Cfa Level 1 Economy

Front 1

own price elasticity

Back 1

% change in quantity demanded / % change in own price
(∆Q/Q) / (∆P/P)

Front 2

income elasticity

Back 2

% change in quantity demanded / % change in income
(∆Q/Q) / (∆I/I)

Front 3

cross price elasticity

Back 3

% change in quantity demanded / % change in the price of related goods
(∆Q/Q) / (∆P'/P')

Front 4

accounting profit

Back 4

total revenue - total accounting (explicit) costs

Front 5

economic profit

Back 5

accounting profit - implicit opportunity costs = total revenue - total economic costs = total revenue - explicit costs - implicit costs

Front 6

normal profit

Back 6

accounting profit - economic profit

Front 7

total revenue (TR)

Back 7

P * Q

Front 8

average revenue (AR)

Back 8

TR / Q

Front 9

marginal revenue (MR)

Back 9

ΔTR / ΔQ

Front 10

total cost

Back 10

total fixed cost + total variable cost

Front 11

marginal cost

Back 11

ΔTC / ΔQ

Front 12

ATC

Back 12

average total cost = total costs / total product

Front 13

AFC

Back 13

average fixed costs = total fixed costs / total product

Front 14

AVC

Back 14

average variable costs = total variable costs / total product

Front 15

breakeven points

Back 15

perfection competition:
AR = ATC
imperfect competition:
TR = TC

Front 16

short-run shutdown points

Back 16

perfect competition:
AR < AVC
imperfect competition:
TR < TVC

Front 17

cost minimizing combination of inputs

Back 17

MP_1 / P_1 = MP_2 / P_2 = … = MP_N / P_N
where
MP_N = marginal product of input N
P_N = cost of input N
N = number of inputs

Front 18

profit maximizing combination of inputs

Back 18

MRP_1 / P_1 = MRP_2 / P_2 = … = MRP_N / P_N = 1
where
MRP_N = marginal revenue product of input N
P_N = cost of input N
N = number of inputs"

Front 19

norminal GDP for year t

Back 19

ΣP_i,t * Q_i,t = Σ(price of good I in the base year * quantity of good I produced in year t)

Front 20

GDP deflator for year t

Back 20

norminal GDP in year t / value of year t output at base year prices * 100

Front 21

GDP, expenditure approach

Back 21

GDP = C + I + G + (X - M)
C = consumption spending
I = business investment (capital equipment, inventories)
G = government purchases
X = exports
M = imports

Front 22

GDP, income apporach

Back 22

GDP = national income + capital consumption allowance + statistical discrepancy

Front 23

national income

Back 23

compensation of employees (wages & benefits)
+ corporate and government enterprise profits before taxes
+ interest income
+ unincorporated business net income (business owners' incomes)
+ rent
+ indirect business taxes - subsidies (taxes and subsidies that are included in final prices)

Front 24

personal income

Back 24

national income
+ transfer payments to households
- indirect business taxes
- corporate income taxes
- undistributed corporate profits

Front 25

personal disposable income

Back 25

personal income - personal taxes

Front 26

growth in potential GDP

Back 26

growth in technology + W_L(growth in labor) +
W_C(growth in capital)
where
W_L = labor's percentage share of national income
W_C = capital's percentage share of national income

Front 27

grwoth in per-capita potential GDP

Back 27

growth in technology + W_C(growth in the capital-to-labor ratio)
where
W_C = capital's percentage share of national income

Front 28

consumer price index

Back 28

cost of basket at current prices / cost of basket at base period prices * 100

Front 29

money multiplier

Back 29

1 / reserve requirement

Front 30

fisher effect

Back 30

nominal interest rate = real interest rate + expected inflation rate

Front 31

neutral interest rate

Back 31

real trend rate of economic growth + inflation target
when the policy rate is above(below) the neutral rate, the policy is contractionary(expansionary)

Front 32

fiscal multiplier

Back 32

1 / (1 - MPC(1-t))
where
t = tax rate
MPC = marginal propensity to consume
meaning: increase in aggregate demand / government spending

Front 33

real exchange rate (d/f)

Back 33

norminal exchange rate (d/f) * (CPI_foreign / CPI_domestic)

Front 34

forward discount (+) or premium (-):

Back 34

forward/spot - 1

Front 35

interest rate parity

Back 35

forward (d/f) / spot (d/f) = (1 + interest rate_domestic) / (1 + interest rate_foreign)

Front 36

Marshall-Lerner condition

Back 36

W_X * ε_X + W_M * (ε_M -1) > 0
where
W_M = proportion of trade that is imports
W_X = proportion of trade that is exports
ε_M = elasticity of demand for imports
ε_X = elasticity of demand for exports

Front 37

4 types of measurement?

Back 37

1. Nominal
2. Ordinal
3. Interval
4. Ratio

Front 38

Marginal rate of substituion (MRS)?

Back 38

the rate at which the consumer will willingly exchange units of Good x for units of Good Y (x is the horizontal axis in this case)

The marginal rate of substitution is equal to the negative of the slope of the tangent to the indifference curve at that point

Front 39

Normal goods, Giffen Goods and Veblen Goods?

Back 39

Normal goods have positive substitution and income effect
Giffen goods have positive substitution effect and negative income effect (overall negative effect)
Veblen goods cannot be explained in the framework provided (higher price leads to more demand)

Front 40

Normal Profit?

Back 40

Normal profit is the level of accounting profit such that implicit opportunity costs are just covered; thus, it is equal to a level of accounting profit such that economic profit is zero.

Front 41

How to calculate MR for monopoly market?

