Business Exam 2 (CUMULATIVE)

Globalization

not just trade; the history of reducing friction that slows down the movement of goods, services, and ideas.

I, Pencil

Total self-sufficiency = poverty. Wealth is created through the specialization and coordination of millions of people globally.

Invisible Hand

a market coordinates the actions of millions of strangers to produce complex goods without the need for a central authority.

Luddites

groups that fight efficiency, technology, and automation to keep their jobs.

Status Quo Bias

the human tendency to overvalue what we own vs. what we could gain from change.

Dependency Ratio

the 'seesaw', illustrating the balance between workers and retirees. The tax burden on fewer workers to support a growing aging population is unsustainable.

Rule of 72

calculates how long it takes for money/an economy to double.

Rule of 72 Formula

72 / Growth Rate = Years to Double

Economic Equation

Capital + Labor = Growth. If you run out of people, capitalism breaks.

Per Capita GDP

measures the standard of living, individual wealth.

Total GDP

measures national power

Per Capita GDP Formula

Total GDP / Population

Rocket Ship Population Pyramid

Ex: Nigeria; a huge base of young workers = potential energy and growth

Demographic Dividend

represented by the rocket ship; a country has a massive base of young workers entering the workforce. It can be a massive gamble if the economy can't provide jobs.

Inverted Pyramid

Ex: Japan; tiny base of workers struggling to support a massive top layer of retirees.

Silver Economy

represented by an inverted pyramid; a tiny base of young workers must support a massive top layer of retirees.

Julian Simon’s Theory

humans are the ultimate resource. Population growth drives scarcity -> Raises prices -> Incentivizes human ingenuity to innovate and create substitutes.

Endowment Affect

tendency to value something more simply because we "own" it; explains why people refuse to raise the retirement age even when the math suggests it's necessary.

Hedonic Treadmill

tendency for humans to adapt to luxury, returning to a baseline level of happiness. Yesterday’s luxury becomes today’s necessity.

Easterlin Paradox

the idea that more money increases happiness only until basic security is reached ($75,000 a year). Then, the happiness line goes flat.

Free Trade

the ‘highway’; prioritizes efficiency and wealth creation, raises the global standard of living but destroys specific local jobs through a “Race to the Bottom”.

Protectionism

the ‘fortress’; prioritizes domestic security through tariffs and quotas, safe and predictable but very EXPENSIVE.

Tariffs

taxes on imported goods; on the importing entity which raises prices, and effects our own citizens.

Quotas

limits on the physical quantity of goods that can be imported.

Loss Aversion

the psychological principle that the pain of losing is 2x as powerful as the pleasure of gaining. Politicians exploit this by ‘saving’ high-visibility jobs at a massive public expense.

WTO

the ‘referee’; an organization that sets rules and settles disputes to prevent trade wars and keep the ‘highways’ open.

WTO Rule

IMF

the ‘firefighter’; focuses on short-term crisis management, bailing countries out of bankruptcy/preventing currency collapse. It uses loans with strict conditionality.

Conditionality

loans come with conditions; austerity measures like cutting government spending/raising taxes.

World Bank

the ‘architect’; focuses on long-term poverty reduction by funding infrastructure, schools, and dams to build the foundation for future growth.

Moral Hazard

the risk that countries/companies will make massive, irresponsible decisions because they know that a safety net (the IMF) will bail them out if they fail.

Bretton Woods Conference

meeting among 735 economists during WWII that created the IMF and World Bank to rebuild global civilization through economic ‘grace’ and forgiveness. They wanted to rebuild people up to prevent war from happening again.

Banana War

20-year trade dispute between ACP Bananas and Dollar Bananas; they placed tariffs on Dollar Bananas, the U.S. brought it to the WTO and won, but Europe ignored their ruling. The U.S. was allowed to retaliate with 100% tariffs on French handbags, Scottish cashmere, and more to create political pressure

Simon-Ehrlich Wager

Simon bet against Paul that the prices of 5 metals would drop over 10 years despite population growth; he won as a result of human ingenuity create more efficient methods, proving that resources are practically infinite.

