Economics (10 Day MBA)

microeconomics

more practical than macro. deals with supply and demand equation of individuals, families, companies, or industries.

Real GNP

"" is GNP adjusted for inflation. During recessions and depressions, Real GNP FALLS and GROWS during booms.

3 panel diagram p 320 graphs

(p 320 graphs) created by Gregory Mankiw of U Chicago. represents world economic system by pulling together domestic interest rates, international capital flows, and currency rates. within each country, supply and demand for loanable funds determine the level of domestic real interest rates. At that equilib interest rate, savers of dollars supply funds and investors' demand for dollars is satisfied. interest rate paid on dollar denominated investments can be either attractive or not in intl marketplace. country's riskiness, currency demands of international trade, and interest rate itself determines country's net capital outflow. These outflows supply the international currency market with dollars. these three variables (domestic interest rates, capital flows, and exchange rates) interact simultaneously in the intl macroeconomic system at a constantly fluctuating point of equilibrium as depicted in a three panel diagram.

Country Analysis: US 1990

1) Analyze past performance: -External measures: US trade deficit reduced from $150 billion in 87 to $60 billion now. US dollar showing small but consistent weakening vs 2 other major currencies. Inflation steady at low 2 -5% past 5 years with little indication of heating up. Unemployment kept low between 5-6% a year. -Internal Measures: sluggish GNP increase of 1% in $5.4 trillion economy (largest in world, 2x Japan, 4x Germany, and 7x UK). -Supply Side: IR steadily falling with prime lending rate at 8-9% (considered high because of low level of inflation) -Demand Side: small and steady growth of 6% in personal consumption. income distribution among population uneven (minority populations participating at a lesser percentage in labor market than in past). -Social Side: No major outward or inward migration. low birth rate and near zero population growth (A SIGN OF A PROSPEROUS INDUSTRIALIZED NATION). Illiteracy is a problem among many students and adults despite availability of public education to children. Overall, economy is sluggish, country has some problems but not bad. 2) Identify country's strategy -Goals: US known for leadership in world affairs. Politicians and businessmen focused on making industrial base more productive following recession of 1981 and 1982. Factory productivity increased 3.1% a year since 1983 from automation, new management practices, and layoffs. Washington has not made economic equity a priority. Leaders talk about "trickle down economics" (suggests that if economy is doing well, everyone will eventually participate). -Policies: Legislature and executive branch's spending policies show little fiscal restraint. Budget defecit remains at a high $220 billion. $2 trillion of additional debt resulting from a steady decade of overspending. 14 cents of every federal $1 was used to pay interest on that debt. Monetary policy (controlled by independent Federal Reserve) shows great restraint by keeping a lid on the money supply, keeping inflation low but interest rates high. BECAUSE THE NATION CONSIDERS ITSELF A FREE-TRADING NATION, FEDERAL GOVERNMENT DOESN'T FOLLOW A FORMAL TRADING POLICY. ISSUES ARE DEALT WITH CASE BY CASE. 3) Analyze a country's context -Physical: NEEDS TO IMPORT OILS AND OTHER METALS despite being one of the largest nations in the world with rich natural resources. -Political: CONSIDERED WORLD'S MOST STABLE CONSTITUTIONAL DEMOCRACY. A federal republic with power shared between the central government and the fifty state governments. CORRUPTION DOES EXIST, BUT A VIGILANT PRESS KEEPS IT TO A MINIMUM. -Institutions: is an ADVANCED INDUSTRIALIZED NATION. INFRASTRUCTURE OF GOVERNMENTAL AGENCIES, BUSINESS, LABOR, RELIGION, AND AGRICULTURE EXIST AND OPERATES LIKE MOST DEVELOPED BUREAECRACIES. -Ideological: US views government as servant of people with a constitution giving individuals a Bill of Rights which government cannot abridge. CULTURE OF US IS A REFLECTION OF ITS IMMIGRANT PAST AND CAPITALIST ECONOMICS. IT IS DIVERSE. A COMMON THREAD OF DEEP RESPECT FOR MATERIAL WEALTH PERVADES THIS SOCIETY. -International: plays a dominant role in world trade BEING THE LARGEST CONSUMER MARKET IN THE WORLD. with a stable dollar and low inflation it continues to be a strong economy. 4) Make a prediction Based on previous steps Like Switzerland, US is a stable industrialized country experiencing a sluggish patch of growth in its business cycle. Should maintain exposure to US economy by maintaining investments in US STOCKS AND BOND MARKETS (no better safe haven).

