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Macroeconomics
Macroeconomics is the study of the economic system as a whole
Measurements
GNP, GDP, Consumer Price Index
GNP
GNP- (gross national product) the total dollar value of all new goods and services sold during a fiscal year, which was produced by nation’s permanent residents, regardless of where they produced it.
GDP
GDP- (gross domestic product) the total dollar value of all new goods and services sold during a fiscal year, which were produced within the geographic borders of a country regardless of the nationality of the producers.
Consumer Price Index
Consumer Price Index- a statistical time-series measure of a weighted average of pricesof a specified set of goods and services purchased by consumers. It is a price index thattracks the prices of a specified basket of consumer goods and services, providing a measureof inflation. The CPI is a fixed quantity price index and considered by some a cost-of-living index.
Consumer Price Index
The CPI can be used to track changes in prices of goods and services purchased for consumption by households, i.e., of the consumer basket. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (such as stocks, bonds, life insurance, and homes) are not included.
Historical Perspective
Keynesian & Monetarist
Keynesians
Created by John Maynard Keynes. Promotes a mixed economy, where both the state and the private sector play an important role. Government policies could be used to promote demand, to fight high unemployment and deflation. “Believe government action is helps fight inflation”.
What did Keynes believe the government's role was in depression.
Keynes believed that the government was responsible for helping to pull a country out of a depression. If the government increases their spending, then the citizens are encouraged to spend more because more money is in circulation. People will start to invest more, and the economy will climb back up to normal.
Monetarists
Associated with Milton Friedman. It is a set of views concerning the determination of national income and monetary economics. It argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability. “Believe that government action is the root of inflation”. It focuses on the supply and demand for money as the primary means by which economic activity is regulated.
Policy Tools
Fiscal Policy v. Monetary Policy: Fiscal policy and monetary policy are the macroeconomic tools that governments have at their disposal to manage the economy.
Fiscal Policy
Fiscal Policy: the deliberate and thought out change in government spending, government borrowing or taxes to stimulate or slow down the economy.
Why do governments use fiscal policy?
Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment and economic growth.
EXAMPLES: Governments fund projects by raising money
1. Taxation of the population 2. Seignorage, the benefit from printing money 3. Borrowing money from the population,resulting in a fiscal deficit (A fiscal deficit is often funded by issuing bonds, like Treasury bills or consols. These pay interest, either for a fixed period or indefinitely. If the interest and capital repayments are too great, a nation may default on its debts, most usually to foreign debtors.
Discretionary Fiscal Policy
a) Discretionary Fiscal Policy: macroeconomic policy based on the judgment of policymakers as opposed to reliance on rules such as the Taylor rule.
Automatic Stabilisers
b) Automatic Stabilisers: work as a tool to dampen fluctuations in real GDP without any explicit policy action by the government.
Examples of stabilisers
Examples of stabilisers are: Induced Taxes, (Transfer Payments), and Imports.
Supply Side Fiscal Policy
Supply-side fiscal policy follows lessons illustrated by the Laffer Curve. The Curve traces the fact that government revenues are zero at two points: when tax rates are 0% and 100%. Between those two extremes in tax rates, there are two tax rates (one high and one low) that will produce exactly the same amount of tax revenues at every level. The lower of these two tax rates will achieve higher levels of production, employment and economic growth while producing the same total tax revenues. Supply-side economics stresses the impact of tax rates on the incentives for people to produce and to use resources efficiently.
Laffer Curve
The Laffer curve is used to illustrate the concept of Taxable income elasticity, the idea that government can maximize tax revenue by setting tax rates at an optimum point. The curve, popularized by Arthur Laffer though widely known among economists long before that, is primarily used by advocates who want government to reduce tax rates (such as those on capital gains) whenever it appears they exceed this "optimum" level.
Budget Debate
Monetary Policy
the process by which the government, central bank, or monetary authority manages the money supply to achieve specific goals.
Monetary Policy Tools
1. Money Supply 2. The Federal Reserve 3. FMOC 4. Interest Rates
Money Supply
Money Supply ("monetary aggregates", "money stock") The quantity of money available within the economy to purchase goods, services, and securities. The money supply affects the interest rates. The two are related inversely, such that, as money supply increases interest rates will fall. When the interest rate equates the quantity of money demanded with the quantity of money supply, the economy is working at the money market equilibrium.
The Federal Reserve did what?
Created centralized banking;
What are the main roles of the Fed. Reserve?
1. conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates 2. supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers 3. maintaining the stability of the economy and containing systemic risk that may arise in financial markets 4. providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system
FMOC (or FOMC)
The Federal Open Market Committee (FOMC), a component of the Federal Reserve System, is charged under U.S. law with overseeing open market operations in the United States, and is the principal tool of US national monetary policy. (Open market operations are the buying and selling of government securities.)
Interest rates
Interest rates: are the main determinant of investment on a macroeconomic scale. Broadly speaking, if interest rates increase, then investment decreases due to the higher cost of borrowing (all else being equal).
Interest rates (cont)
Interest rates are generally determined by the market, but governmentintervention - usually by a central bank- may strongly influence short-term interest rates, and is used as the main tool of monetary policy. The central bank offers to buy or sell money at the desired rate and, due to their control of certain tools (such as, in many countries, the ability to print money) they are able to influence overall market interest rates.
Interest rates (cont)
Investment can change rapidly to changes in interest rates, affecting national income, and, changes in output affect unemployment.
Macroeconomic Issues
Inflation & Unemployment
Explanation of Inflation:
Explanation of Inflation: a general rise in prices measured against a standard level of purchasing power. Previously the term was used to refer to an increase in the money supply, which is now referred to as expansionary monetary policy or monetary inflation. Inflation is measured by comparing two sets of goods at two points in time, and computing the increase in cost not reflected by an increase in quality. There are, therefore, many measures of inflation depending on the specific circumstances. The most well known are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole economy.
