Economics Study Guide- Test 1
Economics Study Guide- Test 1
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Date Created: 01/19/15
Week 3 Kartanagara aka Karta person 0 Was the ruler of Priangan island of lava His family was ruling in the area for priangan was a member of the old aristocracy Kept things under control Deker comes and finds this state of affairs to be appalling Corruption was intolerable for the way Karta was ruling Process of bringing gifts to Karta should be abolished The Dutch loses in the confrontation The collaboration of a essential of a member of the ruler from old aristocracy Collaboration of the aristocracy is essential for further rule Purposes of indirect rule and its logics Priangan Lebak Banten Douwes Dekker Madiun Brotodinigrat High Imperialism in SEA Introduction 0 O Colonists tended to see European as a new arrival but not a threat England still remained number one colonizers There is a moral justification take on the white men s burden but most people believe that these colonizers expansions were economic What did Lenon say about imperialism I The capitalist powers have a problem and the problem is that at its highest stage in which monopolists cartels and such are increasing and they turn outwards towards the rest of the world In Lennin s view imperialism was acting as an agent of the power of the bourgeoisie His argument is too schematic in many ways 19th C Imperialism 0 four major colonizers I Britain had Burma and Java France Netherlands and the USA Direct amp Indirect Rule 0 If you have the rulers by your side you can keep control for yourself Britain put the salaries of the aristocracies to the government Overtime they accepted because they knew who was funding Under direct rule Colonial power will impose their own system of ruling in the local level down to subprovintial level Get rid of the case of ruling institution of government You have to replace them with something Train Europeans in a colonial school in transferring them learn the language then they ll have to rule over the controlled area Because direct rule includes Europeans they are expected to have a higher salary more costly Colonial power ruler will have a paramount power You rule through the existing government get them increasingly over what European power wants to do Be smart and be sure that certain areas are offboundaries ei religion Try to find minorities who may want to collaborate with the colonial power In the case of Burma the colonial state tried to get the collaboration to the ethnical Karen Highlanders welcome imperial overtime they develop as protecting highlanders from low landers incursions 0 Promotion of Opium good for the economics of the states taxes on salt prostitution corporation taxes incomes taxes land taxes and initially they don t know the country well enough so they take the tax collection function and give it to the natives 1965 there were only 150 European officials for all of lava Overwhelmingly the state requires King or the ruling house of Indonesia keep it from ruling they lose increasingly by substance power this realm of symbolic power are very happy to have rulers keep on doing this sort of thing From the process the aristocrats they get better off than before but lose political power and prestige 0 Three Cases 0 France acquires southern Vietnam initially under French naval room Vietnamese recruit people to serve under administration ethnic command and essentially slot them into this new political system Add not just catholic serve economic but many more as well Americans and the Philippines are very odd acquisition of power It happened in the AmericanSpanish War captivated Cuba Puerto Rico and Philippines Admiral Deuey engages in the battle seizes Manila and fight a war where 20000 Philippines died USA gets a new colony immediately put under bureau of the interior Great deals of ambiance it becomes a competition for sugar Minimal kind of bureaucracy by 1935 Philippines agree the previewed independence 19021945 to American European rule USA actually sent teachers and educational system Much higher illiteracy rate SE Asia is the region where the USA maintains a healthy relationship Conclusion 0 European powers in Asia were Machiaveli but practical They decided that indirect rule was the best way to rule and they increased it to take to the next level It worked because this is the age before nationalism They did not have sense of national population would not come together in terms of nationalist composition as we move to the 20th century and there is nationalism this method of rule is not effective as before Discussion Economic development of southeast Asia and the role of minorities In economic terms is colonialism 0 Increased economic activity because they increased in rubber tin and rice industrialize these materials For the direct rule areas they had more to invest the colony received more money from the colonizerthey might have built more roads more investments to build better technology Industrialization Linked to ethnic minorities chinese indonesias who often play an important role in Southeast Asia 0 It is cheaper labor they are more beholding to their masters They are not likely to rebel You want to take away power of the existing ruling class you recruit minority Why Koreans doing to the job of dry cleaning nail salons motels o Tradition o Are there any cultural reasons Why did the British bring in Indians to Malea o It was cheaper they had a trust in them They already had the skills required 9 they had techniques for your average Malea peasant they were pretty well off they did not want to do degrading jobs In contrast you look what is happening in south China overcrowded the people who lived in the area those provinces were willing to work on the tin mine The pay would go to the person who recruited the Chineselabor on plantations when you think about it it is not the relationship between the European owner it is mediated in the work mine These