of another good.

Exy
What are production factors also called?
Inputs
What's da price elasticity of demand formula?
% change in quan demanded / % in price
What's da utility theory?
That an individuals goal is to maximize the total utility from avail income. Pants & shoes ex!
What's GDP?
Da total mkt value of all final goods & svcs produced within a specified country. To avoid multiple counting of da same production, either only da value added to goods at each production stage is counted or only da final goods are counted.

ex. an aircraft engine typically would not be a final good
What are 7 leading indicators?
1. Avg hrs worked per wk by manufacturing workers
2. Initial unemployment claims
3. Stk prices
4. Raw mat'l price change
5. Residential bldg permits
6. Vendor delivery times & unfilled durable orders
7. $ supply changes
What's an example of a vertical merger?
Merger along a supply chain.

ex. an iron mine & a steel manufacturer

Horizontal would be 2 entities that are competitors!
What's da def of a peak in a bus cycle?
A peak is characterized by high levels of economic activity & full use of resources.
What's a cartel?
A group of oligopolistic firms intentionally joining to fix prices.

ex. OPEC
What's disposable income?
Personal income less personal income taxes. Disposable income is divided btw consumption, int pymts & savings!
What tends to offset monopolistic behavior?
Foreign competition!
What's national income?
NDP plus a country's NI earned abroad less indirect bus taxes.
What's "The Common" (externalities)
Assets used in common may suffer poor maintenance. Da damage to common assets are called externalities as the cost is external to da abusers!
What's it called when demand & supply intersect on a graph?
Mkt equilibrium!
In all the E (elasticity) formulas, what's common in da numerator?
% change in quantity (either demanded or supplied)!
Explain da cross-elas coefficient.
Exy = if +, goods are sub's, if -, goods are complements, if 0, goods are unrelated!
Explain da accelerator theory.
Accelator theory states that cap investment is related to da rate of change in national income.

ex. an increase in cap investments is the only way to meet any increased demand. The process of investing to meet demand continues to accelerate. Once a recovery is started, it creates a momentum that continues for some time.
What business or industries that perform much better than avg during expansions & much worse than avgs during recessions called?
Cyclical!
What's real per-captia output?
GDP / by population, adj 4 inflation. It is used as a measure of da standard of living.
What's personal income?
National income plus transfer pymts (such as corp profit distributions & ss benefits) less both corp inc taxes & undistributed profits & less ss contributions!
What's GNP?
Da total mkt value of all goods & svcs produced with resources froma specified country, not necessarily within its borders.
What's a conglomerate?
A merger of 2 entities in diff mkts!

ex. steel manufacturer & computer manufacturer
What is price leadership?
In an oligopoly, a major firm announces a price change & other mkt members match it!
In monopolistic competition, what's profit maximization?
Each producing entity equates marginal rev with marginal cost unless price is less than avg variable cost. If cost is less than avg variable cost, an entity ceases production.
Give the basics of the demand curve.
deman on x-axis, as price increase demand decreases. An increase in demand is a shift to the right.
Explain da elasticity coefficient.
If da absolute value of Ed is greater than 1, demand is classified as elastic, less than 1 it's inelastic, and = 1 is classified as having unitary elasticity.
How does expectations influence demand?
Positively! ex. if cons expect prices to go up, or inflation, they buy more now!
Explain surplus (economic rent).
Surplus or ER is deemed earned when an input is paid or purchased for higher amt than the next highest bidder-consumer of that input would pay.

ex. a muscian earns 500k as a rock star. His alternative work would be a cashier for 20k. ER is 480K.
What's the def of CE of demand?
Closely related goods influence deman.

1. Subs

2. Complements
What's always on the y-axis?
$
What's the def of demand?
Demand is da amt of a good that consumers as a group will (are willing and able to) purchase at a given price during a given time period. Demand analysis concentrates on cons behavior!
What's the law of supply?
Da price & quantity of a good are related directly, that is, da greater da price, da greater da supply!
What are some things that can increase demand?
1. Increase in sub's price or decrease in complements price for normal goods.