Types of Inflation:
1. Demand-Pull inflation 2. Cost push inflation
Demand-Pull inflation
Demand-Pull inflation is from high demand for goods and low unemployment.
Cost push inflation
Cost push inflation: presently termed "supply shock inflation," from an event such as a sudden decrease in the supply of oil, which would increase oil prices. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.
Money, Interest Rates, and Inflation (relationhship between)
Loans, bonds, and shares have some of the characteristics of money and are included in the broad money supply. By setting the interest rate, the government institution can affect the markets to alter the total of loans, bonds and shares issued. Generally speaking, a higher real interest rate reduces the broad money supply. Through the quantity theory of money, increases in the money supply lead to inflation. This means that interest rates can affect inflation in the future
Unemployment Topics
Sticky Wages, Minimum Wage Laws, Phillips Curve, FEUR
Sticky Wages
Sticky Wages: unresponsive wage levels: wage levels that do not respond readily to changes in the labor market (Keynesian Model)
Minimum Wage Laws
Minimum Wage Laws: A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers
Phillips curve
Phillips curve: is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of change in wages paid to labor in that economy.
FEUR
FEUR: Full-employment-unemployment-rate – the rate of unemployment (about 4.5%) below which is inflationary
Commodity Futures - Introduction
US produces about 30% of the world's food; Most of the US foreign exchange (selling things abroad) is from sale of food; One reason is that our land is not spoiled, other reasons below (based on commodities market)
Contract of Ownership
Chicago Board of Trade
A global commodity futures exchange trading treasury bonds, corn, soybean, wheat, mini-sized Dow, gold, silver and more.
Futures
A standardized contract traded on a future exchange (i.e. CBT), to buy or sell a certain commodity at a certain date in the future, at a specified price; Goods are delivered in the future; To get out of contract before the final settlement date, futures must be bought back; Seller has insurance to cover himself incase he can't deliver on the settlement date; Takes farmer out of the gambling mode because they sell their produce ahead of the harvest before they even put the seed in the ground; i.e. "August Wheat" (delivery of commodity will be in August), General Mills buys wheat in 2nd to 3rd week of July just before needed instead of in early March so as not to gamble on price changes; If price changes before the settlement date, for example (March we buy $1.00/bushel, 10% down payment, therefore 10c is ours and 90c is broker's - April price goes to $1.10/bushel, we sell future contract, broker gets 90c and we get 20c, we doubled our money! - number 1 gambling culture in the world = USA
Speculation
Concept of Risk and Margin Requirement
Concept of Risk
Risk can arise if the holder has done any of the following: a. Borrowed cash from the counterpart to buy securities or options; b. Sold securities or options short; c. Entered into a futures contract
Margin Requirement
Margin on a commodities market is cash or cash equivalents posted as guarantee to fulfill the obligations of a futures contract (not a down payment). You have to put some type of collateral up when you purchase futures
Historical Review of Commodity Markets
1. Population Shift a. Agricultural Work Force b. Disguised Unemployment 2. Malthusian Prophecy a. Poor Nations b. Rich Nations 3. Price Stability a. Inelasticity of Demand b. Inelasticity of Supply c. Fallacy of Composition
Government Assistance
1. Intro 2. Changes in Demand 3. Changes in Supply
Physiocracy
US is an extremely physiocratic nation even though only 3% of nation are farmers.; US is the most physiocratic nation in the world.; Reminder – physiocrats were a group of economists who believed that the wealth of nations was derived solely from agriculture (started in France by Quesnay)
State Land-Grant Colleges
Morrill Act 1862; Hatch Act 1887; Smith Lever Act 1914
Morrill Act 1862
Morrill Act 1862 (also known as the Land Grant Act) History; All of the world's big cities all built along a Fall Line (Fall Line = sea level on a river); All big universities were built in the cities along the Fall Line; Abraham Lincoln was born in Kentucky but grew up in Illinois; He grew up on wrong side of Blue Ridge (Fall Line), so was bitter that he didn't get an education; 1862 Lincoln passed Morrill Act with the purpose of providing education to all Americans; The Morrill Act granted each state 30,000 acres of public land for colleges originally for the benefit of agriculture, military and mechanic arts and offered free education – led to the creation of 72 universities; Land-Grant Colleges are US institutions founded based on the Morrill Act
Hatch Act 1887
Disallows certain people who's vote would impact their employment from voting i.e. military officers can't vote, and certain people in the government; Hatch Act led to "Christmas Treeing", i.e. buy people's vote for instance by offer a sewer system so congressman will vote for you and law get's passed through congress; One ornament led to billions of dollars being provided to Morrill Act schools for experimentation station (agriculture research) at your university so that US is always ahead of the word for food production.; Results of this research are shared for free with farmers. Government consultants (County Agents) go to every farm with the latest literature and advice. Must be at least one county agent in any county where anything is produced.
Smith Lever Act 1914
Knew intentions of the Morrill Act failed because school start during the harvest; If you are a Morrill Act school, you must extend school to accommodate farm family students (correspondence, night schools).; Eventually all students were included.
Federal Farm Board
US demand for food is almost totally inelastic <1, 50% of the rest of world is elastic >1; If our GNP goes up by 5%, we are all better off except the farmer, because we won't spend more on food, and the farmer's relative position has weakened.; If our GNP goes down by 5%, we are all worse off except the farmer, his relative position stays the same; So farmer is better off in bad times and worse off in good times.; Golden Age of Farming occurred during the Depression 1909,1914; Family farmer's income 70% of city-dweller = 100% city-dweller's, and the reason his standard of living is so high is due to the fact that the farmer puts his home on a the cheapest part of his land. For the rest of us, when we buy our home, we pay for the house and the expensive land.; 1928 (Great Depression) was successful for farmers so in 1929 Farmer's planted more acres, they bought John Deer tractors, great weather, therefore enormous harvest. Leads to the following: a. 1929 Farmers produce 15-18% more in food quantity b. Leads to a huge price drop (supply curve shifting right) c. Revenue (P*Q); Demand for harvesting equipment shifts right leading to; production costs going; Total Disaster - farmers "Bet the farm" - took out loans to finance their production; 90% of farmers are gone (leaving the "dust bowl") and banks now own them; Only time let down in economy and farmers lost
Federal Reserve Bank
only central bank that is not a national bank owned by the government; owned by the private sector – run by the private banks (therefore not politically motivated)
Previously there were 2 types of banks
Country banks and City banks - not only one type; Country Bank - served primarily farmers; City Banks - Serve primarily commerce and industries; If branch office is same city as a Federal Reserve Bank office, then you are a city bank, otherwise Country Bank
Fed Farm Board (continued)
Farmers all leave their land because of disaster 1929, banks now owns land, county banks had borrowed money from city banks, now city banks can't fund industrial loans. City Bank has to sell stock to meet requirements, banks had about 10% of the market, so stock market values goes down 10%, so now margin requirement 50%, people losing lots of money in stock market. People don't want banks in stock market.
