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101 Cards in this Set

  • Front
  • Back
Types of advantages
Absolute Advantage
An advantage a country has over the other countries in the production of good or service
Comparative Advantage
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
Demand Curve Relationship
Inverse relations with price and quantity demand

downward slopping
quantity on X axsis
Deman curve shifts when:
No changes in prices but price of substitue product goes up, demand will move up and to the right
Variables that drives demand
Prices of ther goods and services

consumer taste

Spendable Income


Size of Market
Price Elasticity of Demand
% change in quantity demanded / % change in price
(change in quantity demand/ave qunatity) / ( change in prices / Ave price)
When is price elasticity greater for a product
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
Elasticity of demand
Ed> 1 = elastic or sensitive to price change

Ed =1, not sensitive, unitary

Ed < 1 = not elastic, not sensitive to price change
Elasticity of demand example
Elasticity coefficient = 1.334, price goes down 10%
Effect on revenue?

(10% X 1.334) = 13.34% increase in Quantity demand
Price Elasticity and Revenue Pice increse relationship
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
Income Elasticity and demand relationship
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
Cross Elasticity
Measures change in demand in one good when price of related or competing product chagnes
Corss Elasticity formula
% change in quantity demand of X / % change in price of Y

Positive Coefficient = substitute produect

Negative Coefficient = complementary prodcut

0 cofficient = unrelated product
Cross elasticity example
Cross elasticity of Y = 2
Demand for X is what?

2 = (X/5%)

X = 10%
Supply curve
Upward slopping
direct relationship with change in price

price is in Y axsis
Shift in supply curve
Cost to produce goes up, no change in price, supply quantity goes down

Moves to left
Factors effecting supply
1. # or size of producers
2. chagne in product cost
3. techonological advances
4. Gov. action
Elasticity of supply
Es = (% change in quantity supplied / % change in price)

Es > 0 elastic
Es = 0 unitary
Es < 0 Inelastic
Factors effecting market equilibrium
1. Government intervention
a. price ceililng
b. price floor
2. Externalities - pollultion
Price Ceilling
Specified maximum price that can be chagne for a good

If price ceilling < equilibrium, then will have shortage of good
Price Floor
a minimum specified price for a good
Price floor > equilibrium, over production and surplus
Effect of shift in demand and supply
Demand goes up, supply stays the same, price goe up

Supply goes up, demand stays the same, price goes down
Shift in Supply and Demand
If supuply stays the same, demand goes up, price goes up

Supply goes up, demand stays the same, price goes down
Marginal Revenue Product
The change in total reveneu form employing one additioanl unit of resources
Whoes spending does macroeconomics focus on
Benchmark of economic activities
Real GDP
Potential GDP
NDP - Net domestic product
GNP - Gross national product
GDP or nomial GDP
Price of all goods and services produced by a domestic economy for a year @ current market price
Real GDP
Price of all goods and services produced by a domestic economy for a year @ current market price without inflation effects
Potential GDP
maximum amount of production could take place vs real GDP.
the differece is call GDP gap
Positive GDP Gap
Negative GDP gap
economy running above capacity
Price should increase soon
Net Domestice product

GDP minus depreciation
(Gross National Product)

the price of all goods and services produced by labor and property supplied by the nation's residence
Calculating GDP (income approach)
Adds up all income earned in the production of final goods and services. Includes:
Consumption of fixed capital
Calculating GDP (Expense approach)
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
Aggregate Demand and Supply
Demand of consumer business and governement as well as foreign purchase for goods and services of the economy @ different price level
Price level of aggretate demand (Interest Rate effect)
Interest rate effect: as price level, increase, interest goes up, causing drop in interest sensitive spending, such as house, automobile, appliance
Price level of aggretate demand (Wealth effect)
When price goes up, makret value of certain financial asset goes down, causing individual to have less wealth hence consumption goes down
International Purchasing Power Effect
When doemstic price level goes up compared to foreign currencies, export goes down, import goes up.

this drecreases demand for domestic aggreegate product
GDP Multiplier Formula
(1/MPS) X change in spending

