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101 Cards in this Set
- Front
- Back
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Types of advantages
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Comparative
Absolute |
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Absolute Advantage
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An advantage a country has over the other countries in the production of good or service
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Comparative Advantage
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An advantage a country has in producing a good or service because it has no alternative use of its' resources that would involve a higher return
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Demand Curve Relationship
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Inverse relations with price and quantity demand
downward slopping quantity on X axsis |
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Deman curve shifts when:
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No changes in prices but price of substitue product goes up, demand will move up and to the right
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Variables that drives demand
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Prices of ther goods and services
consumer taste Spendable Income Wealth Size of Market |
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Price Elasticity of Demand
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% change in quantity demanded / % change in price
or (change in quantity demand/ave qunatity) / ( change in prices / Ave price) |
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When is price elasticity greater for a product
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when there are more substitue for a product is available
large protion of income is spent on the product a longer peirod of time is considered |
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Elasticity of demand
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Ed> 1 = elastic or sensitive to price change
Ed =1, not sensitive, unitary Ed < 1 = not elastic, not sensitive to price change |
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Elasticity of demand example
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Elasticity coefficient = 1.334, price goes down 10%
Effect on revenue? (10% X 1.334) = 13.34% increase in Quantity demand |
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Price Elasticity and Revenue Pice increse relationship
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Elastic Ed >1 = Revneu goes down with change in price
Inelastic Ed<1 = Reveneu goes up with change in price Unitary Ed=0, no change in reveneu |
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Income Elasticity and demand relationship
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Income goes up, demand for normal good goes up
Income goes down, demand for inferior goods goes up Ei = % change in quantity demand / % change in income |
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Cross Elasticity
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Measures change in demand in one good when price of related or competing product chagnes
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Corss Elasticity formula
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% change in quantity demand of X / % change in price of Y
Positive Coefficient = substitute produect Negative Coefficient = complementary prodcut 0 cofficient = unrelated product |
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Cross elasticity example
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Cross elasticity of Y = 2
Demand for X is what? 2 = (X/5%) X = 10% |
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Supply curve
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Upward slopping
direct relationship with change in price price is in Y axsis |
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Shift in supply curve
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Cost to produce goes up, no change in price, supply quantity goes down
Moves to left |
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Factors effecting supply
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1. # or size of producers
2. chagne in product cost 3. techonological advances 4. Gov. action |
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Elasticity of supply
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Es = (% change in quantity supplied / % change in price)
Es > 0 elastic Es = 0 unitary Es < 0 Inelastic |
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Factors effecting market equilibrium
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1. Government intervention
a. price ceililng b. price floor 2. Externalities - pollultion |
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Price Ceilling
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Specified maximum price that can be chagne for a good
If price ceilling < equilibrium, then will have shortage of good |
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Price Floor
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a minimum specified price for a good
Price floor > equilibrium, over production and surplus |
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Effect of shift in demand and supply
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Demand goes up, supply stays the same, price goe up
Supply goes up, demand stays the same, price goes down |
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Shift in Supply and Demand
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If supuply stays the same, demand goes up, price goes up
Supply goes up, demand stays the same, price goes down |
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Marginal Revenue Product
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The change in total reveneu form employing one additioanl unit of resources
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Whoes spending does macroeconomics focus on
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Government
Business consumer |
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Benchmark of economic activities
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GDP
Real GDP Potential GDP NDP - Net domestic product GNP - Gross national product |
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GDP or nomial GDP
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Price of all goods and services produced by a domestic economy for a year @ current market price
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Real GDP
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Price of all goods and services produced by a domestic economy for a year @ current market price without inflation effects
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Potential GDP
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maximum amount of production could take place vs real GDP.
the differece is call GDP gap |
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Positive GDP Gap
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unmployement
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Negative GDP gap
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economy running above capacity
Price should increase soon |
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NDP
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Net Domestice product
GDP minus depreciation |
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GNP
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(Gross National Product)
the price of all goods and services produced by labor and property supplied by the nation's residence |
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Calculating GDP (income approach)
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Adds up all income earned in the production of final goods and services. Includes:
Wages Rent Dividend Interest Consumption of fixed capital |
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Calculating GDP (Expense approach)
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Adds up all expenditure to purchase final goods and services by household, business and government.