workers who were brought in from the outside were brought to work on the tin mines Why is it that Europeans initially develop these industries 0 Because the Europeans were the ones interested in globalization they created the market for it They were the ones that needed these products for finished projects Textiles southeast Asia textile the industry was often destroyed and replaced by industrial ones much cheaper cloth made of cotton 3rd world would sell primary products it was harder to have local industries 0 South East Asia did not have the capital to invest Minning can be very expensive Rubber trees are imported from Brazil and plant them and wait seven years in order to continue the process Colonialism changed the culture of southeast Asia forever Was it necessary to have colonilzation Adam Smith had a 1776 chapter about colonialism he argued that for the British political control over their colonies was unnecessary you could have economic control without having politics Osbord talks about the development of rice fields in Burma Vietnam a lot of Indians minority took part of the rice frontier in Burma They were expelled during WWII and after WWII Why was it that your average farmer in Southeast Asia who owned his own land 0 Because the price of rice fell global market leads to competition and a fall in price Role of money lenders in Southeast Asia even today You had very local credit markets with high interests and you have to pay them if not they default on their assets Malea case what do you think about the case in promoting the rights of the ethnic of the Chinese The ethnic Malasia is politically dominant but economically not as well off The Chinese have been economically successful How do you deal with the For political reason you have to discriminate against successful minorities You need to assert the political power in the interest of social peace very often it revolves into something else discrimination Minorities did not remain distinct Why 0 The assimilation became easy many different ethnic distinctive groups but everybody gets along Burma has the issue with Muslim minority in the case of Vietnam in the case of other issues What if you are a minority coming from the outside Why are people thrown in together 0 Some cultures wanted to keep very quotstraightforwardquot 0 Some people thought about it as a temporary job some cultures were more open to westernization Conclusion Colonization was very bumpy difficult in certain ways it led the way to economic prosperity minorities did play an important role Economics Study Guide Chapter 1 0 People are Rational 0 Bene ts outweigh the cost 0 People respond to Economic Incentives o What will give you more bene ts is not necessarily obvious ex bank security 0 Optimal decisions are made at the margin 0 Marginal bene t additional enjoyment you receive 0 Marginal Cost the consequence of your optimal choice 0 Optimal decision is to continue any activity up to the point where marginal bene ts equal the marginal cost 0 Marginal analysis compares marginal bene ts and marginal cost 0 Economic problem that every society must solve o Tradeoff the idea because of scarcity producing more of one good or service means producing less of another good or service Take into consideration what goods and service will be produced How will the goods and services be produced Who will receive the goods and services produced 0 Opportunity cost the highest value alternative that must be given up to engage in an activity 0 Market economy an economy in which decisions of households and rms interacting in markets allocate economic resource Centrally Planned economy an economy in which the government allocates economic resources 0 Today Mixed economy an economy which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a signi cant role in their allocations o Ef ciency 0 Productive ef ciency occurs when a good or service is produced at the lowest possible cost Stimulated by competition 0 Allocative ef ciency occurs when production is in accordance with consumer preferences Combination of productive and voluntary exchange Voluntary exchange a situation that occurs in markets where both the buyer and the seller of a product are made better off by the transaction Equity the fair distribution of economic bene ts 0 Economic variable something measurable that can have different values such as the incomes of doctors Positive analysis Analysis concerned with what is o Normative analysis Analysis concerned with what ought to be Households consists of all persons occupying a home suppliers of the factors of production 0 Factors of productioneconomic resourcesinputs 0 Firms use factors of production to produce goods services 0 Human capital refers to the accumulated training and skills that workers possess Chapter 2 Tradeoffs Comparative Advantage and the Market system 0 Production Possibility Frontiers and Opportunity costs 0 Opportunity Cost the quantity of what you are losing in producing something else 0 Increasing Marginal Opportunity Costs 0 As the economy moves down the production possibilities frontier it experiences increasing marginal opportunity costs The more resources already devoted to an activity the smaller the payoff to devoting additional resources to that activity 0 Outwards ships of the production possibility frontier represent economic growth 0 Absolute advantage the ability of an individual a rm or a country to produce more of a good or service than competitors using the same amount of resources 0 Comparative advantage the ability of an individual a rm or a country to produce a good or service at a lower opportunity cost than competitors 0 Market system 0 Product market market for goods such as computers or services 0 Factor market of production such as labor capital natural resources and entrepreneurial o The circular ow of Income 0 Flow of funds money Households product markets spending on goods and service rms l factor markets lwages and other payments to