Back 41

MR = P*[1 - 1/E_p]
E_p = demand elasticity

Front 42

The three-firm Herfindahl-Hirschmann Index?

Back 42

company_1 concentration^2 + company_2 concentration^2 + company_3 concentration^2

Front 43

How to calculate GDP by expenditure and income?

Back 43

Expenditure approach:
GDP = C + I + G + (X - M)
Income approach:
GDP = national income + capital consumption allowance + statistical discrepancy
CCA measures the depreciation of physical capital from the production of goods or services over a period

Front 44

What is government budget deficit and how to calculate?

Back 44

government deficit = G - T
(G - T) = (S - I) - (X - M)

Front 45

What does IS curve show?

Back 45

If income and expenditure are to remain in equilibrium, there must be an inverse relationship between the real interest rate and income.

Front 46

What does LM curve show?

Back 46

the combinations of GDP or real income and real interest rate that keep the quantity of real money demanded equal to the quantity of real money supplied.

Front 47

What is quantity theory of money?

Back 47

MV = PY
M = money supply
V = velocity of money in transactions (long term, not easily changed in short term)
P = price level
Y = real GDP (long term, not easily changed in short term)

Front 48

What is the intersection between IS and LM curves?

Back 48

It determines the equilibrium levels of prices and real income for a given level of the real money supply

Front 49

What is the slope of LRAS, SRAS and VSRAS?

Back 49

LRAS is vertical, VSRAS is horizontal, SRAS is inbetween

Front 50

What is stagflation?

Back 50

an environment of both high unemployment and increasing inflation

Front 51

What are the typical characteristics of Trough (business cycle)?

Back 51

GDP growth rate changes from negative to positive
high unemployment rate, increasing use of overtime and temporary workers
spending on consumer durable goods and housing may increase
moderate or decreasing inflation rate

Front 52

What are the typical characteristics of Expansion (business cycle)?

Back 52

GDP growth rate increases
Unemployment rate decreases as hiring accelerates
investment increases in producers' equipment and home construction
inflation rate may increase
imports increase as domestic income growth accelerates

Front 53

What are the typical characteristics of Peak (business cycle)?

Back 53

GDP growth rate decreases
unemployment rate decreases but hiring slows
consumer spending and business investment grow at slower rates
inflation rate increases

Front 54

What are the typical characteristics of contraction (business cycle)?

Back 54

GDP growth rate is negative
hours worked decrease, unemployment rate increases
consumer spending, home construction, and business investment decreases
inflation rate decreases with a lag
imports decrease as domestic income growth slows

Front 55

What is the belief of Neoclassical school on business cycle?

Back 55

aggregate demand and aggregate supply are primarily drive by changes in technology. Business cycles are temporary deviation from long-run equilibrium.

Front 56

What is the belief of Keynesian school on business cycle?

Back 56

shifts in aggregate demand due to changes in expectations are primary cause of business cycles.

Front 57

What is the belief of Monetarist school on business cycle?

Back 57

Business cycles are due to inappropriate decisions by the monetary authorities.

Front 58

What is the belief of Austrian school on business cycle?

Back 58

Business cycles are caused by government intervention in the economy.

Front 59

What is the belief of New Classical school on business cycle?

Back 59

real business cycle theory
real economic variables such as changes in technology and external shocks have an effect on business cycles

Front 60

What is the purpose of precautionary money and it is related to ?

Back 60

Precautionary money is reserved for unforeseen activities, thus it's positively correlated to GDP. (when the volume and value of transactions in the economy are high)

Front 61

What is the theory of money neutrality?

Back 61

an increase in the supply of money leads to an increase in price level ultimately and leaves real variables unaffected in the long run

Front 62

What is the difference between Ricardian Model of Trade and Heckscher and Ohlin Model?

Back 62

Ricardian model of trade has only factor of production ,labor. The source of difference in production cost is differences in labor productivity caused by difference in technology.

Heckscher and Ohlin model has two factors of production, capital and labor. The source of comparative advantage is the differences in the relative amounts of each factor the countries possess.

Front 63

Difference between FTA, customs union, common market, economic union and monetary union?

Back 63

page 218, Econ book

Front 64

What does BOP (balance of payments) include? and what do those accounts include?

Back 64

current account: merchandise and services, income receipts, unilateral transfers
capital account: capital transfers, sales and purchases of non-financial assets
financial account: government-owned assets abroad, foreign-owned assets in the country

Front 65

How to calculate real exchange rate (d/f)?

Back 65

real exchange rate (d/f) = nominal exchange rate (d/f) * CPI_f / CPI_d

Front 66

What is direct exchange rate and indirect exchange rate?

Back 66

Direct exchange rate: d/f
Indirect exchange rate: f/d

Front 67

What are the different currency regimes and the corresponding characteristics?

Back 67

Dollarization: use the currency of another country
Monetary Union: like EU, using same currency among several countries
Currency board arrangement: exchange domestic currency for a specified foreign currency at a fixed change rate (issuing money requires inflow of foreign currency to back up)
more on page 238 econ book

Front 68

What are the three factors influencing the demand for money?

Back 68

1. transaction demand
2. precautionary demand
3. speculative demand, inversely related to returns in the market, positively related to the risk of other investment instruments

Front 69

What is the transmission mechanism for monetary policy?

Back 69

decrease in inter-bank lending rates have effects:
1. market rates decrease
2. Asset prices increase because lower discount rate is used
3. firms and individuals increase their expectations
4. the domestic currency depreciates due to outflow of foreign money
Net effect: people consume more and business export more