BEC Module 2

2-17 Name the motivations for developing internal business operations.

1 COMPARATIVE ADVANTAGE creating economic advantage through specializations 2. IMPERFECT MARKETS barriers to trade 3. PRODUCT CYCLE Establishment of foreign subsidiaries to more efficiently capitalize on foreign demand for domestic products

2-18 Identify three inherent risks of international business operations.

1. Exchange Rate Fluctuation 2. Operation in Foreign Economies 3. Political Risk

2-7 List the three ways the FEDERAL RESERVE could increase the money supply.

1. OPEN MARKET OPERATIONS: Purchase government securities on the open market. 2. CHANGES IN THE DISCOUNT RATE: Lower the discount rate 3. CHANGES IN THE REQUIRED RESERVE RATIO: Lower the required reserve ratio

2-19 Identify three categories of EXCHANGE RATE exposure.

1. Transaction risk (exposure) 2. Economic risk (exposure) 3. Translation risk (exposure)

2-8 What is the likely impact of a decrease in the money supply on interest rates, real GDP, and the overall price level?

A decrease in the money supply leads to an increase in interest rates. As interest rates rise, the cost of capital increases, leading to a decline in investment spending and a shift level in the aggregate demand curve. As the aggregate demand curve shifts left, real GDP and the overall price level falls. Thus, a decrease in the money supply leads to: (1) an increase in interest rates, (2) a decrease in real GDP and (3) a decrease in the overall price level.

2-12 What are the characteristics of a DEPRESSION?

A depression is a very severe recession. A depression is characterized by a sustained period of falling real GDP and high rates of unemployment. For example, during the height of the Great Depression. real GDP fell by approximated 33% and 1 out of every 4 workers was unemployed.

2-40 Define a FUTURES HEDGE.

A futures hedge entitles its holder to either purchase or sell a particular number of currency unites of an identified currency for a negotiated price on a stated date.

2-43 Define MONEY MARKET HEDGE.

A money market hedge uses international money markets to plan to meet future currency requirements by either investing internationally in a manner that times investment maturities with settlement of foreign payables or borrows against foreign receivables in a manner that times the maturity of borrowings with the collection of receivables.

2-10 How is a RECESSION defined?

A recession is defined as a period during which real GDP (national output) is falling for at least two consecutive quarters. Recessions are characterized by falling real output (negative real GDP growth) and rising unemployment.

2-11 What is the definition of a BUSINESS CYCLE?

Business cycles are defined as the rise and fall of economic activity relative to its long-term growth trend. Business cycles vary in duration and severity. Some cycles are quite mild; others are characterized by large increases in unemployment and/or inflation. Business cycles are also called economic fluctuations.

2-9 List and define the phases of a typical BUSINESS CYCLE.

Business cycles are typically comprised of: (1) an expansionary phase characterized by rising growth in economic activity (real GDP), (2) a peak, or high point of economic activity, (3) a contradictory phase characterized by declining growth economic activity, and (4) a trough, or low point of economic activity. Business cycles may also include a recessionary phase during which real GDP is declining and a recover phase during which economic activity starts to grow again after a recession.

2-44 Name the currency option hedge used to mitigate transaction exposure to exchange rate risk for PAYABLES. Name the currency option hedge used to mitigate transaction exposure to exchange rate risk for RECEIVABLES.

CALL OPTION: Option to BUY a foreign currency (for currency hedges at a per-negotiated price PUT OPTION: Option to SELL a foreign currency (for currency hedges at a per-negotiated price

2-6 Explain the relationship between interest rates and the money supply.

Changes in the money supply directly affect interest rates through the money market. An increase in the money supply shifts the money supply curve to the right and causes interest rates to fall. A decrease in the money supply shifts the money supply curve to the left and causes interest rates to rise. Thus, an increase in the money supply leads to a decline in interest rates and a decline in the money supply leads to an increase in interest rates.

2-39 Distinguish between diversible and non-diversiable risk.

D DIVERSIBLE RISK U UNSYSTEMATIC Risk (Non-market/firm specific) N NONDIVERSIBLE RISK S SYSTEMATIC Risk (market)

2-3 What are the causes of DEMAND-PULL INFLATION and COST-PUSH INFLATION?

DEMAND-PULL INFLATION is caused by increases in aggregate demand. Thus, demand-pull inflation could be caused by factors such as increases in government spending, decreases in taxes, increases in wealth,, increase in consumer confidence, and increases in the money supply. COST-PUSH INFLATION is caused by reductions in short-run aggregate supply. Thus, cost-push inflation could be caused by factors such as an increase in oil prices and an increase in nominal wages.

2-35 What are the four key management processes of SUPPLY CHAIN MANAGEMENT (SCM), and what are the stages of supply chain management?

FOUR KEY MANAGEMENT PROCESSES OF SCM: -Plan - Source - Make - Deliver STAGES OF SCM: - Fundamentals - Cross-functional teams - Integrated Enterprise - Extended Supply Chain - Supply Chain Communities

2-22 What is the fundamental law of demand, and what factors shift DEMAND CURVES?