4 factors intl currency traders consider when trying to predict gyrations of world currencies.

1) Trading demands for currency to pay for goods and services: when US needs to buy french wine, importers sell US dollars and buy euros to make payment in EU currency. 2) Demands for currency for attractive investments: -HIGHER RELATIVE INTEREST RATES IN US PROMPT BOND PURCHASES BY FOREIGNERS. -HIGHER US RELATIVE RATE OF ECONOMIC GROWTH PROMPS STOCK PURCHASES BY FOREIGNERS. 3) demands for save havens in times of uncertainty: In times of war or chaos, investors seek currencies of STABLE GOVERNMENTS. ie Gulf War 1991: investors bought US dollar because they believed US would fare better than other countries in an unstable climate. Post Iraq War 2003: investors bought European Union's Euro. 4) Lower inflation relative to other countries: theory of "purchasing power parity" describes the way that currencies value adjust versus each other because of inflation. IF ONE COUNTRY'S INFLATION IS HIGHER THAN ANOTHER'S, THEN ITS CURRENCY WILL BE ADJUSTED DOWNWARD TO COMPENSATE FOR THE ANNUAL LOSS OF VALUE. ie Lebanon's Civil War 1986-87: US inflation was 3.6% compared to Lebanon's 723% in 87 reflecting chaos of their Civil War. Lebanon's exchange rate went from 38 to 496 pounds to the dollar (a loss of 86% to compensate for loss of inflation.) as of 2011, a dollar could buy 1,510 Leb pounds due to continued inflation and political instability.

Elasticity p 297 table

Buyers sensitivity to price changes. ONE OF THE FEW THEORIES ACTUALLY USED. ie brand managers at P&G want to know how price changes affect demand for their soap. production foremen at Ford wants to know how it affects their production requirements. NOT CONSTANT AT ALL PRICE LEVELS. MAY VARY AT DIFFERENT PRICE LEVELS. (table p 297) ie butcher: small price change in burger meat wouldnt prompt switch compared to a $2 to $5 price difference. at higher prices, shoppers select hot dogs or pasta. Elasticity of quantity demanded differs from "" of total revenue: die hard beef eaters willing to buy at higher prices make up for the lost revenue of higher sales volumes.

Quantity Theory Equation

Changes in money supply cause direct changes in nominal GNP. M x V = P x Q Money x Velocity = Price Level x Real GNP Money Supply = Nominal GNP

Monetarist (Friedman)

Conservative (Majority position in MBA schools) Markets work best if left alone with minimal government interference Milton Friedman of U of Chicago believed in power of market to heal itself after witnessing boom years or post WWII (especially prosperity of Eisenhower and Kennedy administrations). Believed government regulation has done more harm in INCOME TAX POLICY, AGRICULTURAL SUBSIDIES, PUBLIC HOUSING, AND OTHERS). Free market economics are best in long run even at cost of unemployment. Inflation is big evil, it is a tax on everyone. Government tinkering makes the economy worse off in the long run. Available economic data are usually inaccurate and too late for useful government intervention. Government spending crowds out efficient private activity.

Global Macroeconomics

Economies of world keep track of activity using Balance of Payments accounting. Good economies: LOW INFLATION, STEADY ECONOMIC GROWTH, HIGH FOREIGN RESERVES, LOCAL CURRENCY MAINTAINING ITS VALUE. Bad country: Lebanon or Zimbabwe. Country analysis is prestigious tool used to predict future of company.

elasticity coefficients.

Elasticity of Quantity demanded = %change in QD / % change in price " " of Total Revenue = %change in TR / % change in price HIGHER ELASTICITY COEFFICIENTS = HIGHER PRICE ELASTICITY COEFFICIENT = OR > 1 IS ELASTIC. ie restaurant meals at 2 and medical services at .31. determined by great deal of research. Managers must analyze historical data and also try to sort out nonprice influencees that may have caused demand change (ie weather and competition). Elasticity of quantity demanded differs from "" of total revenue: die hard beef eaters willing to buy at higher prices make up for the lost revenue of higher sales volumes. Higher prices encourage more production while simultaneously discouraging more consumption. Lower prices discourage production but encourage more consumption.

nominal GNP

GNP not adjusted for inflation. when unadjusted, can show dollar growth even if the economy produced the same amount of goods and services.