MPS = .25, change in spending $1M
Increase in GPD (1 / .25) = $4M
Types of Business Cycle (2)
Contraction/Recession, Drop in GDP
Expansion/ Recovery, increase in GDP, and inflation
Leaving indicator of economic trend
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
Lagging indicator of economic trend
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
Factors affecting investment
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
Most votalitle portion of GDP
Investment spending
Frictional unemployement
Occurs because individual voluntarilty or forced to change jobs
Strcutral unmployement
Occurs due to change in demand for product or serivde, can be reduded by retaining programs
Cyclical Unmployement
Caused by condition in which real GDP is less than portential GDP
Goes up in recession time
Demand Pull Inflation
Inflation occurs when aggregate spending is more than economy's normal, full-employement output capacity
Cost - Push Inflation
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
Inflation and Unemployement
Inverse relationship

shown in Phillips curve
Real vs Nominal Interest Rate
Real - Includes inflation

Nominal - no inflation, quoted by financial institues, news papers
purpsoe of money
1. medium for exchange
2. Common denominator to measure price, revenue, expense, income
3. store a value allowing firms and individuals to save
Types of moeny
M1 = Currency and demand deposits

M2 = M1 + savings account and small time deposits

M3 = M1 + M2+longer time deposits
Which type of money does the Feds focus on
Howe does Fed effects supply of money
change in reserve requirement
open market operation
discount rate
economic analyissi
monetary policy
retional expectation
Expansionary open market
when central bank purchases gov. securities to increase $ supply and decrease interest rate
Contractionary open market
When central bank is selling gov securities and increase interest rate
Classic economic theory
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
Keyhnesian Theory
Economy does not move towards full employment on its own.
Focuses on fiscal policy to stimulate economy
Monetarist theory
Fiscal policy is too crude to control the economy, use monetray policy instead
Supply side theory
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
Neo-Keynesian thory
combine keynesian and monetary
Driver for gloabl economy
Cross boarder movement of goods, services, technology and capital
Factors effecting consumption
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
C1 = slope of consuption function
Marginal prpensity to consumer. How much of the additional income will they consume
Consumption function
C = Co +C1Yd
C = consumption for a peirod
Yd = Disposable income
Co= the Constant
C1= Slope of consumption function
Diamond of National Advantage (michael porter)
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)
Obstacles to free trade
Terrif - inport tax
Quota: retriction on quantity
Embergo - total ban
Voulntary export restraint
Foreign currency exhange control
Examples of foreign currency exchange control
Banning the use of foreign currency
Banning the possesion of foreign currency
restricing currency exhange to gov aprpoved exhanger
fixed exchange rate
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.
Advantages of NAFTA
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
Disadvantages of NAFTA
Some industires are concerns that US firms will be hurt because of lower cost of products from mexico
Certain jobs will be lost
Blance of payment
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
Blance of trade
Difference between total good imported vs. exported
Balance of goods and service
Value of goods and service exported vs
Value of goods and services imported
Trade surplus
Export was higher than import
Trade deficit
Imports higher than export
Capital account
shows the flow of investment in fixed and financial assets
Factors influencing exchange rate
interest rate
balance of paymjent
gove. intervention
political, economic, stability, extended stock markt rallies, significant decline in the demands for major exports
Types of exchange rate regine (4)
Floating exchange rate
Pegged exchange rate
fixed exchange rate
managed exchange rate
Floating exhange rate
exchange rate is dectated by market factors
Pegged exchange rate
country's central bank keep the rate form diviating too far from a target bond ro value
Fixed exhange rate
rate is time to value of another currency such as US dollar or Euro
Managed exchange rate
country's central bank attemps to control the movement in currency value
Premimum/Discoutn on exchange rate
(Forward - spot rate/Spot rate) X (Month in year/Month in forward period).

Forward < spot, currency vlaue will go down soon
Foreign currency risk
Translation risk
transaction risk
Allow (not require) the holder to buy or sell a specific commodity at a specified price during a specified time
Negotiated contract to purchase or sell a specific quantity of commodity at a price specified at origination of contract
Quantity and delivery date is fixed
but will pay market price
Business risk
conditions that threaten mgmt's ability to execute strategy and achieve firm's objectives
General environment factors
political, legal
technological segment
Industry environment factos
potential entrant
equivelent product
bargaining power of customer
bargaining power of input supplier
Perfect competition
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
Pure Monopoloy
Single seller with no close substitue
Resaons for pure monopoly
Increasing return to scale
control over supply of raw material
gov. franchise
Monopoly characteristics
Demand curve is downward slopping
entery barrier allow long term economic profit
No incentive to reduce cost
Monopolistic Competition
Many firms selling differenciated product and services
Focus on innovation
Negative slope of demand curve
sell until marginal revneue is less than variable cost
Significant entry to barriar
No proice fixing allowed
product differenciation or high level of service
knked deman curve
usually there is a price leader
Adjusted R square in Price Elasticity
Adjusted R Square is the % of varinace explained by price
A = Intercept
X = variable
b= price
Demand = A +bx