Leads to Glass-Steagle Act 1933
Leads to Glass-Steagle Act 1933 that states that no business can act as a bank and a securities dealer/broker at the same time.
Federal Farm Board 1930
Board was created to investigate what happened in 1929 and fix it; Board came up with relief programs and the concept of parity price to help farmers live like farmers did during Golden Ages 70% farmer income => 100% of city dweller (be on par with non-farm population)
Parity Price
Price established by Federal Farm Board that leads farmers to receive for their production a price for their product to allow them to have a standard of living on par with non-farm population. Shift supply left and demand right so that the market price becomes the parity price.
Changes in Demand
a. Food Stamps and School Lunch Program b. Foreign Trade and Tariff Agreements c. Public Law 480
Food Stamps
Shifts demand curve slightly to the right; Should food support be done by government or private sector? Private Sector.; Should we give money or food stamps? Need to trust people. Of $45 million, only $800,000 was not used properly. 39c of every $1 of food stamps goes to administration. If money was given to IRS and distributed instead, it would only cost ½ % and could raise poverty line in country.; LESSON: Don't give people money and tell them you don't trust them, they won't appreciate the help, and they will say you owed it to them if you stop the help. So nothing is fixed.
Hot Lunch Program
Shifts demand curve slightly to the right; Government is very inefficient with food distribution.; Poor didn't have breakfast so low blood sugar (hypoglycemic) and memory skills are lessened and leads to higher illiteracy (17% US adults)
Foreign Trade and Tariff Agreements
Public Law 480
Public Law 480 (P.L. 480) is a food aid and market development program focused on the needs of developing countries and is aimed at establishing a U.S. presence in such markets and supporting their economic growth.; Shifts demand curve to the right; Leads to soft currencies paid for food by countries receiving help from the US (1954 – paying for help on food from US came from Nairu vs Krishna in India, and Nairu would be kicked out of office if food was given for free, but India would starve to death if no food, so paying soft currency for food);
Counterpart Funds
Soft currency money, which is money that is only used to pay for consulate services in those countries and the Peace Corps (Sergeant Shriver's creation)
Changes in Supply
a. Crop Limitation Programs b.Technical Assistance c. Parity Prices
Soil Banking
land retired from crop cultivation and planted with soil-building crops; government subsidies are paid to farmers for their retired land; pay farmers not to plant their soil; a subsidy equal to what he would have been paid for a 5 yr average of production levels; they have to spend a certain amount of soil reclamation; Shift supply to the right
PIK – "Payment in kine"
Don't pick, government pays you not to pick produce (government silos were full); Government gives you a supply of what you would have picked from the government silos; Farmer has to keep produce in the silo and pay for storage fees; Shift supply to the right
Technical Assistance
Hatch Act – money for research to improve farming process (see above); Shift supply to the right
Parity Prices
In 1930s all of these efforts to change supply and demand curves didn't work so they landed on the parity price and simply said they would order what the price would be. Two main price support programs described in section D below.
Price Supports
a. Government Purchase b. Price Differential
Government Purchase
Government buys enough of the supply so that the so that the market supply function crosses the demand function at the parity price (equilibrium price becomes the market price)
Price Differential
Fill out form and government pays the difference between what you actually received and what you should have received. Costs consumer less. c. Example: Wheat and Fu-Fus; What would the government purchase cost if we use Government Purchase program?; What would the Price Differential program cost?
Govt Purchase
Govt has to buy 2 mega bushels to get the supply in the market place to match up with the parity price (2 x $12)
Price Differential
Govt pays the difference between equilibrium and parity ($7 x 10)
Peter Principle (Primer)
A book by Laurence J. Peter that explains how every employee tends to rise to his level of incompetence i.e. Buffalo Bills in the Super Bowl
Pros and Cons
a. Food Cost to the Consumer b. Elasticity of Demand c. Farmers d. Foreign Goodwill
Food Cost to the Consumer
Ralph Nader tugging on arm - asking for Price differential because it will cost the consumer less
Elasticity of Demand
OMB (Office of Managing Budget) Director tugging on arm - would want to spend as little money as possible therefore would pick Government Purchase, he will be totally schooled in economics, and will start each decision he makes starts with elasticity of demand and supply, and if law is passed what is it going to mean in these terms.
Farmers
Man of the soil, would want government purchase, proud, and therefore doesn't want price differential and doesn't want a handout that he considers welfare check. He has pride and does not want a subsidy and wants a government purchase.; President of Cargill - Advocate of Government Purchase- wants to avoid press of several billion dollar subsidy payment because doesn't want headline of "most successful farmer receives billions in subsidy" as it will ruin his business.
Foreign Goodwill
Omar Houda – Counsel General from Bangladesh. (Advocate of Government Purchase). Govt Purchase puts food in the silos for use for Public Law 480.; Russian lobbyist – Price Differential advocate. Because market price would be cheaper price. (Proves Ralph Nader is a communist) (Marxist country cannot receive Public Law 480 or former Marxist country cannot participate)
Impact
3. Impact a. Short-Run Supply b. Long-Run Supply
Legislation
4. Legislation a. Countervailing Interests b. Solutions
Does economics give you the answers?
