Economics Q1
Learning goals:
- Identify the indicators of economic growth and of market inefficiencies in order
to understand the international sales and foreign direct investment
opportunities of international business operations
- Explain the demand for and supply of goods in different market structures and
the influence of international institutions and regional trade agreements in
order to recognize the risks and opportunities of a competitive international
business strategy.
The measurement of Gross domestic product
GDP is the market value of all final goods and services produced within a country in
a given period of time. For an economy as a whole, income must equal expenditure
because every transaction has a buyer and a seller and every dollar of spending is a
dollar of income. Higher GDP indicates higher living standards. The value of leisure,
clean environment or any other activity that takes place outside of the marketplace
are not part of the GDP
What is not included in GDP?
- Items that are produced and consumed at home and never enter the
marketplace
- Items produced and sold illegally
GDP (Y) is the sum of the following:
- Consumption (C): the spending by households and goods and services
- Investment (I): the spending on capital equipment, inventories, structures and
new housing.
- Government purchases (G): the spending on goods by local and central
governments. Does not include transfer payments
- Net exports (NX): export minus import
Y= C+I+G+NX
Nominal GDP values the production of goods and services at current prices
- (Price A x quantity A) + (Price B x quantity B)
Real GDP values the production of goods and services at constant prices
- Only using price of the base year
The GDP deflator is a measure of the price level, it tells us the rise in nominal GDP
that is attributable to a rise in prices rather than a rise in the quantities produced. It is
calculated as follows: GDP deflator = Nominal GDP/ Real GDP × 100
Measuring the cost of living
Inflation is the term used to describe a situation in which the economy’s overall price
level is rising. The consumer price index (CPI) is a measure of the overall cost of the
goods and services bought by a typical consumer. When the CPI rises, the family
has more money to spend. Five stages to calculate the CPI:
1. Fix the basket: determined what prices are most important to the typical
consumer
2. Find the prices
, 3. Compute the basket cost: use the data on prices to calculate the cost of the
basket of goods and services at different times
4. Choose a base year and compute the index
5. Compute the inflation rate: (CPI year 2-CPI year 1) / CPI year 1 x 100
The following issues causes that the CPI overstates the true cost of living:
- Substitution bias
- Introduction of new goods
- Unmeasured quality changes
The GDP deflator reflects the prices of all goods an services produced domestically
whereas the consumer price index reflects the prices of all goods and services
bought by customers.
The CPI compares the price of a fixed basket of goods and services to the price of
the basket in the base year whereas the GDP deflator compares the price of
currently produced goods and services to the price of the same goods and services
in the base year.
Money figures from different points in time do not represent a valid comparison of
purchasing power.
Various laws and private contracts use price indexes to correct for the effects of
inflation.
Market structures
Perfect competition market
- many suppliers
- homogenous products
- easy to enter market
- Positive about perfect competition is: high profits lead to more sellers entering
market → lower prices
- Buyers and sellers have no influence over the price; they are price takers
Monopolistic competition
- Many suppliers
- Different products
- Easy to enter market
- Positive about monopolistic competition is: high profits lead to more sellers
entering market → lower prices
- Each seller may set price for its own product
Monopoly
- Is a firm that is the only seller of a product without close substitutes.
- The main cause of monopolies is barriers to entry—other firms cannot enter
the market. Because a single firm own a key resource, governments give
firms exclusive rights to produce the goods or because of natural monopoly
- Higher prices because of no competition, seller controls price
- Economies of scale: low costs/high profits may permit R&D
Oligopoly
- Few firms in market
- Interdependence- firms react to each other
Learning goals:
- Identify the indicators of economic growth and of market inefficiencies in order
to understand the international sales and foreign direct investment
opportunities of international business operations
- Explain the demand for and supply of goods in different market structures and
the influence of international institutions and regional trade agreements in
order to recognize the risks and opportunities of a competitive international
business strategy.
The measurement of Gross domestic product
GDP is the market value of all final goods and services produced within a country in
a given period of time. For an economy as a whole, income must equal expenditure
because every transaction has a buyer and a seller and every dollar of spending is a
dollar of income. Higher GDP indicates higher living standards. The value of leisure,
clean environment or any other activity that takes place outside of the marketplace
are not part of the GDP
What is not included in GDP?
- Items that are produced and consumed at home and never enter the
marketplace
- Items produced and sold illegally
GDP (Y) is the sum of the following:
- Consumption (C): the spending by households and goods and services
- Investment (I): the spending on capital equipment, inventories, structures and
new housing.
- Government purchases (G): the spending on goods by local and central
governments. Does not include transfer payments
- Net exports (NX): export minus import
Y= C+I+G+NX
Nominal GDP values the production of goods and services at current prices
- (Price A x quantity A) + (Price B x quantity B)
Real GDP values the production of goods and services at constant prices
- Only using price of the base year
The GDP deflator is a measure of the price level, it tells us the rise in nominal GDP
that is attributable to a rise in prices rather than a rise in the quantities produced. It is
calculated as follows: GDP deflator = Nominal GDP/ Real GDP × 100
Measuring the cost of living
Inflation is the term used to describe a situation in which the economy’s overall price
level is rising. The consumer price index (CPI) is a measure of the overall cost of the
goods and services bought by a typical consumer. When the CPI rises, the family
has more money to spend. Five stages to calculate the CPI:
1. Fix the basket: determined what prices are most important to the typical
consumer
2. Find the prices
, 3. Compute the basket cost: use the data on prices to calculate the cost of the
basket of goods and services at different times
4. Choose a base year and compute the index
5. Compute the inflation rate: (CPI year 2-CPI year 1) / CPI year 1 x 100
The following issues causes that the CPI overstates the true cost of living:
- Substitution bias
- Introduction of new goods
- Unmeasured quality changes
The GDP deflator reflects the prices of all goods an services produced domestically
whereas the consumer price index reflects the prices of all goods and services
bought by customers.
The CPI compares the price of a fixed basket of goods and services to the price of
the basket in the base year whereas the GDP deflator compares the price of
currently produced goods and services to the price of the same goods and services
in the base year.
Money figures from different points in time do not represent a valid comparison of
purchasing power.
Various laws and private contracts use price indexes to correct for the effects of
inflation.
Market structures
Perfect competition market
- many suppliers
- homogenous products
- easy to enter market
- Positive about perfect competition is: high profits lead to more sellers entering
market → lower prices
- Buyers and sellers have no influence over the price; they are price takers
Monopolistic competition
- Many suppliers
- Different products
- Easy to enter market
- Positive about monopolistic competition is: high profits lead to more sellers
entering market → lower prices
- Each seller may set price for its own product
Monopoly
- Is a firm that is the only seller of a product without close substitutes.
- The main cause of monopolies is barriers to entry—other firms cannot enter
the market. Because a single firm own a key resource, governments give
firms exclusive rights to produce the goods or because of natural monopoly
- Higher prices because of no competition, seller controls price
- Economies of scale: low costs/high profits may permit R&D
Oligopoly
- Few firms in market
- Interdependence- firms react to each other