Luddites

historical group that smashes machines to save their jobs during the Industrial Revolution, representing an early example of Status Quo Bias.

Greece Debt Crisis

Greece borrowed heavily to fund early retirements. Later revealed a 13% debt of GDP (wasn’t 3.7%), leading to a massive bailout through Austerity measures.

EU

introduced the 4 freedoms; free movement of goods, capital, services, and people.

Euro Adoption

nations give up monetary sovereignty; they can NOT control their own interest rates or print their own money anymore.

Exchange Rate

the price of one country’s currency in terms of another country’s currency.

Strong vs. Weak Currency

strong => exports undesirable to foreign buyers, weak => exports more attractive to foreign investors.

Real GDP

adjusted for inflation; accounts the balance of producing goods and printing money.

Nominal GDP

prices may go up, but no new goods are produced.

GDP

measures new production; used cars, volunteering, and illegal jobs don’t count.

Higher Global Life Expectancy

a result of wealth creation; economic growth funded sanitation, medicine, and secure food supplies.

Third Global Revolution

primarily driven by the internet.

Global Poverty Levels

decreased from 80% to <15% over the past 50 years.

Fiat Money

value by decree; the government decreed that the dollar has value. It’s built on complete trust/public faith.

Gold Standard

every dollar represented a specific physical weight of gold; prevented printing of money, but had 0 elasticity. (Increase money supply? => dig up gold/acquire through trade)

Bank Run

when society panics and goes to the bank to withdraw their funds; inevitably leading to banks collapsing.

M2

measure of total money supply that’s readily available to be spent; includes all physical cash, deposits, and easily convertible money.

Stagflation

HIGH inflation and HIGH unemployment, a FLAT-LINING GDP; when money supply increases, but GDP doesn’t grow at the same time. This breaks the Phillips Curve.

Phillips Curve

identifies the inverse relationship between inflation and unemployment; to lower unemployment, increase inflation. To lower inflation, promote high unemployment.

Hyperinflation

when the government tries to save a crisis by printing money excessively. Ex: Zimbabwe with the 100 trillion dollar note that can’t buy bread.

Disinflation

rate of growth has SLOWED DOWN, growth is still positive, but at a slow pace.

Deflation

when inflation rates drop below 0 and prices reverse; UNLIKELY TO HAPPEN. If prices fall, society will delay buying goods until it’s cheaper.

The K

upper arm: asset owners’ wealth increased, spending on luxuries and increasing aggregate GDP. lower arm: wage earners, rely on a fixed salary to survive.

Income Equality Data

has generally increased within the U.S. since the 1980s.

Signs of a Recession

1) Trading Down, 2) Shrinkflation, and 3) Debt Bridge

Trading Down

people are downgrading their quality of life.

Shrinkflation

altering products to have less substance to keep prices the same.

Debt Bridge

people are forced into debt to survive as basic necessities rise and wages stay flat.

Dual Mandate

impossible job assigned by Congress to the Fed; 1) Maximum employment and 2) Stable prices, target 2% annual inflation rate.

Seesaw

inflation and interest rates can’t be low at the same time. Low interest rates => High inflation. Stopping high inflation requires high interest rates; high borrowing destroys money.

Warren Buffet

came up the idea of gravity and the apple; high interest rates = heavy gravity = pulls prices down. Low interest rates = weak gravity = prices rise up.

Federal Funds Rate

specific interest rate set by the Federal Reserve to influence the entire economy; “the overnight banking rate”.

Overnight Banking Rate

the interest rate banks charge each other for overnight loans; happens when banks are short on money after daily operations and need to meet the minimum reserve requirements.

M2 Supply Effects

Increases through buying bonds, decreases through selling bonds.

Prime Rate Formula

10 Year Treasury Bond

an IOU that pays you interest over time, then you get the principal bank; represents a baseline return on investment, very risk free.