2. Increase in cons inc for normal goods.

3. Decrease in cons inc for inferior goods.

4. Expected future price increases
What's the def of price elasticity of demand?
It measures responsiveness of demand to changes in price. If demand is elastic, demand will fluctuate as the price changes!
How does income influence demand?
1. Normal goods - positive relationship

2. Inferior goods - negative

ex. as income increases so does the demand for normal goods!
What's da def of elasticity?
The measure of how responsive da mkt is to change in a determinant.
What's da relationship btw price & quantitiy demanded?
Inverse
How does the future expected price of a good affect supply currently?
An increase in da expected future price for good incourages firms to supply less now!
What's communism?
Resources are owned by da state & most decisions are made by da state.
What's da def of supply?
Amt of a good that producers as a group will (are willing and able to) supply at a given period of time.
How is the gen'l price level related to da purchasing pwr of $?
Inversly!
What's a balanced budget?
Taxes = Gov't Expenditures
What's a margin req't?
When the fed req's a min down pymt that applies to securities.
What's da monetarist theory?
A steady, restrained growth of $ supply is more significant than fiscal policy on economic activity, inflation & employment.

Inflation - in da long run, excessive increases in da $ supply cause inflation. Inflation can be controlled only by restricting $ supply growth.
Explain the open-mkt Op's of monetary control.
Purch and sell gov't debt

1. Selling - decreases $ supply by taking it from circulation

2. Purchase - opposite!
What's a multiplier coefficient?
Any increase in autonomous investment, consumption, or gov't spending results in a multiplied increase in national income. Da same income is spent several times. Da impact of this effect is determined by the marginal propensity to save (MPS).
What's a disc rate?
When banks borrow from fed. Lowering da discount rate encourages borrowing & increases the money supply.
What's da model of closed economy?
In a simple economy w/o a gov't,a money mkt or int'l trade, equilibrium income occurs when aggregate savings equals aggregate investment. In other words, equilibrium income occurs when aggregate demand (consumption & investment) equals aggregate supply. With gov't - taxes & gov't expenditures play a factor!
What are 3 examples of near money?
1. Gov't sec's
2. Nonchecking saving deposits
3. Time deposits
What are da 3 components of investment?
1. Residential Const
2. Inventories
3. P & E
Brief explanation of monetary policy is?
Monetary policy is policy intended to control da money supply. Control of money supply growth is deemed essential to control inflation, spending & credit availability. Stable int rates & monetary control are mutually exclusive goals. The Fed focuses sometimes on int rates & sometimes on $ supply.
What are some things that can increase/decrease investment?
High tech growth - Increase
Real Int Decline - Increase
High Cap Good Stk - decrease
Higher acq & maint - decrease
What's da supply side theory?
Cutting taxes stimulates work, savings & investments & restores incentive to the economy.
What's da PPF?
All da possible combo's of output, with all da other factors held constant.
What's da neo-keynesian theory?
Fiscal policy influences econ activities, but excessive monetary growth leads to inflation.
Explain how a shift or inflation is in the PPF.
1. Shift - outward shift is called economic growth, a nation can have more output. Change in the PPF are caused by changes in resources (land, labor, cap, etc.) or technology.

2. Inflation - If production is at the PPF boundary & demand increases, consumers will bid up prices of goods.
What's the fwd exchange rate?
The fwd exchange rate is da rate agreed to be paid in the future. Da diff btw da spot rate & da fwd exchange rate is called a discount or premium. If fwd is more than spot, it's a premium!
What's da basics of keynesian economics?
Keynesian economics holds da theory that an economy can be in equilibrium at less than full employment. Keynesian economics focuses on spending & fiscal policy (gov't stuff) as determinates of economic activity.
What's hedging?
It's a risk avoidance technique! Hedging involves offsetting a G or L on rec/pay denominated in foreign currencies by purchasing or selling fwd exhange contracts. Buying these contracts covers liab in da foreign currency, selling covers rec!
What's in the capital or current accts?
Current - bal of goods & svcs, net int & dividends, & net unilateral transfers!