the factors of production households 0 Flow of factors of production labor Households l factors markets l labor capital natural resources rms product markets l goods and services households 0 Property rights the rights individuals or rms have to the exclusive use of their property including the right to buy or sell it Chapter 6 Firms the Stock Markets and Corporate Governance 0 Firms that sell stock that is traded in nancial markets such as the New York Stock Exchange are called public rms while rms that do not sell stock are called private rms 0 Types of rms responsible for organizing the factors of production to produce goods and services 0 Sole proprietorship Firm owned by an individual Has limited ability to raise funds 14 of pro ts 72 of rms are solo o Partnership Two or more individuals share work and risks Limited ability to raise funds 26 of pro t 10 of frims are parternships o Corporation Is a legal form of business that provides owners with protection from losing more than their investment in the rm should the business fail Limited personal liability Greater ability to raise funds Costly to organize possible double taxation of incomes Responsible fro 60 of pro ts by rms Only 18 of rms are corpporation 0 Liability Sole and partner have unlimited partnership because there is no distinction between the company s and individual assets l they are not legally distinct of the rms on their own Corporations 0 Limited liability investors cannot lose more money than they put in the rm if the corporation was to fail general incorporation laws 0 They are considered the a quotlegal personquot 0 The structure of Corporation and the PrincipalAgent Problem 0 Corporate structure and corporate governance They are owned by their shareholders but do not manage the rm directly Instead there is a board of directors 0 CEO CFO Separation of ownership from control is the situation where the shareholders own the corporation but do not manage daily operations l leads to principalagent problem where the interests of the CEO are questioned if their interests are their own or the corporate s interests 0 Solve the problem in the 19905 the board of directors started to tie the salaries of the managers to the pro ts of the company or the price of their stock 0 How Firms raise money Retained earning Pro ts that are reinvested in the rms Borrow funds from relatives friends or banks lnvite additional owners to increase the rm s nancial capital Sources of External Funds Financial system transfer funds from savers to borrowers lndirect nance 0 O O 0 Financial intermediates such as banks Direct nances Takes the form of the borrowers selling the lender a nancial security 0 Bonds and stocks Bonds are nancial securities tht represent promises to repay a xed amount of funds lending funds to that rm 0 Coupon payment interests payments on the bonds Interest rates coupon rate is the cost of borrowing funds usually expressed as a percentage of the amount borrowed couponface value of the bond Bond s maturities period where bonds last until the rm pays you back for the original value Also consider default risk the higher the default risk l higher interests rates would be 0 Stocks actually buying part ownership of the rm increases nancial capital Do not have maturity date 0 Dividends Payments by a corporation to its shareholders o Retained earnings provide capital gain for investors o By law corporations must make payments on any debt they have before making payments to their owners which means they have to pay bondholders before it can make any dividend to shareholders Mutual funds sell shares to investors and use the fund to invest in a portfolio of nancial assets such as stocks and bonds l better for small investors and includes lee risk 0 Stocks and Bond Markets Provide Capital and Information 0 Stocks and bond markets stocks and bonds that are sold between other people not necessarily the company would be issuing more 0 National Association of Securities Dealer Automated Quotations system NASDAQ An increase in stock prices rms means that investors are more optimistic about rms pro t prospects and want to expand the rm s operations Changes in the value of the rm s bonds imply changes in the cost of external funds to nance the rm s investment in research and development or in new factories higher bond price indicates lower cost of new external funds while a lower bond price indicates a higher cost of new external funds 0 Why do Stock prices Fluctuate so Much 0 Stock material indexes are average of stock prices with the value of the index set equal to 100 in particular year called base year intended to show movement of prices from one year to the other 0 Dow Jones 30 large US corporationsSampP 500 500 large US rmsNASDAW Composite lndex more than 4000 rms whose shares are traded in the NASDAQ 0 Higher the company s pro t is the higher their stock prices would be 0 Using Financial Statements to Evaluate a Corporation liability anything owed by a person or a rm 0 Income Statement A nancial statement that shows a rm s revenues costs and pro ts over a period of time Difference between scal vs normal years 0 Accounting Pro t The net income from the income statement is the account pro t rms revenues minus operating expenses and taxes paid 0 Economic Pro t Calculated using all rm s costs Opportunity cost is the next best thing given up to produce that good Explicit costs payments of any any including wages and etc Implicit costs can be expressed in opportunity cost Most important to investors is the normal rate of return which is the minimal amount that investors must earn on the funds they invest expressed as a percentage of the amount invested The return that investors require to continue investing in the rm should be also subtracted from the rm s pro ts Economic pro ts include both implicit and explicit costs 0 The Balance Sheet A nancial statement that sums up a rm s nancial position on a particular day usually the end of a quarter or year 