FUNDAMENTAL LAW OF DEMAND: The price of a product (or service( and the quantity demanded of that product (or service) have an INVERSE relationship. Factors that shift demand curves include the mnemonic "WRITTEN," which are changes in WEALTH, prices of RELATED goods, consumer INCOME, consumer TASTES or preferences, consumer EXPECTATIONS, and the NUMBER of buyers in a market.

2-23 What is the fundamental law of supply, and what factors shift SUPPLY CURVES?

FUNDAMENTAL LAW OF SUPPLY: Price and quantity supplied are positively related. The higher the price received for a good, the more quantity sellers are willing to produce. Factors that shift supply curves include the mnemonic "ECOST" and include changes in price EXPECTATIONS of the supplying firm, production COSTS, the demand for OTHER goods, SUBSIDIES or taxes, and TECHNOLOGY.

2-5 Define: GROSS DOMESTIC PRODUCT (GDP)

GROSS DOMESTIC PRODUCT is the total market value of all final goods and services produced within the borders of a nation in a particular time period. Note that GDP includes the output of foreign owned factories in the U.S. but excludes the output of U.S. owned factories operating abroad.

2-13 Define Globalization

Globalization is defined as the distribution of industrial and service activities across and increasing number of nations.

2-14 Describe the impact of Globalization

Globalization results in deeper integration of the world's individual national economies and makes those economics more independent.

2-38 What is INDIFFERENT BEHAVIOR?

INDIFFERENT BEHAVIOR exists when the certainty equivalent < expected value.

2-31 When measurements indicate the following? - INELASTICITY of demand in the supply - ELASTICITY of demand and supply - UNIT ELASTICITY of demand and supply

INELASTICITY of demand (or) supply exists when the absolute value of elasticity calculation is <1.0. ELASTICITY of demand (or) supply exists when the absolute value of elasticity calculation is >1.0. UNIT ELASTICITY of demand (or) supply exists when the absolute value of elasticity calculation is EXACTLY 1.0.

2-45 Name an objective to TRANSFER PRICING between foreign and domestic subsidiaries and their parent companies.

Minimization of taxation

2-4 What is the difference between NOMINAL GDP and REAL GDP

NOMINAL GDP measures the value of all final goods and services produced within the borders of a nation in terms of current dollars (i.e., the prices prevailing at the time of production). REAL GDP measures the value of all final goods and services produced within the borders of a nation in terms of constant prices (i.e., the value of goods and services adjusted for changes in the price level). Specifically, Real GDP = Nominal GDP/ GDP Deflator X100 , where GDP Deflator is the price index used to adjust nominal GDP for changes in the overall prices of goods and services.

2-32 What effect do the following forms of government intervention have on market operations? - Price ceilings - Price floors - Rationing

PRICE CEILINGS: a price is established below the equilibrium price, prices are artificially low, and more quantity is demanded than supply is available (MARKET SHORTAGE) PRICE FLOORS: a price is established above the equilibrium price, prices are artificially high, and less quantity is demanded than is available (MARKET SURPLUS) RATIONING: a limit is placed on the availability of goods, demand is reduced, and price is lowered for a given supply (BLACK MARKETS COULD EMERGE)

2-30 Elasticity is the measure of how sensitive the demand for or the supply of a product is to a change in its price. Define PRICE ELASTICITY of DEMAND and PRICE ELASTICITY OF SUPPLY

PRICE ELASTICITY OF DEMAND: the percentage change in the quantity demanded divided by the percentage change in price. PRICE ELASTICITY OF SUPPLY: the percentage change in the quantity supplied divided by the percentage change in price.

2-21 Name and define three significant theories of international finance that seek to explain exchange rate fluctuation.

PURCHASING POWER PARITY Inflation will cause exchange rates to adjust in a manner that produces equal prices for similar goods in a common currency in different economies. INTERNATIONAL FISHER EFFECT Interest rates include an inflation premium that pinpoints the cause of exchange rate changes. INTEREST RATE PARITY Interest rates, in conjunction will forward contracts used to hedge investment results, pinpoint exchange rate differences.

2-41 State the formula for the real cost of hedging PAYABLES and define the terms of the formula.

RCHp = NCHp - NCp Terms are defined as follows: RCHp real cost of hedging payables NCHp nominal cost of hedging payables NCp nominal cost of payables without hedging

2-42 State the formula for the real cost of hedging RECEIVABLES and define the terms of the formula.

RCHr = NRr - NRHr Terms are defined as follows: RCHr real cost of hedging receivables NRr nominal domestic revenues received without hedging NRHr nominal domestic revenues received from hedging

2-36 What is the RISK AVERSE BEHAVIOR?

RISK AVERSE BEHAVIOR exists when the certainty equivalent < expected value. Most common - Investor seeks to avoid risk

2-37 What is RISK SEEKING BEHAVIOR?