Personal consumption expenditure Gross private investment of capital goods Net exports |
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Aggregate Demand and Supply
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Demand of consumer business and governement as well as foreign purchase for goods and services of the economy @ different price level
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Price level of aggretate demand (Interest Rate effect)
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Interest rate effect: as price level, increase, interest goes up, causing drop in interest sensitive spending, such as house, automobile, appliance
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Price level of aggretate demand (Wealth effect)
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When price goes up, makret value of certain financial asset goes down, causing individual to have less wealth hence consumption goes down
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International Purchasing Power Effect
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When doemstic price level goes up compared to foreign currencies, export goes down, import goes up.
this drecreases demand for domestic aggreegate product |
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GDP Multiplier Formula
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(1/MPS) X change in spending
MPS = .25, change in spending $1M Increase in GPD (1 / .25) = $4M |
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Types of Business Cycle (2)
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Contraction/Recession, Drop in GDP
Expansion/ Recovery, increase in GDP, and inflation |
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Leaving indicator of economic trend
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1. Ave. weekly hours, manufacturing
2. Ave weekly claims on umployment 3. Menufacturing new orders 4. Vendor performance 5. Building permits 6. Stock price 7. Money supply 8. Interest rate spread 9. Index of consumer expectation |
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Lagging indicator of economic trend
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1. Ave. duration of unemployment
2. Inventories to sales ratio 3. Labor cost per unit of output 4. Ave prime rate 5. Commercial and industrial rate 6. Consumer installment credit to personal income 7. Consumer price index for services |
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Factors affecting investment
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1. Rate of technology growth
2. Real interest of capital good 3. the stock of capital goods 4. Action by government 5. Acquisition, operating cost of capital goods |
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Most votalitle portion of GDP
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Investment spending
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Frictional unemployement
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Occurs because individual voluntarilty or forced to change jobs
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Strcutral unmployement
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Occurs due to change in demand for product or serivde, can be reduded by retaining programs
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Cyclical Unmployement
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Caused by condition in which real GDP is less than portential GDP
Goes up in recession time |
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Demand Pull Inflation
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Inflation occurs when aggregate spending is more than economy's normal, full-employement output capacity
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Cost - Push Inflation
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Increase in the cost of producing good and service. When decrease in aggreate output and unemployement because consumers are not willing to pay higher price
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Inflation and Unemployement
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Inverse relationship
shown in Phillips curve |
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Real vs Nominal Interest Rate
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Real - Includes inflation
Nominal - no inflation, quoted by financial institues, news papers |
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purpsoe of money
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1. medium for exchange
2. Common denominator to measure price, revenue, expense, income 3. store a value allowing firms and individuals to save |
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Types of moeny
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M1 = Currency and demand deposits
M2 = M1 + savings account and small time deposits M3 = M1 + M2+longer time deposits |
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Which type of money does the Feds focus on
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M2
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Howe does Fed effects supply of money
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change in reserve requirement
open market operation discount rate economic analyissi monetary policy retional expectation |
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Expansionary open market
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when central bank purchases gov. securities to increase $ supply and decrease interest rate
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Contractionary open market
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When central bank is selling gov securities and increase interest rate
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Classic economic theory
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this thoery holds that market equilibrium will eventually result in full employement over long run W/O gov intervention
does not support the use of fiscal policy to stimulate the economy |
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Keyhnesian Theory
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Economy does not move towards full employment on its own.
Focuses on fiscal policy to stimulate economy |
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Monetarist theory
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Fiscal policy is too crude to control the economy, use monetray policy instead
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Supply side theory
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Blostering an economy's ability to supply more goods is the most effective way to sitmulate economy.