Economics doesn't give you the answers, but provides the tools needed to find the answers.
GATT
General Agreement on Tariffs and Trade; Created as part of a larger plan for economic recovery after World War I; Main purpose was to reduce barriers to international trade; Achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of different agreements.; The functions of the GATT weren't making enough progress so it was replaced by the World Trade Organization (WTO) which was established through the final round of negotiations in the early 1990s.
Trading Partners
Free Trade Area
a. Absence of internal tariffs b. Absence of external tariffs
Absence of internal tariffs
means that the members of the area/group can trade among themselves without any significant trade restrictions (tariffs); Example – NAFTA (North American Free Trade Association – US, Canada, Mexico – Clinton brought Mexico in during his presidency); Can be a gradual effort to eliminate all tariffs between countries, i.e. at first lumber still taxed and insurance, then later remove tax; Problem with free trade areas, is that you can have different taxes i.e.Vancouver charges on tax, Seattle port charges a different tax, so people would bring things in to the cheaper area and the drive it across. Prefect situation all areas have the same tax.
Absence of external tariffs
Means you can bring everything into a country without any tariffs; Example: Hong Kong, one of the most developed places in the world because it allows for huge economic growth and development. They still have taxes on three goods (alcohol, tobacco, perfume).; Example: Singapore went to free trade area and went from one of poorest countries to one of the wealthiest counties because free trade leads to enormous growth.
Customs Union
2 Characteristics – each is a necessary condition; a. Have to have absence of internal tariffs AND b. Have common external tariff (i.e. problem with Seattle & Vancouver); Central America (5 Countries) – doesn't matter which port(country) you bring your goods into you get the same tariff, and internal there are no customs.
Common Markets
3 Characteristics – each is a necessary condition a. Have to have absence of internal tariffs (free trade area) AND b. Have common external tariff (customs union) AND c. Factor mobility – factors can move without restriction
Common Markets EXAMPLES
Italian worker can work in Germany – they do need a work permit but it only costs about a $1 and is used for statistics purposes only ii. Again, not perfect in the beginning when first implementing iii. Rome was one example iv. USA is most successful common market since industrial revolution (New York was opposed to the idea in the beginning because of cabbage production in New Jersey and cheaper to bring into New York and New York wanted to protect upstate New York farmers). Many say that US beating the rest of the world to a common market has made us the wealthiest nation in the world. v. European Community - Jean Monnet – brilliant diplomat - scrambled eggs theory – take everyone's eggs and scramble them together, then if someone asks for their yoke back, they can't get it back! He brings Italy, Germany, and France and forms then into common market, and mixes them up so economies are all intertwined, then will defer the countries from going to war. Other countries join later. vi. Benelux – acronym for the common market that pre-dated (and is now included in) the European Community formed by the nations of Belgium, Netherlands, and Luxembourg. (Primer Definition Scrambled Eggs Doctrine – the nations of Europe would be disinclined to wage war over historical disagreements if their economies were interdependent)
Theory of Comparative Advantage
Ricardo's Basic Concept of Theory of Comparative Advantage; Definition; Do what you are best at compared to everything else that you do.; (Primer Defn) Something that A does better than B relative to everything else that A does; This theory has had the greatest impact on our world's economy; 2 Assumptions to the model; Labor theory of value (must not forget this! Governing assumption in this model); Definition: the value of an output is equal to the sum of the value of the labor inputs ii. Nobody is useless
Law of Comparative Advantage (Internet Def)
(Internet Definition) - Countries increase their economic prosperity by exporting the goods that they are relatively more efficient at producing and importing the goods that other countries are relatively more efficient at producing.
Ricardo's Example Simplified
United Kingdom and Portugal Produce two goods, wool and wine (world of warm drunks!) Assuming that the productivity of labor (i.e., the quantity of output produced per worker) varied between industries and across countries and the assumption is that Portugal was more productive in both good; If England specialized in producing one of the two goods, and if Portugal produced the other, then total world output of both goods could rise. ; If an appropriate terms of trade (i.e., amount of one good traded for another) were then chosen, both countries could end up with more of both goods after specialization and free trade then they each had before trade; This means that England may nevertheless benefit from free trade even though it is assumed to be technologically inferior to Portugal in the production of everything.
Equilibrium
a. Limit of Trade (Primer) b. Terms of Trade (Primer)
Limit of Trade (Primer)
Limit of Trade (Primer) – in international economics, the maximum benefit gained by either side of a transaction while the other side neither gains nor loses. Part of Ricardo's explanation of why actual trading ratio, called the terms of trade, takes place between the two extremes.
Terms of Trade (Primer)
Terms of Trade (Primer) – equals the market price, but during Ricardo's time there still wasn't concept of demand. Terms of trade will occur in between the limits of trade.
Classical Case Study
The United Kingdom and Portugal (see above) b. Advantages of Trade – rising tide raising all ships, it's not a zero sum game (most of the world still believes that economics is a zero sum game –"if you get more I get less") c. Monetary Comparison
Tariff
Tariff Implications & Arguments
Tariff Implications
a. Economic Growth and Development b. Production Possibilities and Efficiency; Trade restrictions guarantees that you don't get to the production possibilities frontier, and are not operating at most efficient point where factors of production are being used for the highest and best use. c. Welfare Effects (Pareto); If you allow trade restrictions, it results in: i. less quantity produced ii. higher prices iii. higher average costs – results because we end up using factors of production for things they shouldn't be used for iv. increase in excess profits – people making off money are paying off congress to get this done v. decrease in consumer surplus
Protection Arguments
List all 7
Infant Industries
If you were an infant industry (brand new industry), would you have the resources to encourage your congressman to impose protection? NO! Infant industries are not protected by the infant industry section of the bill, because none of them have the money to encourage the congressmen. Dr G. says this is bogus.; Infant Industry Argument (Primer) – the presumption that a new (or new to a country) industry would become internationally competitive if it were protected and/or subsidized by the government
National Security
Argument is that we have to have protection for the industries that produce the goods that are essential to the countries national security.; Dr. G says this is bogus……how many goods i.e. nuclear submarines do we buy a year from foreign countries for our national security? We don't buy anything from foreign companies that are critical to our security.; i.e. watch manufacturing is covered under this act. Argument is that watches/timing devices are used in the rockets.; Tariffs lead to companies becoming less and less competitive, no need to be competitive if they are protected and have little competition.