Keynesian GNP

GNP=C+I+G+X Where the drivers of GNP(each should be influenced by governments desire to maintain steady economic growth and low unemployment) are: C= Personal Consumption I=Private Investment G=Government Purchases X= Net of Exports over Imports according to above equation, any increase in consumption, investment, or government spending will result in economic growth. China, Japan, and Taiwan use exports as their engines for growth. US on other hand drags its economy with a yearly trade deficit. "GNP Gap" (Lowering GNP) is distressing because it means fewer jobs (counterintuitive to Keynesian goal of full employment). Monetarist would argue that measures of economies provided by government are not accurate because of absence of underground and unrecognized economies of CRIME, UNREPORTED EARNINGS, AND OUTPUT OF MOTHERS WORKING AT HOME. Also neglects to subtract the cost of environmental damage and add value of leisure time produced.

John Kenneth Galbraith and Liberal View

Harvard economist known for his broad policy statements. ability to give rousing lectures and market his books make him a big name in econ. American Capitalism: The Concept of Countervailing Powe(1951): made case for labor unions The Affluent Society (1958): called for economy to deemphasize production in favor of public services. The New Industrial State (1967): commented on gradual move toward socialism in U.S.

Joseph Schumpeter and Creative Destruction

Harvard economist ressurected in 1980s. SAW ENTREPRENUER AS CRUCIAL FIGURE IN ECONOMICS. Considered Capitalism "unruly and disconcerting, a system of flux rather than equilibrium." In Capitalism, Socialism, and Democracy (1942), wrote capitalism was a process of "creative destruction." (entrepanuers create industries that displace others in a painful and disquieting way). CORPORATE RAIDERS QUOTE SCHUMPTER TO JUSTIFY THEIR ACTIONS AND PROFITS AS HEALTHY ACTIVITIES THAT CLEANSED THE CAPITALIST SYSTEM IN LBO CRAZE OF 80S.

inflation

Inflation is when price levels rise. Economists use 3 measures to gauge inflation's impact on economy: 1) GNP deflator index 2) Consumer Price Index (CPI) 3) Producer Price Index (PPI)

IS/LM curve is not fixed or precise

It can change. If spending increases due to pump priming by the government during a recession, people will spend more money in the aggregate. The entire IS curve will shift upward, resulting in higher interest rates and a higher GNP. If the money supply were also to be increased by the right proportion to accommodate increase in spending, THEN IR WOULD REMAIN THE SAME (in theory of course). While not precise, it does illustrate a relationship that makes logical sense.

liquidity preference

Keynes notes that HIGHER IR = HIGHER LP FOR MONEY. ie Dec 1980: interest rates at all time high of 21% caused people to invest in Money Market Funds. 1992: IR at 3 to 5%, investors rushed to shed cash and ventured into Stock Market. 2003: IR at 1 to 3% and somewhat risky market, investors rushed to Real Estate ending badly in 2007. Higher IR = Higher LP for money = Invest in Money Market Lower IR = Lower LP for money = Invest in Stock Market

Macroeconomics

Keynesians: like government and consumer spending. Friedman/monetarist: place their faith in control of money supply. Only agreement of 2 theories is that SUPPLY EQUALS DEMAND AT AN EQUILIBRIUM PRICE.

Keynesians (Liberal)

Liberal (Minority in B Schools) Government intervention significantly improves operations of economy. John Maynard Keynes wrote The General Theory of Employment, Interest, and Money (1936) amid chaos of Great Depression. Free enterprise without government intervention does not cause full employment. Unemployment is big problem that needs a solution. With government spending and monetary policy, government should smooth out business cycles. Adequate information is available to take government action. Government spending can help spur efficient economic growth.