Teeter Totter Effect

federal funds rate increases => bond prices fall => 10 year treasury effective yield increases => mortgage rates rise => housing demand drops

Forward Guidance

financial market look toward the future; when Jerome Powell signals that they’ll raise the Federal Funds rate, traders react by dumping bonds => starting the Teeter Totter effect.

Anchoring

anchoring society to a specific reality; when the government says inflation is under control to prevent inflation from getting worse through pay raises/raising prices.

Fractional Reserve System

requires banks to keep a percentage of deposits, and use the rest to create new loans (credit). It brings future wealth into the present, growing GDP.

Reserve Ratio

a percentage of deposits that must be kept within the bank as reserves.

Lower Reserve Ratio

banks can lend more out, stimulating business.

High Reserve Ratio

banks tighten credit, giving out less loans.

0 Reserve Ratio

money multiplied reaches infinity; the same deposit amount can be lent over and over again, but no money is kept in the bank.

Reserved Amount

= Original Deposit * Reserve Ratio

Amount Loaned Out

= Original Deposit - Reserved Amount

Money Multiplier

MM = 1 / Reserve Ratio

Total Credit Created

= Original Deposit * MM, increases the money supply.

Monobank

100% reserve ratio with 0 economic growth; economy is frozen, NO business loans, banks charge HIGH fees to make profits.

2008 Financial Crisis

caused by subprime mortgages and the trading of CDOs, falsely rated AAA (rating companies paid off). Resulted in housing prices dropping, with less homeowners paying into CDOS, a self-starting cycle. Banks refused to lend overnight cash.

Subprime Mortgages

lending to borrowers with poor credit profiles => causing high defaults. Were essentially NINJA (No Income, No Job, No Assets).

CDOs

bundling of thousands of mortgages into 1 security; were believed to be safe because mortgages were diversified.

Leverage

the usage of loans to increase your profits, so long as you pay them back; caps were removed for investment bank holding companies, making their debts 10x worse.

2008 Response

Federal Reserve injected liquidity into the economy because as all the banks shutdown, normal citizens who had no cause in the disaster lived in misery.

Liquidity Coverage Ratio (LCR)

mandates that large banking institutions must hold a strict quantity of high quality liquid assets that are easily convertible into money.

The Herd

psychology such that banks who abstained from participating in CDOs, would eventually have to participate in order to stay running because other competitors were doing better.

Keynesian Theory

advocates for the government to step in and manage the economy during a recession with active spending and policy changes.

Mercantilism

argues that a nation only benefits from international trade through a trade surplus; export everything, import NOTHING. This limited access to goods, kept domestic prices high, and suppressed innovation.

Absolute Advantage

being better, faster, or cheaper at producing a specific thing compared to somebody else.

Opportunity Cost

the value of what you give up; what you give up/what you get. OC item 1 in X units of item 2 sacrificed = item 1 / item 2 and viseversa. Lowest number => specialize in OC.

Law of Least Sacrifice

it’s NOT about what you’re best at, but about what you give up. Allocate your time to the activity with the smallest opportunity opportunity

Comparative Advantage

strives for lower opportunity cost by specializing in what you’re best at.

China’s Modern Economy

experiencing massive growth after market reforms in 1978, is one of the largest economies globally, but their growth pacing has slowed in recent years (Japanification)

China WW2

invaded by Japan, needed to fund the army so they printed money and suffered from hyperinflation and resource misallocation, leading to famine and stagnation. To survive, they isolated themselves from other countries.

China’s Economic Rise

1) Opened their economy to foreign investment, 2) Massive government spending on infrastructure, 3) Abundant supply of cheap labor from rural population

Elephant Chart

global poverty drops at the sacrifice of the U.S. middle class; the back: asian middle class’ income grows, the trunk: western working classes’ income stagnate.

Japanification

the slowing of China’s growth as real estate collapsed with many vacant home available + a shrinking workforce through aging.