RISK SEEKING BEHAVIOR exists when the certainty equivalent > expected value

2-24 Changes in equilibrium cause demand and supply curves to shift, and new equilibrium price and quantity result. In general, what effect do the following shifts in demand and supply curves have? - Shift right in the demand curve - Shift left in the demand curve - Shift right in the supply curve - Shift left in the supply curve

Shift RIGHT in the DEMAND curve: increase in demand, causing in increase in price and market clearing quantity. Shirt LEFT in the DEMAND curve: decrease in demand, causing a decrease in price and market clearing quantity. Shift RIGHT in the SUPPLY curve: increase in supply, causing a decrease in price and an increase in market clearing quantity. Shift LEFT in the SUPPLY curve: decrease in supply, causing an increase in price a decrease in market clearing quantity (Note: Market clearing quantity is the equilibrium quantity.)

2-20 Name the factors influencing EXCHANGE RATES.

TRADE-RELATED FACTORS 1. Relative inflation rates 2. Relative income levels 3. Government controls FINANCIAL FACTORS 1. Relative interest rates 2. Capital flows

2-16 What is meant by shift in economic balance of power?

The ability of the world's emerging nations to contend with the economics of the industrialized world for power, resources, influence, etc.m is a charge of shift in the economic balance of power from previous decades. Balance of power theory holds that the states that are members of the global economy can either engage in balancing or bandwagoning behavior. An emerging nation might side with the United States or other industrialized nations in an embargo or other economic sanction (bandwagoning) or could join with other emerging nations ignoring the leadership of the United States (balancing). The significance of their decision to change the impact of the embargo represents an important shift in the balance of economic power.

2-28 What are the attributes and basic competitive strategies of MONOPOLISTIC COMPETITION?

The attributes and strategies of monopolistic competition include: - Numerous firms with differentiated products - Few barriers to entry - The ability of firms to exert some influence over the price and market - Significant non-price competition in the market (to promote brand awareness and loyalty) - Zero economic profits in the long run - Strategic plans include maintaining the market share but also including a plan for enhanced product differentiation.

2-27 What are the attributes and basic competitive strategies of MONOPOLY?

The attributes and strategies of monopoly include: - A single firm with a unique product - Significant barriers to entry - The ability of the firm to set output and prices (e.g., patents and restriction against competition-firms are price setters) - No substitute products - Produce where price > marginal cos (i.e., less output than socially optimal) - Strategies include ignoring market share and focusing on profitability from production levels that maximize profits

2-29 What are the attributes and basic competitive strategies of OLIGOPOLY?

The attributes and strategies of oligopoly include: - Relatively few firms with differentiated products - Fairly significant barriers to entry (high capital costs, etc.) - Strongly interdependent firms (prices tend to be fixed) - Kinked demand curve (firms match price cuts but ignore price increases) - Strategic plans focus on market share and call for the proper amount of advertising and ways to adapt to price and volume changes

2-26 What are the attributes and basic competitive strategies of PURE (PERFECT) COMPETITION?

The attributes and strategies of pure (perfect) competition include: - A large number of suppliers and customer acting independently - Very little product differentiation - No barriers to entry - Produce where P=MR=MC - Firms are price-takers - Strategies include maintaining market share and responsiveness to sales price.

2-34 What are the FIVE BASIC COMPETITIVE STRATEGIES, and what do the main components mean?

The five basic competitive strategies are: - Cost leadership focused on a broad range of buyers - Cost leadership focused on a narrow range (niche) of buyers - Differentiation focused on a broad range of buyers - Differentiation focused on a narrow range (niche) of buyers COST LEADERSHIP: lowest overall costs DIFFERENTIATION: unique features that create loyalty/value BEST COST: low cost leader among rivals and unique features

2-33 List the FIVE EXTERNAL FORCES that affect the competitive environment and profitability of a firm.

The five external forces that affect the competitive environment and profitability of a firm are: - Barriers to market entry - Market competitiveness (intensity of competition) - Existence of substitutes - Bargaining power of the customers - Bargaining power of the suppliers

2-25 List some examples of change that the strategic plans of firms must be flexible enough to adapt to.

The strategic plans of firms must be flexible enough to adopt changes in such factors as: - Technology - Competition - Crisis situations - Regulatory laws - Customer preferences

2-1 How is GDP calculated under the EXPENDITURE APPROACH?

Under the expenditure approach, GDP is calculated by summing total expenditures in the domestic economy. GDP is calculated as: GOVERNMENT purchases of goods and services + Gross private domestic INVESTMENT + Personal CONSUMPTION expenditures + Net EXPORTS ( exports minus imports Mnemonic: GICE

2-2 How is GDP calculated under the INCOME APPROACH?

Under the income approach, GDP is calculated by summing the value of resource costs and incomes generated during the measurement period. GDP is calculated as: INCOME of proprietors + PROFITS of corporations + INTEREST (net) + RENTED income + ADJUSTMENTS for net foreign income + TAXES (indirect business taxes) + EMPLOYEE compensation (wages) + DEPRECATION (capital consumption allowance) Mnemonic: I PIRATED

2-15 What is a frequently used statistical measure for Globalization?

World trade expressed as a percentage of GDP