Marginal Revenue and Marginal Cost p 293 graph

MR should be > MC to produce. MR from sale should exceed MC to produce Good for evaluating transactions, not whole businesses. associated with opportunity cost. Companies want to maximize profits and minimize costs. If a business has an opportunity to sell a single additional unit at a profit, they should do it. should continue to produce until MR = MC, then at equilibrium, the MProfit on next unit will be zero. after this, MR of each additional unit sold DECREASES and MC INCREASES. EXPERIENCE TELLS US THAT THE MORE UNITS BUSINESSES TRY TO PUSH ON THE MARKET, THE LESS THE MARKET IS WILLING TO PAY FOR THESE GOODS. once a factory reaches capacity, the MC of producing one additional unit INCREASES beyond the cost of the last unit produced. ie cattle rancher Bud Montana: MC of adding a steer to his herd is minimal. Fences still have to be mended and pasture maintained. Since he is a "rational" decision maker, Bud will add cattle until MR from selling an additional steer will cover MC of raising the steer. If cost of raising one additional unit becomes higher than the current market price, then Bud will stop adding steers to his herd. demand curve is flat (rather than downward sloping) because the price of beef is determined in a competitive auction. If Bud had a monopoly on market, he would always produce and sell at point where MR=MC (demand curve would be sloped downward to right) ( \ ) graph p 293 MR and MC are critical in making marginal pricing and production decisions. However, to evaluate profitability of an entire business, TOTAL REVENUE MUST BE > TOTAL COSTS TO MAKE A BOTTOM LINE COMPANY PROFIT.

sources/uses of foreign exchange p 315

Merchandise Exports/merchandise imports (most frequent) Travel Expenses of Foreigners Here/travel of citizens abroad Transportation Receipts of Domestic Carriers from Foreigners/transportation expenses by residents paid to foreigners FEES AND ROYALTIES RECIEVED/FEES AND ROYALTIES PAID ABROAD Foreign Investment Income/Interests and Dividends paid abroad Government foreign aid received/Government foreign aid given Private transfers of money into the country/private transfers of money abroad Increase in foreign liabilities/increases in foreign assets above items most frequently entered into foreign exchange ledger. Excluded from the count are international drug trade and other unreported activities. *THE PRESS USUALLY IGNORES THE WHOLE BOP PICTURE AND FOCUSES ONLY ON THE "MERCHANDISE TRADE DEFICIT."

Investment and Spending Curve (IS)

Not fixed. downward sloping curve explaining relationship between higher interest rates and consumers buying habits. Keynesian theory says interest rates are powerful force and HIGHER INTEREST RATES RETARD INVESTMENTS THAT DRIVE ECONOMIC GROWTH.

liquidity and money curve (LM) p 306 graph

Not fixed. illustrtates relationship between investors and interest rates. (graph p 306) At some theoretical point, there is an equilibrium point where IS and LM curves meet at an equilibrium interest rate and a level of GNP. ie Dec 1980: interest rates at all time high of 21% caused people to invest in Money Market Funds. 1992: IR at 3 to 5%, investors rushed to shed cash and ventured into Stock Market. 2003: IR at 1 to 3% and somewhat risky market, investors rushed to Real Estate ending badly in 2007.

Gary Becker and Behavioral Economics

One of the first to apply economic theory to topics belonging to sociology. Argued that many types of behavior can be seen as rational and utility maximizing. racial discrimination, crime, family organization, and drug addiction were topics of his most famous studies. Further popularized by U Chicago's Steven Levitt's book Freakonomics.

Money supply

Referred to as M1 and M2. include "money equivalents" such as checking account balances and money market funds. M1: the most accessbile, includes only cash, checking, account balances, and nonbank travelers checks. M2: includes M1's components plus savings and money market accounts. Government closely monitors M1 and M2 money supply to GUAGE THE ECONOMY'S DEMAND FOR MONEY/ITS HEALTH. Was 2 and 9 trillion respectively in 2010. Monetarists consider money main driver of GNP. considered product of amount of money. If money is devalued by price increases, the real value of the economy's output is diminished. THE TRICK IS TO HAVE THE WISE MEN IN WASHINGTON INCREASE THE MONEY SUPPLY JUST THE RIGHT AMOUNT SO THAT THERE MAY BE ECONOMIC GROWTH WITH LITTLE INFLATION.

Microeconomics

Supply equals demand at an equilibrium price. Consumers try to minimuze opportunity costs and maximize marginal profits and utility. Consumer behavior is elastic if they respond to price changes.