Capital - tracks cash flows resulting from the exchange of fixed or financial assets.
What are 3 things that measure inflation?
1. CPI - comparison of the items price in a "typical" shopping cart to a base value.

2. WPI - same as above except wholesale quantities.

3. GDP Deflator
Explain factor endowment.
The Heckscher-Ohlin theory states that regional differences in efficiency occur because of diff in supply of prod factors: land, labor, & cap! For ex, farming is favored by a slowly moving river as a reliable irrigation source, but manufacturing is favored by a swiftly moving river as a power source.
What's da basics of classical economies?
Classical economics theory holds that an economy is in equilibrium at full employment, the economy generates & maintains full employment over the long run w/o artificial (gov't) intervention due to price & wage flexibility.
What's da demand-pull theory?
Inflation is caused by xs aggregate demand for goods & svcs. Usually xs aggregate demand is deemed to be due to expansionary fiscal policy (additional gov't expenditures).
Give examples of capital, labor & land intensive goods.
Cap intensive - req's high level of investment, like a construction plant to build an aircraft.

Labor intensive - req's high level of labor, for ex. da labor involved in making computer programs.

Land intensive - ex. land involved in beef production.
What's da spot rate?
It's da rate paid for currency now!
What's an export incentive?
Subsidies are gov't pymts to producers, typically in a protected industry. Indirect subsidies, or incentives, include favorable tax treatment on export-related income. This practice might have similar effects on the foreign country as import quotas or tariffs.
What's da purpose of trade barriers?
Trade restrictions exist due to many factors. An exporting country may allow conditions that are not permitted in a country that would otherwise import goods from that exporting country.
What's sovereignty risk?
Sov risk is risk of significant restrictions on removal of the investment, either as dividends or sale of the operations, including nationalization.
When does currency appreciate or depreciate?
Currency appreciates when it can buy more units of another currency & depr's when it can buy fewer units of another currency.
Give 3 reasons against free trade.
1. Incubate infant industry - one argument is that a country has a comparative adv in the long run, but a temporary disadvantage!

2. Protect local jobs from cheap foreign labor!

3. Fair competition tariff - an import tariff that brings da cost of imported goods up to the domestic price level.
Explain current & capital in int'l pymts.
Int'l pymts - imports, exports, debt or equity investments - rarely net to 0! Da balance of pymts (da def or surplus) typically is tracked in 2 prin accts - current or capital!
What's comparative adv?
Comp adv for a good exists when the opportunity cost of producing that good is less than the cost of producing other goods in the same country compared to another country.
What's a trade barrier?
Usually, the effect of trade barriers is to keep resources (land, labor, cap, etc) in less efficient protected industries rather than move the resources to relatively efficient industries.
Which goods do countries tend to export?
Goods in which they have a comparative adv! For ex in a model with only labor, land & cap as production factors, countries with a relative abundance of labor will import cap-intensive goods & land intensive goods & export labor intensive goods!
Barrier vs free trade?
Barrier support - competition costs are obvious!

Free Trade Support - competition benefits are less obvious!
What are 4 impacts of inflation?
1. Discourages saving
2. Restricts Lending
3. Strained relationships (uncertainty with LT contracts)
4. Wealth redistribution (debtors repay with less valuable dollars, pensions pay out less valuable $, etc)
What's da cost-push theory of inflation?
Inflation is caused when increased product costs are passed on the da consumers in da form of higher prices. Labor unions are considered da primary source of these costs.
What's da 4 objectives of da EU?
1. Establish euro citizenship
2. Ensure freedom, security & justice
3. Promote economic & social progress
4. Assert Europes role in da world
Explain what happens when an exchange rate is set above the mkt equilibrium price.
There's a surplus! More people are willing to supply than there is demand & a deficit of pymts results!