Tax revenue lost from reduction is more than offset by tax due increased from economic activies |
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Neo-Keynesian thory
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combine keynesian and monetary
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Driver for gloabl economy
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Cross boarder movement of goods, services, technology and capital
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Factors effecting consumption
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Disposable income
expectation about future prices of goods Quantity of consumer liquid asset Amount of debt Stock of consumer durable goods Attitude about savings money interest rate |
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MPC
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C1 = slope of consuption function
Marginal prpensity to consumer. How much of the additional income will they consume |
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Consumption function
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C = Co +C1Yd
C = consumption for a peirod Yd = Disposable income Co= the Constant C1= Slope of consumption function |
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Diamond of National Advantage (michael porter)
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1. Factor condition: create skilled labor to gain comparative advantage
2. Demand condition: a country has a comprative advantage if it has a strong demestic market 3. Related adn Supporting industry: Also has storng supporting industry 4. Firm Strategy, structure, revelry: Differ typs of comprative advantages occur from diff business organizational structure. (Intense rivelry needed) |
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Obstacles to free trade
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Terrif - inport tax
Quota: retriction on quantity Embergo - total ban Voulntary export restraint Foreign currency exhange control |
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Examples of foreign currency exchange control
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Banning the use of foreign currency
Banning the possesion of foreign currency restricing currency exhange to gov aprpoved exhanger fixed exchange rate |
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Dumping
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A predatory pricing policy in which manufecturer in one country exports product at a price that is lower than the price changed in home market.
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Advantages of NAFTA
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Ability to take advantage of low cost labor
openign of new markets for good of US industires that have a comparative advantages, such as technology |
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Disadvantages of NAFTA
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Some industires are concerns that US firms will be hurt because of lower cost of products from mexico
Certain jobs will be lost |
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Blance of payment
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Summary of one national's transactions with another nation
1. current account balance of trade balance of goods adn serivces trade surplus trade deficit 2. capital account 3. Balance of payment 4. Official reserve account |
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Blance of trade
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Difference between total good imported vs. exported
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Balance of goods and service
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Value of goods and service exported vs
Value of goods and services imported |
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Trade surplus
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Export was higher than import
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Trade deficit
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Imports higher than export
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Capital account
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shows the flow of investment in fixed and financial assets
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Factors influencing exchange rate
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Inflation
interest rate balance of paymjent gove. intervention political, economic, stability, extended stock markt rallies, significant decline in the demands for major exports |
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Types of exchange rate regine (4)
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Floating exchange rate
Pegged exchange rate fixed exchange rate managed exchange rate |
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Floating exhange rate
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exchange rate is dectated by market factors
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Pegged exchange rate
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country's central bank keep the rate form diviating too far from a target bond ro value
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Fixed exhange rate
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rate is time to value of another currency such as US dollar or Euro
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Managed exchange rate
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country's central bank attemps to control the movement in currency value
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Premimum/Discoutn on exchange rate
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(Forward - spot rate/Spot rate) X (Month in year/Month in forward period).
Forward < spot, currency vlaue will go down soon |
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Foreign currency risk
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Translation risk
transaction risk |
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Option
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Allow (not require) the holder to buy or sell a specific commodity at a specified price during a specified time
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Forwards
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Negotiated contract to purchase or sell a specific quantity of commodity at a price specified at origination of contract
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Future
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Quantity and delivery date is fixed
but will pay market price |
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Business risk
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conditions that threaten mgmt's ability to execute strategy and achieve firm's objectives
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General environment factors
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Economic
demographic political, legal sociocultural technological segment global |
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Industry environment factos
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competitors
potential entrant equivelent product bargaining power of customer bargaining power of input supplier |
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Perfect competition
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Large # of seller but too small to effective price
virtually identical product can enter or leave industry easily msut be the lowes cost producer perfectly elastic deman curve no economic profit in long term no product differencitation |
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Pure Monopoloy
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Single seller with no close substitue
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Resaons for pure monopoly
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Increasing return to scale
patent control over supply of raw material gov. franchise |
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Monopoly characteristics
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Demand curve is downward slopping
entery barrier allow long term economic profit No incentive to reduce cost |
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Monopolistic Competition
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Many firms selling differenciated product and services
Focus on innovation Negative slope of demand curve sell until marginal revneue is less than variable cost |
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Oligopoly
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Significant entry to barriar
No proice fixing allowed product differenciation or high level of service knked deman curve usually there is a price leader |
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Adjusted R square in Price Elasticity
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Adjusted R Square is the % of varinace explained by price
A = Intercept X = variable b= price Demand = A +bx |