Arthur Laffer and Supply Side Economists of 1980s p 313 curve

USC. Best known supply side economist (believe in incentive effects of reduced taxation. Tax incentives and federal spending reductions are critical in promoting growth by causing increases in savings and investment). Developed "Laffer Curve" explaining incentive effects of tax rates (MOTIVATING REAGAN TAX CUTS IN 1981). suggests tax revenues are correlated to tax rates. curve shows that total tax revenues increase as tax rates increase, but past a certain point, increase in rates decrease total tax revenues. Higher rates encourage tax cheating and discourage people from working more. (Laffer Curve p 313) PROBLEM WITH THIS THEORY IS THAT IT IS TOO ABSTRACT. Theoretically there is an optimal tax rate but nobody knows exactly what it is. Other radical supply side economists from Reagan era are George Gilder (Wealth and Poverty 1981) and Jude Wanniski (The Way the World Works 1978).

Utility and Marginal Utility

Utility is value of a product to a consumer. Marginal Utility is the usefulness or utility of having an additional unit of a product. a buyer becomes completely satisfied eventually and an additional sale would be of no value to them. ie beer to unwind: 2nd beer would be of great MU, but a few hours later (12 beers, games of pool, and dancing), person is fully unwinded and an extra beer is useless to them.

Arthur Okun and Okun's Law

Yale, studied economic growth and unemployment like A.W. Phillips. One of the most influential economists on Presidents Council of Economic Advisers during Kennedy and Johnson administrations. FOUND THAT HIGHER LEVELS OF ECONOMIC GROWTH ARE ACCOMPANIED BY LOWER UNEMPLOYMENT. historical studies indicated for ever 2.2 percentage points of real GNP growth, unemployment falls 1 point. (This rule of thumb was extensively used to justify stimulative policies pursued by Washington in the 1960's).

Cookie example (MR and MC)

a customer wants to pay $1.00 per dozen (total of 100 dozenz to be sold at church fair). your accountant says it will cost $1.45 per dozen with following breakdown: Cookie Batter: $.80 Labor: .25 Factory Utilities: .20 Factory Upkeep: .20 Total Cost: $1.45 You see that MC of running automated production line is the extra batter. (machine operator would be there anyway, oven would be on anyway, and factory would continue to require usual maintenance). Factory manager SHOULD WELCOME ORDER BECAUSE HE CAN MAKE A MARGINAL PROFIT. ONLY REASON TO REJECT ORDER IS IF WORD GOT OUT TO REGULAR CUSTOMERS THAT YOU SOLD $2 COOKIES FOR $1. (if everyone paid $1 special per dozen, THERE WOULD BE NO PROFITS TO PAY FIXED COSTS),

invisible hand

at the right price, there is a demand for 10 kegs of beer aggregate supply (AS) = aggregrate demand (AD) at an equilibrium price and level of economic output. graph p 291 ie local brewed Duff Beer running a $1 special of mugs. your normally drink Heineken but are willing to try it out because of cheap price. graph on p 290

foreign exchange

balance of liquid assets such as cash and gold reserves that can be used to make international payments. Having enough foreign exchange is extremely important. ie Zimbabwe's currency collapse in 2008: resulted in insufficient foreign exchange in its central bank to make good on the purchases made by its government and citizens. When foreigners went to convert their claims to US dollars, the central bank was emptied of its foreign exchange. WITHOUT CONVERTIBILITY, EVERYONE DUMPED THEIR NEARLY WORTHLESS ZIMBABWE DOLLARS ($1 US = 1 trillion Zimbabwe dollars forcing government to abandon its currency) (p 315 chart, comparisons)

Importance of Economics in Business World

cant provide a clear picture, BUT IT CAN SUPPLY SOME INSIGHTS INTO THE "INVISIBLE FORCES" THAT UNDERLIE THE MOVEMENT OF BUSINESS AROUND THE WORLD. studies how society allocates limited resources of the earth to the insatiable appetites of humans.

Gross National Product (GNP)

centerpiece of macro. TOTAL MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED BY AN ECONOMY IN A YEAR. *CHANGES IN GNP ARE USED AS A MEASURE OF HEALTH OF AN ECONOMY. "final" is important. no double counting. In automobiles, steel is counted in production only once.