Retaliation
Argument is that if they have a tariff on our stuff, then we will put a tariff on their stuff; Dr G says this is bogus….tariffs lower consumer surplus so both countries are losing out!
Scientific Tariff
Use resources in our scientific community to analysis of production costs of everything that is important in the US, then set tariff equal to the cost difference; Dr G says this is super bogus ….. Law against the law of comparative advantage – which would end all trade!
Balance of Trade
Get other country to do the work and we end up with the goods.; i.e. Buy a car from Toyota, we take possession of the car and we give them US dollars. It takes 3 years for the US$ to get back into Japan's economy, and 3 years later, the value of that same US$ is lower. So we are better off.; Surplus or deficit in balance of trade is measuring the money transfer not the real transfer. It was reworded in a way that makes it look like Japan is better off… Dr G says this is bogus
Unemployment and Unions
Every time unions have been successful at getting trade protection, they go out of business because they become less efficient… Dr. G says this is bad; i.e. Steel industry – at one point almost 80% of world steel made in US, then got trade protection and tariffs kept getting raised, and only now about 3%
Tax Revenue
Got to have tariffs because government needs the money (tax revenue); Need tariffs to pay for the salaries of the collection agents who collect the taxes! Dr G says this is bogus i.e. Dr G's example of parking meters on strip with stores and all business on the street going under because everyone goes to mall instead, and the city wouldn't remove parking meters because they pay for the salary of the collection agent with civil servant seniority.
Non-Tariff Barriers
Important Limitations
a. Quotas (Primer) b. Import licenses c. Exchange Control
Quotas (Primer)
a trade restriction which protects a domestic producer by limiting the amount of a particular good that may be imported from a specific foreign nation i. Exception – quota on coffee to make sure Brazilians don't monopolize
Import Licenses
In the US most people don't remember paying for a license to import, it's about $7 dollars and is only used for statistics to keep track of things only ii. In the rest of the world important licenses are used to impede trade iii. Example – in France, if supporting electronics industry, only allowed to import into one port in Marseille if you are not part of the common market, and you need to get important license stamped, but the lady who stamps them only works 2 days a week, so it is really hard to bring goods in.
Exchange Control
a form of trade restriction whereby a government controls the foreign market by establishing an official rate and location of exchange, and retaining the foreign currency for use as determined by political leadership.
Local Standards and Cultural Differences
a. Language and Customs b. Labeling Laws c.
Language and Customs
Never ever write in foreign language, make sure someone from the home country writes the sales and marketing visuals. Tells someone orally what you want and let them write it. ii. Examples of mistakes; "Nova" car name used in Mexico, which means "won't go" in Spanish; Mandarin interpretation of coke's slogan in China written by and American "Coke brings you back from the dead"
Labeling Laws
In US we have dual labeling i.e. bottled water with liters and ounces, rest of the world dual labeling is illegal, which allows them to increase our costs a fraction so it prevents dumping. Rest of world doesn't allow this so their costs are a fraction higher, which is all it takes
Buy-American Campaigns
Cost Differences
Subsidies and Transportation
Subsidies
Subsidies to doll manufacturer is stupid, but to wide body aircraft it makes sense
Transportation
Homework Answers not included above:
Tariffs are a benefit to domestic producers because they reduce the number of competitors in the producer's home market. The reduced competition causes prices to rise and should help increase the company's revenues. · The increased production and price causes domestic producers to hire more workers which causes consumer spending to rise. · The tariffs also increase government revenues that can be used to the benefit of the economy · Examples of Non-tariff barriers to trade: o State subsidies, procurement, trading, ownership. o National regulations on health, safety, employment. o Intellectual property laws (patents and copyrights).
Business Organization
Proprietorships and Partnerships; Corporation:;
Proprietorship:
Proprietorship: A business organization that operates as a DBA (doing business as) for the owner(s) who are personally responsible for all taxes and liabilities.
Partnership:
Partnership: A partnership is a type of business entity in which partners share with each other the profits or losses of the business undertaking in which all have invested. The most basic form of partnership is a general partnership, in which all partners manage the business and are personally liable for its debts. Two other forms which have developed in most countries are the limited partnership (LP), in which certain "limited partners" relinquish their ability to manage the business in exchange for limited liability for the partnership's debts, and the limited liability partnership (LLP), in which all partners have some degree of limited liability.
Corporation:
A business organization (entity) having a legal status, with liability limited to the assets of the corporation. A corporation is a separate entity and therefore carries with it limited liability protection for its owners or stockholders. It has perpetual life and is a tax paying entity. Double taxation is a potential negative feature as earnings are taxed at the entity level and then taxed again when distributed to the stockholders as dividends.
Corporation Advantages
Liability is limited for debts and obligations; Perpetual lifetime; Tax benefits
Corporation Disadvantages
double taxation is possible; laws and regulations
Accounting
See Note Q in Primer
BALANCE SHEET
BALANCE SHEET: A static report of a firm’s stock of assets and liabilities at a point in time. Prepared for the last day of the fiscal (business year). Assets - liabilities = net worth
ASSETS
Current assets: Cash, Accounts Receivable, Inventories, and Prepaid insurance; Current: means liquid; convertible into cash in a period less than one year; Fixed assets: Land, buildings, equipment; Intangible assets: Patents, copyrights, goodwill; Goodwill: location, reputation, and executive talent
Depreciation vs Depletion
Depreciation: A non-cash expense that is incurred as capital goods are used up (result of wear and tear, age, or obsolescence).; Depletion: A non-cash expense that is incurred as natural resources (i.e. oil, coal, timber) are used up.
