Econ Test 2

Sole Proprietorship: Definition

A business owned and operated by one person with no legal distinction between the owner and the business

Sole Proprietorship: Formation

No formal filing required beyond licenses or permits; simplest and least expensive to create

Sole Proprietorship: Advantages

Easy to establish; full control for owner; all profits go to owner; simple tax reporting

Sole Proprietorship: Disadvantages

Owner personally liable for debts; harder to raise capital

Sole Proprietorship: Best Suited For

Freelancers, consultants, or small local businesses with low risk

Partnership: Definition

A business owned by two or more people who share profits, losses, and management

Partnership: Formation

Can be oral or written agreement; some states require registration; written agreement recommended

Partnership: Advantages

Easy to establish; shared management/resources; pass-through taxation

Partnership: Disadvantages

Partners personally liable (unless limited partnership); conflicts possible; profit sharing may feel unequal

Partnership: Best Suited For

Professional practices like law or medical groups; small businesses with shared ownership

Limited Liability Company (LLC): Definition

A hybrid combining corporation liability protection with partnership tax flexibility

LLC: Formation

File Articles of Organization with state; pay fees; adopt Operating Agreement

LLC: Advantages

Members not personally liable; flexible tax treatment; less paperwork than corporations; flexible profit/loss allocation

LLC: Disadvantages

More costly to form than sole proprietorship or partnership; state rules vary; less appealing to some investors

LLC: Best Suited For

Small-to-medium businesses seeking liability protection without corporate formalities

Limited Partnership (LP): Definition

A partnership with at least one general partner with full liability and one limited partner with limited liability

LP: Formation

Requires filing with state; partnership agreement strongly recommended

LP: Advantages

Limited partners shielded from liability; passive investors can contribute; pass-through taxation

LP: Disadvantages

General partners personally liable; limited partners can't manage without risking liability; more complex to form

LP: Best Suited For

Businesses needing outside investors who want limited liability; real estate or investment projects

Corporation (C Corporation): Definition

A separate legal entity owned by shareholders, able to sue, be sued, own assets, and contract

Corporation: Formation

File Articles of Incorporation; adopt bylaws; appoint directors; issue stock

Corporation: Advantages

Strong liability protection; unlimited growth potential; easier to attract investors; perpetual existence

Corporation: Disadvantages

Expensive and complex to establish; double taxation; significant recordkeeping requirements

Corporation: Best Suited For

Larger businesses; companies seeking outside investment; or planning to go public

Inflation

A general rise in the overall level of prices in an economy

Disinflation

A reduction in the rate of inflation, prices still rise but more slowly

Deflation

A general decline in the overall level of prices in an economy

Cost Pust Inflation

Inflation caused by rising costs of production (wages, materials) that push prices up

Demand Pull Inflation

Inflation caused by excessive demand for goods and services pulling prices upward

Effects of Inflation

Consumers lose purchasing power; savers lose value of savings; borrowers benefit from paying back in cheaper dollars; lenders lose value of repayments

Nominal Rate of Interest

The stated interest rate before adjusting for inflation

Real Rate of Interest

The nominal rate minus inflation

Wages

Payment to labor for work performed, usually expressed as hourly, weekly, or monthly earnings

Shrinkflation

When companies reduce the size or quantity of a product but keep the price the same

Skimpflation

When companies reduce the quality of services provided while charging the same price

PPI (Producer Price Index)

Measures the average change in selling prices received by domestic producers for their output

CPI (Consumer Price Index)

Measures the average change in prices paid by consumers for a basket of goods and services

Personal Consumption Expenditures Index

A measure of consumer prices that tracks actual spending and is often used by the Federal Reserve

GDP (Gross Domestic Product)

The total market value of all final goods and services produced within a country in a given time period

How GDP by Demand is Measured

Consumption + Investment + Government Spending + Net Exports

What is Not Included in GDP by Demand

Government transfer payments; unpaid childcare; volunteer work; illegal activities; sale of used goods

Nominal GDP

The value of goods and services produced measured at current prices, not adjusted for inflation

What Nominal GDP Doesn't Account For

Inflation

Real GDP

The value of goods and services produced adjusted for inflation

What GDP per Capita Measures

The average output per person; an indicator of standard of living

Who is Excluded from the BLS Population Survey

People under 16 years old; active-duty military; people in prisons or correctional institutions

Labor Force

People who are employed or actively seeking work

Not in Labor Force

People not working and not seeking work

Employed

People who currently have jobs

Unemployed

People without jobs who are actively looking for work

Looking for Work

Actively applying for jobs or taking steps to find employment

Marginally Attached to Labor Force

People who want and are available for a job but have stopped looking recently

Discouraged Workers

People who want jobs but have given up searching because they believe none are available

Hidden Unemployment

Underemployment or discouraged workers not counted in official statistics

Cyclical Unemployment

Joblessness caused by downturns in the business cycle (recessions)

Frictional Unemployment

Short-term unemployment as workers move between jobs or enter the labor force for the first time

Structural Unemployment

Joblessness caused by mismatches between workers' skills and available jobs

Why Are Wages Sticky Downward

Wages tend not to fall easily even in recessions due to several reasons

Why Wages Are Sticky Downward: Implicit Contract

Employers keep wages stable to build trust and avoid sudden cuts

Why Wages Are Sticky Downward: Efficiency Wage Theory

Employers pay higher-than-market wages to increase worker productivity and loyalty

Why Wages Are Sticky Downward: Adverse Selection of Wage Cuts Argument

Cutting wages may drive the best workers to leave, leaving less productive employees

Why Wages Are Sticky Downward: Insider Outsider Model

Current employees (insiders) resist wage cuts and have more bargaining power than unemployed outsiders

Why Wages Are Sticky Downward: Relative Wage Coordination Argument

Where some companies decide to reduce wages, so others join in

Core inflation

Inflation that excludes food and energy

Who does the civilian labor force include

All employed and unemployed people

Unemployment rate calculation

Number of unemployed divided by total labor force

CPI and PCEPI differences

PCEPI shows a lower rate of inflation