Net National Product (NNP)

considers cost of using up machinery, factories, and equipment in production. NNP = GNP-depreciation on fixed assets used in economy

GNP deflator index

converts unadjusted nominal GNP to real GNP. ie 2005 as base year: GNP deflator index was 100. 17 in 1950 (price of goods and services was 17% of what it was in 2005). if you produce a pound of taffy worth $1 in 2011, and it is worth $1.04 in 2012 due to inflation. Nominally, you produced 4% more value (.04 cents more) but in reality you did same amount (calculated by deflator index).

country analysis

developed at HBS, is a 4 step process that attempts to organize all available ECONOMIC, SOCIAL, POLITICAL, AND GEOGRAPHIC data for strategy development. 1) Analyze Past Performance: External Measures: balance of payments, exchange rates Internal measures: -General: GNP, inflation, employment -Supply side: interest rates, investment, capacity -Demand side: consumption, income distribution -Social side: human migrations, population growth, education 2) Identify Country's Strategy Goals: autonomy, productivity, equity Policies: fiscal, monetary, trade, social 3) Analyze a Country's Context Physical: size, population, geography Political: government type, stability, corruption, leaders Institutions: government agencies, business, labor, religion, agriculture Ideological: role of government, family, culture, individualism International: trade advantages, competetiveness 4) Make a prediction based on previous steps

Adam Smith and The Wealth of Nations

earliest economist. WON (1776) described Invisible Hand of competition as guiding an economic system based on self-interest. believed WON increased by "division of labor." In pin factory example, Smith described how productivity was enhanced when different tasks were assigned to those workers with appropriate skill. Observed cases where 10 people each performing a separate task turned out 48,000 pins a day in era where only a few were being produced.

phillips curve

graph depicting relationship between inflation and employment. Keynesians like a little inflation because higher inflation is accompanied by lower unemployment (backed by research of A.W. Phillips). HISTORICAL DATA IN THE U.S. SHOWS VALIDITY OF THIS ESPECIALLY IN PERIOD BETWEEN 1950-1985, BUT NOT AFTER.

Market Structures (4)

greater competition = greater sensitivity in price changes in supply and demand ie gold: many suppliers worldwide and price fluctuates daily on commodity exchanges. 1) Pure Monopoly: one seller with unique product. Government regulation is only restraint on greed. Arent any close substitutes to which consumers can switch. are "price makers" because they can set prices of stadium tickets and utilities. Pharm companies holding exclusive patents . ie NBA, electrical utilities, GlaxoSmithKline's AIDS drug AZT (exclusive patent allows GSK to charge thousands with little cost to produce). 2) Oligopoly: few suppliers and few substitutes. Few competitors allows prices to be maintaned at high levels if producers choose not to compete on price. If not, few competitors engage in Price Wars that push prices down. ie Airlines: price wars break out on busy routes, but once it becomes clear that nobody can win, oligopolists return prices to higher levels. 3) Monopolistic Competition: market where many producers with products that can be differentiated. Copy stores known for this. Copies may be same but service varies. ie FedEx Kinkos: sell copies for 11 cents each versus economy shops prices of 5 cents. FedEx justifies higher price by being open 24/7 in addition to friendly service in clean stores. EXISTENCE OF DISCOUNTERS place a lid on copy prices in market. FedEx would face a downturn if prices were 2 or 3x more than economy shops. 4) Pure Competition: many competitors selling a similar, substitutable product. MARKETING DOESNT AFFECT PRICE PRODUCERS CAN GET. ie Gold, silver, wheat, and corn: many suppliers and buyers compete on commodity exchanges and prices are determined by market forces of supply and demand. Producers are "price takers" from the market that arrives at prices by competitive bidding.

fixed exchange rate system

host government tries to change interest rates or buy and sell foreign currencies to maintain a fixed value against the U.S. dollar, EU's euro, or a basket of currencies (called "pegging" the value of the currency to another). ie Bretton Woods System 1945 to 71: U.S. dollar was "pegged" against a certain amount of gold and all other countries were pegged to the U.S. dollar. (system ended in 1971 when many countries decided to "float" their currencies)

fiscal policy

how Congress and president decide to spend money. Keynesians believe government's fiscal policy can "prime the pump" of a slow economy. ie 2009: members of Congress raced to start public works projects, to boost economy during recession. Road construction involved purchase of rock, cement, steel, equipment, and labor where people involved spend their wages and profits on food, housing, and clothes. This multiplies throughout the community the effect of original government spending.