LIABILITIES
Current Liabilities: accounts payable; Long-term debt: bonds, notes payable
NET WORTH
This may be called Book Value, Owner’s Equity, the Stock Account, the Capital Account, or the Proprietorship Account Note: if the net worth is negative, the firm is said to be insolvent.
INCOME STATEMENT
A dynamic profit and loss report of the flow of income over a period of time. Prepared annually and quarterly, and sometimes monthly. REVENUES-EXPENSES= PROFIT
Sales
revenue from the sale of goods or services
cost of goods sold
Material and direct labor expenses
gross profit
Sales less Cost of Goods Sold (Sales- COGS)
operating expenses
all expenses except the cost of goods sold -Payroll (wages, salaries, transfer payments), Rent, Insurance, Depreciation, depletion, utilities (water, power, telephone), supplies, automotive (transportation), interest on debt, etc.
NOTE
NOTE: the purchase of a capital good is not an expense; its use is. This use is called depreciation expense. If the asset is owned by an extractive industry, and is non-replaceable such as oil, coal, or timber, the expense is called depletion
REVENUE FROM OTHER SOURCES
t-bills, C-D’s, Rents, etc.
Net Profit
Gross Profit less Operating Expenses plus other revenues (Gross Profit – Operating Expenses + Other revenues)
NOTE
NOTE: Net profit (earnings) less taxes and dividends (or withdrawals)= equals retained earnings (used for internal financing) (Net Profit – Taxes – dividends= retained earnings)
Balance Sheet Bullets
1. static 2. point in time 3. Prepared the last day of the fiscal year, usually quarterly, and sometimes monthly 4. reports flow of income
Income Statement Bullets
1 dynamic 2. period of time 3. prepared annually and quarterly, and sometimes monthly 4. Reports stock of assets and liabilities
Current Ratio
current assets divided by current liabilities Current Assets/Current Liabilities Note: if the current ratio is less than 1.0, the firm is said to be illiquid.
Illiquidity
when current liabilities are greater than current assets current liabilities > current assets
Insolvency
when total liabilities are greater than total assets, when net worth is negative total liabilities > total assets ; -net worth
Bankruptcy
a court ruling which provides relief, granted if insolvency exists or is anticipated: permanent relief (Chapter 7) temporary relief to a municipality or county (Chapter 9) a firm (Chapter 11) or an individual (Chapter 13)
From Homework
Earnings per Share: EPS. Total earnings divided by the number of shares outstanding. EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS"). 2. Interim Earnings: An earnings which are calculated before the company's annual earnings have been calculated. 3. Earnings: Revenues minus cost of sales, operating expenses, and taxes, over a given period of time.
Price/Earnings Ratio
The most common measure of how expensive a stock is. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12- month period. The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. Companies with high P/E ratios are more likely to be considered "risky" investments than those with low P/E ratios, since a high P/E ratio signifies high expectations. Comparing P/E ratios is most valuable for companies within the same industry. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all.
Note on market cap
NOTE: Market capitalization is calculated by multiplying the number of shares outstanding by their current price per share
Price/Equity Ratio
Compares a company's book value to its current market price. (Book value denotes the portion of the company held by the shareholders; the company's total assets less its total liabilities). The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. A low ratio may signal a good investment opportunity, but the ratio is less meaningful for some types of companies, such as those in technology sectors. This is because such companies have hidden assets such as intellectual property which are of great value, but not reflected in the book value.
Payout Ratio
Dividends paid divided by company earnings over some period of time, expressed as a percentage.(Also called Dividend Payout Ratio)
Corporate Finance
1. Debt, 2. Equity, 3. Finance
Debt
that which is owed; usually referring to assets owed or other obligations. a. Bond: a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity.
The most important features of a bond are:
· nominal, principal or face amount—the amount over which the issuer pays interest, and which has to be repaid at the end. · issue price—the price at which investors buy the bonds when they are first issued. The net proceeds that the issuer receives are calculated as the issue price, less issuance fees, times the nominal amount. · maturity date—the date on which the issuer has to repay the nominal amount. The length of time until the maturity date is often referred to as the term or maturity of a bond.
short/med/long term bills
short term (bills): maturities up to one year; medium term (notes): maturities between one and ten years; long term (bonds): maturities greater than ten years.
Coupon
Coupon—the interest rate that the issuer pays to the bond holders. Usually this rate is fixed throughout the life of the bond. It can also vary with a money market index.
Coupon Dates
the dates on which the issuer pays the coupon to the bond holders.
Indenture or covenants
a document specifying the rights of bond holders
Optionality
a bond may contain an embedded option; that is, it grants option like features to the buyer or issuer: callability and puttability
Callability
Some bonds give the issuer the right to repay the bond before the maturity date on the call dates; Most callable bonds allow the issuer to repay the bond at par. With some bonds, the issuer has to pay a premium, the so called call premium.
puttability
Some bonds give the bond holder the right to force the issuer to repay the bond before the maturity date on the put dates; see put option.
Sinking Fund
sinking fund provision of the corporate bond indenture requires a certain portion of the issue to be retired periodically. The entire bond issue can be liquidated by the maturity date.
Convertible Bond
· convertible bond lets a bondholder exchange a bond to a number of shares of the issuer's common stock.
Exchangeable Bond
· exchangeable bond allows for exchange to shares of a corporation other thant he issuer.
Callable bond NOTE
Note: Never buy a “callable” bond. Never buy bonds when interest rates are low. Value of bond is inversely related to market rate.
Cash Value
R (annual return) / r (market rate) or CV = R/r
Stocks
Stocks: An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding.
Preferred stock variations
Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preferred stock is that the investor has a greater claim on the company’s assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred, non-cumulative, participating, and convertible.
