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Macroeconomics 1012 Week 1 Notes

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by: Kate Notetaker

Macroeconomics 1012 Week 1 Notes Econ 1012

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Kate Notetaker
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Notes for January 14, 2016
Dr. John Volpe
Class Notes




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This 4 page Class Notes was uploaded by Kate Notetaker on Thursday January 14, 2016. The Class Notes belongs to Econ 1012 at George Washington University taught by Dr. John Volpe in Spring 2016. Since its upload, it has received 149 views. For similar materials see Macroeconomics in Economcs at George Washington University.


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Date Created: 01/14/16
Macroeconomics Notes The Types of Firms  Sole proprietorship: firm owned by a single individual and not organized as a corporation o Get into and out of sole proprietorship pretty easily o You are the boss; you determine what happens in that business o Key Advantages  You are in control  You don’t have a lot of regulatory activity impeding how you run the business o Disadvantages  Unlimited personal liabilities  Someone sues you, they can come after your home, car, etc.  Limited ability to raise funds from a bank  You are the business so if you pass away or if something happens, they will have a harder time getting the money back  Banks are wary about loaning money to small businesses  Partnership o Two or more people running the business o Key Advantages  Ability to share work  Ability to share risk  You can have a partner that is an expert in something different than you, partner can help bring in business that you may not be able to get by yourself  Someone else to rely on o Disadvantages  Unlimited personal liability  Limited ability to raise funds  Bank is still stuck (not as much) similar to sole proprietorship  Who really runs the business? Pretty much the person that brings in the most money since they could dissolve the business if they wanted to  Corporation o Corporate form of doing business is the form of doing business that has the most influence in many developed countries o Key advantages  Limited personal liability  You only loose the shares that you have in that business  Because of this, they can take more risks than other smaller firms  Corporations benefit from limited liability but are expensive to organize  Greater ability to raise funds  No limit in how long a corporation can last  Banks more willing to loan money o Disadvantages  Costly to organize  Possible double taxation of income  Profits may be taxed twice: once as corporate profits and again when the profits are disbursed to investors (corporate level and then personal level)  Subject to regulatory oversight  Lots of regulation o Sole proprietorships and partnerships, the owners of the firm are typically involved in day to day decisions at the firm  Not the case for larger corporations – they usually have separation of ownership from control  There is not a unique best business structure  Separation of ownership from control  a situation in a corporation in which the top management, rather than the shareholders, controls day to day operations o Owners designate a board of directions o They then appoint a chief executive officer to oversee day to day operations  Could be along with other members of top management  How do you align the goals and objective of the CEO with those of the board of directors? o Incentivize the CEO to maximize profit o Have a contract and if they reach a certain goal, they will get a bonus o Subsidiary department  Main corporation o Helps the shareholders become more content  Small businesses get their money from their friends, family, credit cards, bank, etc. o As firms get larger, the need to obtain external funds tends to grow o Economy’s financial system facilitates the transfer of funds from savers to borrowers o Banks can act as financial intermediaries, permitting indirect finance of the firm by their savers  Indirect finance  a flow of funds from savers to borrowers through financial intermediaries such as banks o Intermediaries raise funds from savers to lend to firms (and other borrowers)  Firms can appeal directly to potential investors for funds o This is direct finance  Direct finance  the flow of funds from savers to firms through financial markets o This generally takes the form of one of two financial securities  Bonds  A financial security that represents a promise to repay a fixed amount of funds  Guaranteed that you will get money back, but does not guarantee how much it will be (depending on when you redeem it / where interest rates go)  If you think that interest rates will rise in the future, buying bonds is a mistake  No voice in what the corporation does  Most bonds are convertible  Most bonds can be redeemed before the time is up (they want to do this if interest rates fall)  Stocks  A financial security that represents partial ownership of a firm  A corporation that sells a stock act similarly to a partnership taking on a new partner  though the new shareholder typically owns a tiny fraction of a firm  When corporation makes profits, these are either reinvested in the firm or paid out to the firm’s shareholders as dividends  Capital gain  increase in value of the stock  Corporations must repay bondholders before shareholders o Helps to ensure that bonds are substantially less risky financial securities to hold than stocks  Two kinds: preferred stock and common stock o Preferred stock  Can go on forever  You get a dividend  much more money than common stock  You have no say in what the company does  You get paid first o Common stock  You do not get a dividend  You do have some kind of voice in the company  Expectation of a dividend even if it is not paid can help with the desirability of stocks 


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