0 Corporate Governance Policy and the Financial Crisis 20072009 Managers have incentives to keep assets greater than liabilities o The Accounting Scandals of the Early 20005 Managers falsi ed their income statements to attract investors The landmark SarbanesOxley Act of 2002 requires that CEO personally certify the accuracy of nancial statements Requires that nancial analysts and auditors disclose whether any con ict of interest might exist The nancial crisis of 20072009 0 Wall Street Reform and Consumer Protection Act legislation passed during 2010 that was intended to reform regulations of the nancial crISIs 0 Mortgage backed securities l the investors who buys one receives regular interest payments Did the principalagent problem help cause the 2007 2009 Financial Crisis 0 Investment banks had traditionally concentrated on providing advise to corporations selling new stocks and bonds and on underwriting the issuance of stocks and bonds by guaranteeing a price to a rm selling them GlassSteagall Act in 1993 l act that prevented nancial rms from being both commercial banks and investment banks 0 Led to lend to default borrowers because they the managing people were not the same as the owners given this gap of interests Chapter 8 GDP Measuring total production and Income 0 Measuring Total Production Gross Domestic Product 0 Gross domestic product the market value of all nal goods and services produced in a country during a period of time typically one year Measured in dollars Only the Final goods and services with no intermeadiate goods other wise would be double counting Only the production that takes place in the period of the year therefore reused materials such as antique stores etc do not include the value of the good 0 Production Income and the CircularFlow Diagram 0 Households l provide savings to Financial system pays taxes to the government buys goods and services from rms and imports goods from other countries Financial system borrowing to government and rms Firms pay wages to households and taxes to the government while exports to other countries Government expends on goods and services provided by the rms pays wages and interest and transfer payments to households 0 The sum of wages rent interest and pro t is total income 0 in the economy It shows that we can calculate the total value of expenditures consumption investments government purchases and net exports Components of GDP 0 Consumption Service largest component of Consumption Nondurable goods foods clothing Durable goods cars and furniture 0 Investments Business xed investment offices new factories research and development largest component of investment Residential investment houses Changes in business inventories goods that have been produced but not necessarily sold 0 Net exports and imports Exports minus imports Imports are greater than exports in the USA 0 Government purchases Government expending on goods and services public goods Both federal government Local government largest component for government purchases 0 An equation for GDP Y CGNX Measuring GDP Using the Valueadded method 0 Valueadded the difference between what you paid to produce the goods and the price you sell your goods for 0 Does GDP Measure what we want it to measure 0 Shortcomings in GDP as a Measure of Total Production Household Production Goods and services people produce for themselves 0 Are not counted in GDP Underground Economy lllegal goods and services Avoid paying taxes on the income they earn Avoid government regulations 10 of USA economy 0 o Shortcomings of GDP as Measure of WellBeing The value of Leisure is Not Included in GDP Person s well being increases but GDP or income decreases GDP is Not Adjusted for Pollution or Other Negative Effects of Production 0 Does not compensate for the health loses or pollution costs GDP is Not adjusted for Changes in Crime and Other Social Problems 0 Crime might increase GDP GDP Measures the Size of the Pie but Not How the Pie is Divided Up Inequality between social classes 0 Real GDP versus Nominal GDP measure of production 0 Calculating Real GDP Nominal GDP is the value of nal goods and services evaluated at currentyear prices Real GDP the value of nal goods and services evaluated at baseyear prices Holding prices constant means that the purchasing power of dollar remains the same from one year to the next 0 Comparing Real GDP and Nominal GDP Real GDP is measured in baseyear dollars Real and Nominal GDP equals at base year Before base year real GDP is higher than nominal GDP After base year real GDP is lower than nominal GDP 0 The GDP De ator Interested in price level GDP de ator is nominal GDP Real GDP X 100 In base year where nominal and real GDP equas price de ator will always be 100 in the base year 0 Other Measures of Total Production and Total Income National income accounting refers to the method the BEA uses to track total production and total income in the economy Measured by National Income and Product Accounts NIPA 0 Gross National Product The value of nal goods and services produced by residents of the United States even if production takes place outside the USA Excludes domestic production by foreign rms 0 National Income Depreciation the replacing of machinery equipment and buildings GDP consumption of xed capital or depreciation national income value of total production is only equal to total income if production equals GDP and income equals national income 0 Personal Income Personal income subtract earnings that the corporations retain rather than pay to shareholders in the form of dividends and add in transfer payments and interest paid by government bonds 0 Disposable Personal Income Disposable personal income personal income personal tax payments 0 The division of Income Gross domestic income l the sum of income payments to households Calculate by adding wages interests pro ts and rents Real rate of interest interest rate rate of in ation
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