Securities Exchange Commission (SEC)
United States government agency having primary responsibility for enforcing the federal securities laws and regulating the securities industry/stock market. The main reason for the creation of the SEC was to regulate the stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. The SEC was given the power to license and regulate stock exchanges. Currently, the SEC is responsible for administering seven major laws that govern the securities industry.
Risk
1. MU of gambling 2. Rules of gambling 3. Hedging 4. Arbitrage
MU of Gambling
Gambling: to make a decision where the validity of your decision depends on a future event. Probability Theory began by John Maynard Keynes (discovered it and Actuarial Tables). A bet is evaluated by the probability of success and what the payout is (can't evaluate a bet by just looking at the odds) John Nash put probability theory into boxes & invented Game theory
Heads and Tails example
Head or tails example: P(E) = 0.5 (2/1) = 1 (Cindy put in $1 (cost of gamble), Chris put in $1, Total Rev = $2)
P & E
P = x (# of successes)/n (number of trials) must be between 0 and 1 E (expected return) = R (revenue of gamble)/C (cost of gamble) When P (E) = 1 = FAIR bet (Keynes)
EXAMPLE AGAIN
Example: If the probability of success is 5% and the bet is $25, how big must the payout be if the bet is FAIR? In a fair bet, the probability of success times the return equals 1. In this case the bet is $25 so that becomes your "1". If you're chance of success is 1 in 20, your return needs to be 20 times your bet to be "Fair" therefore: E return = 1/P => 1/.05 => 20. Payout = (E) x Bet = $500
NOTE
NOTE: economists against a fair bet because: Ex: MUgain= 50 (if you win) MUloss= -5000 (if you loose) MUgain < MDUloss: The marginal disutility of loosing is ALWAYS higher than the marginal utility of winning. “A dollar more is always worth less, than a dollar less”.
Rules of Gambling
1. P(E) > 1 2. Repetitive Gamble 3. The most important rule: "Always take a small loss" (know this word for word) - 10% loss at the most Note: Vigorish - When the provider of the gamble gets paid, many times casinos add double 00s to increase the vigorish
Hedging
Paying a premium to another party (e.g. insurance company) to bear or absorb a risk. An investment made in order to reduce the risk of adverse price movements in a security, by taking an offsetting position in a related security, such as an option or a short sale. Note: Buying car insurance is an example of hedging.
Arbitrage
a simultaneous transaction in two or more markets, buying in the cheap (low price) market and selling in the dear (high price) market. Attempting to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. This is not gambling, it is the antithesis of gambling, there is no future event! It is anti-cyclical, brings the two prices together.
Stock Market Intro
See pp 25 in pdf Notes
Leverage
Using someone else's money for your own gamble. the use of borrowed money at a fixed rate to invest (or speculate) in a security or other asset, thereby increasing the risk; the percentage of potential gain or loss. Ex: options= borrowing, borrowing from a bank. Debt/Equity if = high for a company; means they are buying leverage.
Buying on Margin
purchase of securities with borrowed money, using the shares themselves as collateral. Usually done using a margin account at a brokerage, and subject to fairly strict SEC regulations. (Margin or Maintenance Call – maintain level of margin)
Warrant
a call option issued by the company itself. a security that entitles the holder to buy stock of the company that issued it at a specified price, which is much higher than the stock price at time of issue. When the warrant is exercised the company issues new shares of stock, so the number of outstanding shares increases. When a call is exercised, the owner of the call receives an existing share from an assigned call writer (except in the case of employee stock options, where new shares are created and issued by the company upon exercise). Warrants do not have voting rights.
Calls
Calls: a financial contract between two parties, the buyer and the seller of this type of option. Often it is simply labeled a "call". The buyer of the option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). or premium.
Puts
Puts: a financial contract between two parties, the buyer and the writer (seller) of the option. The put allows the owner the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) to the writer (seller) of the option at a certain time for a certain price (the strike price). The writer (seller) has the obligation to purchase the underlying asset at that strike price, if the buyer exercises the option.
Straddle
put and call, betting on the spread
PEARL OF WISDOM
When they raid the whorehouse, they take the piano player right along with the girls
Periodicals
a publication that provides information or content
How to pick a stock
1. define clients needs, 2. value analysis 3. decision matrix 4. technical analysis (Decision timing)
Define a clients needs
Define the Client’s Needs 3 kinds of people put their money in the market: o 15% of clients don’t want change (Category A) o 15% of clients want change (Category B) o 70% of clients you can’t help (Category C) figure out volatility of stocks, and match client need with their type of volatility
Value Analysis
Value analysis- from our stock project 1. Volatility - what is the potential for change? Will help to determine if stock fits the need of the person (Category A,B,C) 2. Value Use at least 5 (variable model) criteria to determine the volatility and value of the stocks
Decision Matrix
See Graphic pp 26 in notes
Technical Analysis
Depends on price, volume, or time
Speculation Requirements
Big Board
Big Board: The New York Stock Exchange (NYSE), nicknamed the "Big Board," is a New York City-based stock exchange publicly held and listed under the symbol NYX on its own exchange. It is the largest stock exchange in the world by dollar volume and the second largest by number of companies listed.
AMEX
(American Stock Exchange) The second-largest stock exchange in the U.S., after the New York Stock Exchange (NYSE). In general, the listing rules are a little more lenient than those of the NYSE, and thus the AMEX has a larger representation of stocks and bonds issued by smaller companies than the NYSE. This is a curb market.
NASDAQ
NASDAQ: National Association of Securities Dealers Automated Quotations. (Trade OTC stocks).
Curb Market
Curb Market: is a stock market for trading in securities not listed on the NYSE.
Selling Short
Selling short: is a way to profit from the decline in price of a security, such as stock or a bond. Used as a blanket term for all those strategies which allow an investor to gain from the decline in price of a security. Borrowing a security (or commodity futures contract) from a broker and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the broker. Short selling (or "selling short") is a technique used by investors who try to profit from the falling price of a stock.) Sell high, buy low.
