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Becker 2011 BEC 2

What are some of the techniques that the government may employ to dampen the fluctuations in the economy?

fiscal or monetary policy

What are the two ways of measuring GDP?

Expenditure Approach (GICE) or Income Approach (IPIRATED)

What does the mnemonic GICE for the expenditure approach of measuring GDP stand for?

Expenditure Approach; G overnment purchases of goods and services, gross private domestic I nvestment, personal C onsumption expenditures (durable goods, non-durable goods, and services); net E xports (exports minus imports)

What does the mnemonic IPIRATED for the Income approach to measuring GDP stand for?

Income approach; I ncome of proprietors, P rofits of corporations, I nterest (net), R ental income, A djustments for net foreign income and miscellaneous items, T axes (indirect business taxes), E mployee compensation (wages), D epreciation (also known as capital consumption allowance)

What are some of the variations on GDP and how are they computed?

by removing or changing components of its measurement; they are: NDP, GNP, NNP, NI, PI, and DI

What does the unemployment rate measure?

ratio of the number of unemployed to the total labor force; usually has inverse relationship with GDP

What are the different kinds of unemployment?

Frictional (workers routinely changing jobs), Structural (available jobs don't match skills of workforce or location), Seasonal, Cyclical (rises during recession falls during expansion)

What is the definition of CPI?

Measure of overall cost of fixed basket of goods and services purchased by an average household

What are the two causes of inflation?

demand/pull (caused by increase in aggregate demand, maybe +government spending, -taxes, +wealth, +money supply) and cost/push inflation(caused by reduction in short-run aggregate supply; maybe + oil prices, + nominal wages)

Is deflation or inflation considered to be more harmful?


What kind of relationship do unemployment and inflation tend to have?

inverse as shown in the Phillips curve

What are the main tools of fiscal policy?

government spending and taxes

What are the main tools of monetary policy?

Interest rates and their effect on money supply

What is the "real interest rate"?

nominal rate adjusted for inflation

What effect does pumping money into the economy, thus making it cheaper tend to have?

It will generally expand the economy

What is a significant measure of globalization?

world trade expressed as a percentage of GDP

Which nations make up the G7 (developed nations)?

U.S., Japan, UK, France, Germany, Italy, and Canada

Do developed countries usually have trade deficit or surplus?

They usually have trade deficit because they need to import more things than are produced

The ability of a firm to succeed is a direct result of what?

how well strategic plan fits market and how well plan is executed

What is strategic positioning?

involves defining the mission, identifying the strategy and critical success factors, and analyzing those factors by SWOT

What is SWOT?

Strengths, weaknesses, opportunities and threats

What is the fundamental law of demand?

price of a product and quantity demanded are inversely related

What are some factors other than price that will shift demand?

WRITEN mnemonic

What is WRITEN mnemonic?

change in W ealth, change in price of R elated goods, changes in consumer I ncome, changes in consumer T astes or preferences for a product, changes in consumer E xpectations, changes in N umber of buyers served by market

What is the fundamental law of supply?

price of a product and quantity supplied of a product are positively related

What are some factors other than price that will shift supply?

ECOST mnemonic

What is the ECOST mnemonic?

changes in price E xpectations of supplying firm, changes in production C osts, changes in the price or demand for O ther goods, changes in S ubsidies or taxes, changes in production T echnology

How is the equilibrium price determined?

By the interaction of supply and demand; if either curve shifts, then the equilibrium price shifts

When is demand for a product elastic?

When raising the price decreases total revenue; it means that consumers are shifting to other products

When is demand for a product inelastic?

When raising the price increases total revenue; it means there are no readily available substitute products

What does cross elasticity of demand measure?

the percentage change in quantity demanded of one good caused by the price change of another; positive cross-elasticity=substitute; negative cross-elasticity=complementary

What is income elasticity of demand?

measures percentage change in quantity demanded caused by a change in income; positive income elasticity=normal; negative income elasticity=inferior

What is the difference between explicit and implicit costs?

explicit=out of pocket; implicit includes economic or opportunity costs; difference between economic and accounting profits is similar

What is the difference between short-run and long-run costs?

In the short-run, costs are generally fixed or variable; in the long run they are pretty much all variable

What is marginal cost?

The cost of producing one more unit

What are the four types of market structure?

perfect competition, monopolies, monopolistic competition, and oligopolies

What is perfect competition?

No individual firm can influence the market price of its product nor shift the market supply sufficiently to make a good more scarce or abundant

What are monopolies?

Concentration of supply in hands of a single firm

What is monopolistic competition?

Many sellers compete to sell a differentiated product in a market into which the entry of new sellers is possible (e.g. brand name cosmetic products)

What are oligopolies?

A market structure in which a few sellers dominate the sales of a product and entry of new sellers is difficult or impossible

What are economies?

systems of markets that are driven by factors of production

What are the factors of production?

CELL mnemonic; Capital, Entrepreneurial talent, Land, and Labor

What happens in value chain analysis?

firm will analyze its flow of activities to see how it creates value in the marketplace

With relation to competitive strategy, what is cost leadership?

Selling product for lower price than all competitors.

With respect to competitive strategy, what is differentiation?

Making your product appear better or to have something different that other product don't have

With respect to competitive strategy, what is a best cost provider?

This basically combines cost leadership and differentiation and usually equates to success

What is market risk?

exposure to loss as a result of changes in trading value of an asset or liability

What are the kinds of risk associated with exchange rate?

transaction, economic, and translation; these effects flow from transactions, changes in present value, and changes on financial statements caused by exchange rate fluctuation

Can you diversify systematic risks?


What is hedging?

A financial risk management technique in which an organization acquires a financial security whose financial behavior is opposite that of the hedged item

What are the different kinds of hedging instruments?

Future (entitles holder to either purchase or sell a particular number of currency units of an identified currency for a negotiated price on a stated date), forward (same as future hedge but for a lot more money), and money market (uses domestic currency to purchase a foreign currency at current spot rates and invest them in securities timed to mature at the same time as related payables)

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