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Tuesday, September 1, 2015

Comprehensive Outline for Economic Concepts and Theory

Outlined by Lambers CPA Review
  • Supply and Demand
    • The market matches buyers and sellers of good and services.
    • Demand is the quantity of a good or service that consumers are willing and able to purchase at various prices.
      • Law of demand  - the price of a product and the quantity demanded are inversely related.
      • Substitution effect - when prices decrease, buyer will enter the market. The product will be cheaper relative to other goods and is substituted for them.
      • Income effect - people buy more when prices are lower.
        • Normal goods - commodities for which demand is negatively related to income.
        • Inferior goods - commodities for which demand is negatively related to income.
        • Substitutes - increase is price of one product will generate an increase in demand for another.
        • Complements - increase in the price for one product will generate a decrease in demand for another. Bread prices go up, jelly demand goes down
    • Demand curves
      • Elasticity of demand - the parentage change in quantity demanded divided by the percentage change in price.
    • Supply is the amount of goods or services that producers are willing to offer at a given price.
      • Law of supply - the price of a product and the quantity supplied are positively related.
      • Price elasticity of supply - percentage change in quantity supplied divided by the percentage change in price. 
      • Equilibrium - the point at which the demand and supply curves intersect.
    • Law of diminishing returns - a fixed amount of production resources, the addition of increments of labor will produce diminishing returns.
    • Law of diminishing marginal utility  - useful will decline as consumers acquired additional units of a product.
  • GDP and Business Cycles
    • National income - the measure of the output and performance of a nations’ economy.
      • Gross domestic product (GDP) - the total market value of all final goods and services produced within the US whether domestic or foreign during a year.
      • Gross national product (GNP) - value of output produced with the US owned resources regardless of their location. GNP is GDP plus output of US owned resources abroad minus foreign owned resources in the US.
      • Measurement of GDP can use one of two approaches.
        • Income approach - GDP is sum of various types of income such as wages, interest, rents, indirect business taxes, net foreign income.
        • Expenditure approach  - GDP is sum of spending such as personal consumption spending, gross private domestic investment, government purchases, net exports.
      • Net domestic product - GDP - deprecation (consumption of fixed assets)
      • National income - NDP + US net income earned abroad - indirect business taxes such as sales taxes.
      • Personal income  - NI  - corporate taxes  - social security contributions  + transfer payments
      • Disposable income - PI - personal income taxes
    • Business cycles
      • Peak phase - economy has reached its highest level of production (GDP).
      • Trough - low levels of economic activity and under use of resources.
      • Recovery (expansion) - increasing economic activity.
      • Recession - activity severely contracts.
      • Depression - conditions are similar but longer lasting.
    • Economic indicators
      • Consumer price index (CPI) - based on prices of 364 goods and services over time.
      • Leading indicators such as new orders, building permits, weekly production.
      • Lagging indicators - unemployment consumer credit,
    • Employment
      • Natural rate of unemployment - the long-term rate that would exist even if there were no cyclical unemployment.
      • Full employment - when the real rate of unemployment is equal to the natural rate.
      • Frictional unemployment - employees are between jobs.
      • Structural unemployment - includes those who have skills but do not match the required skill levels. by employers.
      • Cyclical unemployment - downturn in the business cycle.
  • Fiscal Economics
    • Deals with the ability of the economy to generate and maintain full employment over the long run without government intervention.  Three assumptions about this theory.
      • The difference between savings plans and investment plans is fundamental to an understanding of changes in the level of income.
      • Price flexibility cannot be relied upon to provide full employment.
      • Equilibrium GDP does not necessarily provide full employment.
    • Multiplier - a change in consumption, investment, net exports or government spending results in a multiplied change in equilibrium GDP.
      • Marginal propensity to consume (MPC) - the percentage of additional income that is consumed.
      • Marginal propensity to save (MPS) - the percentage of additional income that is saved.
        • MPC + MPS = 1 or MPS = 1 - MPC
  • Money and the Economy
    • M1 - coins and currency, checking deposits
    • M2 - M1 plus savings, small time deposits, money market accounts.
    • Monetary policy by the FED is designed to control the economy through the supply of money in the banking system.  Tools to accomplish this are:
      • Reserves
      • Discount rates
  • Unemployment, Inflation, Deflation, Government
    • Unemployment   - types
      • Frictional - caused by the normal workings of the labor market.
      • Structural - aggregate demand is sufficient to provide full employment but the distribution of demand does not relate to labor force.
      • Cyclical
      • Seasonal
      • Regional
      • Technological.
    • Inflation
      • Cost-push - increased production costs are passed on to the consumer.
      • Demand-pull - demand for goods and services is excessive.
      • Consumer price index
    • Government’s role
      • Taxation
        • Progressive
        • Regressive
        • Proportional
      • Direct taxes are paid by the taxpayer directly such as income taxes.
      • Indirect  taxes  are  paid  by  someone  else  even  though  the  individual  will eventually pay the taxes.
  • International Trade
    • Comparative  advantage  -  countries  should  produce  products  when  they  have  the competitive advantage for sale and buy when they do not.
      • Production possibilities curve - represents the tradeoffs between two alternative goods that can be produced from the same amount of resources.
  • Trade Barriers
    • The following items are barriers to successful trade.
      • Tariffs - consumption taxes to restrict imports.
        • Antidumping taxes
      • Import quotas
        • Embargo - total ban on some kinds of imports.
  • Foreign Currency Rates and Markets
    • Exchange rate determination
      • Spot rate - rate paid for immediate delivery of a currency.
      • Forward exchange rate - future price of currency.
    • Avoiding the problem through hedging.
      • Purchased or selling forward contracts.
  • Balance of Payments
    • Balance of trade is difference between total exports and imports of goods.
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*Author's Note: These materials are intended solely for review and academic use specifically published to help aspiring CPA Reviewees and accountancy students prepare for the Philippine Certified Public Accountant (CPA) Board Examinations. Copying and distributing such materials are considered violations of the copyright law and may result to legal proceedings.

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