Listed Stock
Listed stock: (must be on a formal list) Such conditions sometimes include minimum number of shares outstanding, minimum market capitalization, and minimum annual income.
Orderly Market
Orderly market: Any market in which the supply and demand are reasonably equal. Orderly markets usually don't have volatile price swings and prices are competitive, reflecting the true value of the good or service.
Specialist
Specialist: A stock exchange member who makes a market for certain exchange-traded securities, maintaining an inventory of those securities and standing ready to buy and sell shares as necessary to maintain an orderly market for those shares.
OTC
Over the counter (OTC): (abbreviation not acronym, you don't say "otc" you say "O"."T"."C") trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. A bi-lateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future.
Stop Sell Order
Stop sell order: An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position.
Round Lot
Round lot: 100 shares
Odd Lot
"Odd lot: (ex: 25) quantities that differs from a standard trading unit, especially an amount of stock of fewer than 100 shares. Less than 100 shares of a stock; or less than 10 shares of a very thinly traded stock. Some brokerages charge higher commissions for such transactions (often 1/8 of a point per share, called the differential). (Also called broken lot or uneven lot.) Traded in the Ante-room. Note: 125 shares = a round lot (100 shares) and an odd lot (25 shares)
None
Bull Market
Bull market: A prolonged period in which investment prices rise faster than their historical average. Bull markets can happen as a result of an economic recovery, an economic boom, or investor psychology. (Buyers are in control)
Bear Market
Bear Market: A prolonged period in which investment prices fall, accompanied by widespread pessimism. Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly. i.e Great Depression in 1930s. (Supplier is in control)
Bear and Bull Graphs of S & D
pp 28 of notes
Limit Order
Limit Orders - An order to a broker to buy a specified quantity of a security at or below a specified price, or to sell it at or above a specified price (called the limit price). This ensures that a person will never pay more for the stock than whatever price is set as his/her limit.
Averaging Down
Averaging Down - Buying additional shares of a stock which one holds a position in, and which has dropped in price since the earlier purchase.
Daily, weekly, monthly bar charts
Daily, Weekly, and Monthly Bar Charts - Bar charts are by far the most common type of price charts. In a bar chart, each time period is represented by a vertical line that ranges from the low to the high of that time period. The opening value is recorded as a small notch on the left and the closing value is a similar notch to the right of the vertical line. The daily bar chart is most useful for trading purposes, but bar charts for longer data periods provide extremely important perspectives. These longer-period bar charts (e.g., weekly, monthly) are entirely analogous to the daily bar chart, with each vertical line representing the price range along with the beginning and final price level for the period. NOTE SEE PIC ON pp29 notes
Dow Jones Industrial Average
Dow Jones Industrial Average - one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. The index is used to gauge the performance of the companies in America's stock markets. The average consists of 30 of the largest and most widely held public companies in the United States. The "industrial" portion of the name is largely historical — many of the 30 modern components have little to do with heavy industry.
Head & Shoulders Formation
Head and Shoulders Formation - A technical analysis term referring to a chart formation in which a price exhibits three successive rallies, the second one being the highest. The name derives from the fact that on a chart the first and third rallies look like shoulders and the second looks like a head. Believed by technical analysts to be a bearish indicator. NOTE SEE PIC on pp 29 of notes
Beta
Beta - A quantitative measure of the volatility of a given stock, mutual fund, or portfolio, relative to the overall market, usually the S&P 500. Specifically, the performance the stock, fund or portfolio has experienced in the last 5 years as the S&P moved 1% up or down. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile.
Upside/Downside Volume
Upside/Down Volume - This indicator is calculated by dividing the weekly volume of advancing and declining issues by the total weekly volume. A 10-week moving average is applied to smooth out the swings NOTE SEE IMAGE ON pp 30
Moving Average
Moving Average - is one of a family of similar techniques used to analyze time series data. A moving average series can be calculated for any time series, but is most often applied to stock prices, returns or trading volumes. Moving averages smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. Two most popular types of simple moving averages (SMA) and exponential moving averages (EMA) NOTE SEE IMAGE ON PP 30 of notes
Anti-cyclical
Anti-cyclical – Buyer1/Seller1 – behavior moves price of stock towards moving average (stabilizing) – this would be anti-cyclical
Pro-Cyclical
Pro-cyclical – Buyer2/Seller2 – behavior moves price of stock away from moving average (increases vagaries of the cycle)
NOTE IMAGE FOR ANTI & PRO
pp 30 of notes
Another name for the Morrell Act of 1862?
Land Grant Act
What did the Hatch Act of 1887 lead to?
Christmas Treeing
US Demand for food is elastic or inelastic?
Almost totally inelastic
What was the Glass-Steagall Act a result of?
See flashcard 58
Gov Pur v. Price Diff - Follow logic for Russian Lobbyist
Market price would be cheaper price - Marxist country cannot take advantage of Public Law 480 - PL480 shifts demand curve to right and countries pay with soft currency
What led to the WTO coming into being?
GATT was not making fast enough progress after WWI - WTO formed in 1990's
What are the 2 necessary conditions of a Customs Union?
1. Absence of internal tariffs and 2. common external tariff
What is the 3rd condition that makes a Customs Union a Common Market?
3. Factor Mobility
What is BENELUX?
Acronym for the common market that pre-dated the Euro Community

Formed by the nations: Belgium, Netherlands, and Blusxemburg
If a firm's net worth is negative, it is said to be what?
Insolvent
If current ratio is less than one, a firm is said to be what?
illiquid
When total liabilities are greater than total assets, you have a negative net worth, making the firm what?
insolvent
Never buy a _____ bond.
Callable
Never buy a bond when interest rates are _____.
Low
Cash Value (of a bond)
R (annual rate)/ r (interest rate) = CV
Can you evaluate a bet by just looking at the odds?
No, you need the probability and the expected return (p x E)
Who invented Game Theory?
John Nash
Is an economist for or against a fair bet?
Against, because the MU is alwasy less than the MDU