Balance of Payments (BOP)

how nations keep track of international transactions. registers the changes in a country's financial claims and obligations with all other countries. registers the changes in a country's financial claims and obligations with all other countries. shows changes in "foreign exchange" for a period of time. similar to Cash Flow Statements in company.

Elastic (sensitive)

if consumers are sensitive to price changes. ie Taco Bell in 1988: lowered prices introducing value meals. caused more consumer purchases because of 59 cent tacos. Competitors followed like McDonalds giving consumers option to save 25 cents on package deals (supersize options with apple pies) versus ordering them separately.

price elasticity of consumer demand for product

important to consider when pricing a product. ELASTICITY COEFFICIENTS are used to quantify elasticity.

opportunity costs

increase in production of a certain good/s requires that a cost or sacrifice be incurred. cost of choice when output, time, and money is limited ie 1990 Harley Davidson: demand for Harleys had company's factories operating at full capacity. HD controlled 60% of big ticket, big bike market and management had to decide between exporting most profitable models to Japan or catering to domestic market of bikers who helped create mystique of Harley brand. They opted not to maximize short term profits with Japansese.

equilibrium

market price allows the quantity supplied to equal quantity demanded. supply equaling demand for a price is basis of all economic theory.

Producer Price Index (PPI)

measure price changes of a collection of raw materials used most often by producers. Uses 1982 (1982=100) Was 184 in 2010 (184% greater than 1982).

Consumer Price Index (CPI)

measures price changes of a specifically defined basket of consumer goods and services that people buy most often. This collection of goods is kept constant from year to year. Uses 1982-84 as base years (1982-84=100) Was 224 in 2010 (consumer prices were 224% greater than in 1984 for identical goods).

Monetary Policy Tools

money supply can be manipulated by a group of 7 men appointed by president to sit on Federal Reserve Board of Governors in Washington/The Fed. Has 3 tools to regulate economy: 1) Change the discount rate: Banks borrow from Fed at discount rates and loan them to public at higher rates. If DR is lowered, margin between banks' loan rate and their cost from the Fed is higher. Encourages more loans to business and consumers for homes, cars, and credit cards. Banks charge best customers lowest loan rate (Prime Rate). More loans increase money supply and begins multiplier affect. ie Post 9/11 Fed lowered rate to 1% to prevent recession under extraordinary circumstances and to 0% in 2008. 2) Trade Government Securities: Fed trades int hese in financial markets. "Open Market Operations" is when Fed Buys and sells Government's own Treasury bonds. Fed purchasing gov bonds from public increases money supply in process called "Quantitative Easing." (money supply decreases when public buys securities from Fed) ie 2008: in addiiton to unprecedented low rates, Fed bought over $2 trillion governmental debt to get US out of recession. 3) Change reserve requirement of financial institutions: requires banks and brokers keep a prescribed percentage of cash deposited by customers on hand (called a Reserve). A "reserve requirement" is needed for banks to conduct daily transactions and accommodate depositors who wish to withdraw their funds. The rest of depositers money is loaned to customers. WHEN REGULATORS REQUIRE HIGHER LEVEL OF RESERVES, BANKS CANNOT LOAN AS MUCH MONEY REDUCING MONEY SUPPLY IN ECONOMY. These tools allow Fed to change money supply and cost of money/interest rates. WHen Fed gradually increases money supply correctly, inflation and IR stay low while economy grows. If money supply is kept too tight, then a deep recession like early 1980s occur. IF LEFT UNRESTRAINED, INFLATION CAN ROAR OUT OF CONTROL LIKE IN MANY SOUTH AMERICAN COUNTRIES THESE PAST TWO DECADES AND MAY HAPPEN TO US IN FUTURE.

