CFA Econ.txt

• Price elasticity of demand =
• % Change =
• < 1 = inelastic
• 1 = unit elastic
• > 1 = elastic

• Cross elasticity =
• >|.5| implies strong correlation
• Positive implies substitute, negative implies compliment

• income elasticity =
• < 0 = inferior good
• 0<>1 = normal good
• >1 = superior good

elasticity of supply =

• Total industry sales made by four largest firms
• below 40% is a fairly competitive market
• greater than 60% indicates oligopoly

• sum the squared percentage market shares (numbers, not decimals) of the 50 largest firms in an industry (or all if there are less than 50)
• low in a highly competitive industry
• 1000 - 1800 is moderately competitive
• >1800 is not competitive
• max is 10,000 (100^2)

• Total Product = total output per unit time
• Marginal Product = TP'
• Average Product = TP/L

• Opportunity cost to a firm of using its own capital
• Opportunity cost of the time and financial resources of the firm's owners

the ability to produce a good at a lower cost that it can be bought

• Restricts the supply of imported goods
• Benefits domestic producers

Quotas are more harmful because under a quota, the domestic government does not receive any benefit, only domestic producers (and some foreign producers due to higher prices). The foreign producers receive the revenue transfer that would go to the government under a tariff

Difference between real and potential GDP

real exchange rate = nominal exchange rate * domestic price / foreign price

• Fixed regimes: currency unions, dollarized regimes, currency boards, conventional currency pegs
• Intermediate regimes: horizontal bands, crawling pegs, crawling bands
• Flexible regimes: managed and independent floats

highest bidder wins, but pays second highest bid as the price

quantities at each price along the marginal cost curves for all firms in a given industry

• Giffen: inferior goods, demand decreases as price decreases
• Velben: demand increases for these as price increases
• Both have upward sloping demand curves at some point

JPY:USD = USD/JPY

increasing government spending increases rates, which deters private investment. This is the opposite of the intended effect

sum of the growth rates of productivity and labor force

inflation

• Federal funds rate: rate at which banks borrow from each other
• Discount rate: rate at which banks borrow from the Fed

• Externalities are effect a business has on others or the environment (cost would be pollution, benefit would be a scenic garden).
• Since the producer of these costs and/or benefits does not realize them, there is an over-allocation of resources to activities that have external costs and an under-allocation of resources to the opposite

• Common value auction: item being bid on provides the same benefit to all (mineral rights). Associated with winner's curse - the person who wins has probably overshot the value
• Private value auction: item has different value to different people, and each will only bid what it's worth to them (antique automobile)

• 1: availability of substitute goods (directly related)
• 2: proportion's of consumers' budgets spent on the good (directly related)
• 3: time since the price change (directly related)

when MR=MC=P, economic profit = TR - TC

• relative tax each economic actor in the market pays (producers, consumers)
• depends on the shape of the supply/demand curves

• downward sloping demand curve
• two customer groups with different price elasticities for the product
• customer groups cannot trade the product

• MR: additional revenue from making one more unit
• MRP: additional revenue resulting in one more unit of input
• Example: worker can make 2 units if he works 1 more hour. price is $15 per unit. MR = 15, MRP = 30

• Investment is money spent on fixed assets and inventory
• Sources: governemnt saving, national saving, foreign borrowing

• Money Supply and Price
• LM = M/P

• supply of natural resources
• supply of physical capital
• supply or productivity of labor

• monetary neutral rate = real gdp growth + inflation target
• if policy rate > neutral rate: contractionary
• if policy rate < neutral rate: expantionary

maintains means spending must also increase, which will increase real GDP since spending multiplier > tax multiplier

• Full employment: natural level of employment, there will always be some unemployment
• Zero unemployment: not the same as full employment, this has a literal interpretation

• does not include food and energy (inelastic demands)
• better measure of change in prices

• Demand for money is highly inelastic, so expanding the money supply does not affect rates (people are protective of their money
• Usually associated with deflation

• Fixed basket = CPI = Laspeyres index
• Variable basket = GDP deflator = Chained price index

• current unemployment = natural unemployment + a*(P - Pe)
• a = positive constant
• P = actual price level
• Pe = expected price level

• trade surplus => more exporting than importing, ^ in X
• trade surplus is the same as current account surplus

firms cannot sell mass volumes at a low price just to drive out competition, then raise prices to earn abnormal profits

• free trade area: member nations remove barriers to import/export among themselves (NAFTA)
• customs union: all members adopt common trade policies with nonmembers
• common market: like customs union, but also removes all barriers to movement of labor and capital among members (Australia and New Zealand)

• Sources of comparative advantage
• Ricardian: only considers labor
• H-O: considers labor and capital

• change in exchange rates presented in basis points
• if 6 month forward rate points are -75 and current rate is 1.3500, then future rate will be 1.3425

currency depreciation will initially increase a trade deficit (short run), the decrease it (long run)

foreign/domestic

marshall-lerner: elasticities approach to the balance of trade. trade deficit is more likely to be narrowed by devaluing a nation's currency if demand for imports and exports are both more elastic

absorption approach: saving and investment approach to the balance of trade. Says that national saving must increase relative to domestic investment for