comparative advantage

outlined principles by David Ricardo's 1817 work Principles of Policy, Economy, and Taxation. a nation's ability to produce a product most efficiently at a lower cost than its trading partners because of availability of land, labor, or good weather. a country should maximize most efficient production (to other nations) rather than lower cost. ie RIcardo proposed Ricardo Portugal export wine to England and import wool from ENgland despite both products produced at lower costs in Portugal. rationale is that Portugal is more efficient at producing wine than wool and has a limited productive capacity (best utilized for wine). ie U.S.-Japanese trading relationship: (Theoretical) US should mazimize ability to produce food at lower cost with plenty of good farmland, machinery, fertilizer, technical expertise, and labor (US is 3x productive than Japan). Japan thus produces electronics and automobiles. REALISTICALLY, there are other national agenda and special interests at work prompting nations to erect trade barriers. THIS PREVENTS EFFICIENCIES OF COMPARATIVE ADVANTAGE FROM WORKING. Trade barriers such as import taxes, import quotas, or other trading rules are governmental attempts to protect domestic industries and jobs. (B schools consistently preach that tariffs and trade barriers are bad and free trade is preferred for long term economic growth).

Gross Domestic Product (GDP)

part of GNP that is produced within a country's borders. GDP is widely used IMPORTANT STATISTIC FOR ECONOMIES HEAVILY INVOLVED IN TRADE. ie Japan's GNP includes profits from Honda's assembly plants in the United States, BUT THESE PROFITS WOULD BE EXCLUDED FROM ITS GDP.

International Macroeconomics

popular subject in B School with globalization.

merchandise trade deficit

press usually ignores the whole BOP picture and focuses only on this. easier to say that the U.S. ran a $650 billion merchandise trade deficit. JOURNALISTS IGNORE that the U.S. ran a $150 billion surplus in trading services, such as consulting and engineering, and a net surplus of investment income of $160 billion, leaving a net trade deficit of $340 billion in a $14 trillion economy.

exchange rate

rate where one country's currency is converted into another. are governed by host country's exchange rate system (floating, fixed, or pegging). In 80s, US dollar was more valuable allowing for bargains when traveling to Europe, in 2000s, not so much. Exchange rate movements are critical for companies involved in international trade. If exchange rates change between time of signing a contract and its settlement, anticipated profits can be wiped out by currency fluctuations. *companies and individuals use the FUTURES and OPTIONS markets to hedge losses on the type of currency transactions above (farmer selling meat to Japan example). NOT LIKE THE STOCK-OPTION HEDGING DESCRIBED IN FINANCE CHAPTER.

impossible trilogy

says a government can have only 2 of the following 3 options: 1) Independent Monetary supply 2) Fixed exchange rates (China): if chosen, a country has to abandon an independent monetary policy or impose capital controls to maintain its fixed peg versus the other independent currency. Becomes expensive to keep if country decides to maintain a peg in volatile times. ie failure of fixed system in Mexico 1994, and Southeast Asia 1998: currencies fall to their true levels causing trade and investment disruptions. 3) Absence of capital controls

scenario analysis

several forecasts of future. same facts that support a future recession may also support a boom.

velocity

speed at which money changes hands. money under mattress has velocity of 0 because it doesnt change hands. Monetarists oddly believe velocity of money is constant. Holding velocity constant makes money supply only determinant of growth in the economy.

Macroeconomics p 301 table

studied to understand forces that shape larger economy in which companies operate. Ie Recession occuring, interest rates rising, inflation a threat? Divided into Keynesians vs Friedman. Each party influenced by times they lived in. (Table p 301)

multiplier effect

the way spending to spur the economy ripples in a repetetive cycle of spending and income. ie 2009: members of Congress raced to start public works projects, to boost economy during recession. Road construction involved purchase of rock, cement, steel, equipment, and labor where people involved spend their wages and profits on food, housing, and clothes. This multiplies throughout the community the effect of original government spending.

floating exchange rate system

value of country's currency can freely move based on factors described above.

inelastic (insensitive)

when consumers are not sensitive to price changes. ie medical services and cigarettes.

When to use Microeconomic theory

when thinking about specific conditions of an industry, company, or buying behaviors of individuals.

Marginal propensity to consume (MPC) p 304 equation p 305 picture

workers impact on economy dependent on this/spending the money they earn. HIGHER MPC = GREATER IMPACT ON ECONOMY MPC of .8= Worker spending 80% of earnings and saving 20%. effect on economy would be as follows: (p 304 equation) effect of $1 million of wages would result in $5 million (1 million x 5) of total spending in economy. Additionally, congressmen's (who win public works projects and defense contracts for their districts) voting power is multiplied by 5.