CIMA BA1 flashcards

GDP =

Household spending

+

Capital investment spending

+

?????

+

Exports of goods and services

–

Imports of goods and services

  What term is missing from the above formula for GDP? Government spending

What are the deflationary and inflationary gaps? A deflationary gap occurs when aggregate demand needs to increase if full employment is to be achieved. An inflationary gap occurs when aggregate demand has to decrease to match full employment.  

What events can cause a rightwards shift in the aggregate demand curve?

• An increase in disposable income
• Consumers deciding to save less (known as a lower marginal propensity to save).
• Increased government spending
• A more relaxed monetary policy (for example, the government simply printing more money.
• An increase in net exports.

What are the five types or causes of inflation?

• Demand pull
• Cost push
• Import cost inflation
• Expectation
• Increase in the money supply

What are the Laspayre and Paasch indexes? They are indexes to measure inflation. Laspayre: uses base year quantities or base year values. Paasch: uses current year quantities or current year values.

In the following diagram, what label should be on the middle horizontal arrow?

What are the four ways in which governments can obtain more money?

• Taxation
• Borrowing
• Printing money
• Sale of state assets (eg privatisation)

 

What are regressive, progressive and proportional taxes?

• A regressive tax takes a higher proportion of a poor person’s salary than it does for a rich person.
• A progressive tax takes a higher proportion of income as income rises
• A proportional tax takes exactly the same proportion of income tax from all levels of income.

 

What is an ‘ad valorum’ tax? An ad valorem tax is charged as a fixed percentage of the price of the good. A good example of an ad valorem tax is VAT  

What are the three elements of fiscal policy?

• Government spending
• Taxation
• Government borrowing

What is the ‘multiplier’? If a government injects money into the economy, this will be ultimately earned by suppliers and employees who will spend it in turn thus stimulating the economy even more. The effect is that the total additional money spent in the economy is: Initial expenditure x 1/Marginal propensity to save

What is absolute advantage in relation to international trade? A country has absolute advantage when it performs a task more efficiently than producers in other countries

What are four reasons why international trade occurs? Any four of:

• Natural resources available in one country
• Access to low labour costs
• Economies of scale
• Skills
• Unique products in one country only

 

What is comparative advantage in relation to international trade? It is when it is better if one country switches production to a particular product because, compared to making another product, it is comparatively more efficient

What are four potential drawbacks arising from international trade? Any four of:

• Transport costs and carbon footprint
• Export of jobs
• Strategic weakness
• Balance of payment problems
• Dumping

What are four possible protectionist methods?

• Quotas
• Tariffs
• Administrative difficulties
• Subsidies

What is meant by the term ‘globalisation’? The process by which the countries and businesses throughout the world are becoming increasingly interconnected because of increased trade. Globalisation has increased the production of goods and services. The biggest companies are multi-national companies with subsidiaries in many countries throughout world.

A country is trading with the USA. If its currency strengthens against the US$ what effect does this have on the price of its exports in the USA and the cost of its imports from the USA?

• Exports: become more expensive in US$
• Imports: become cheaper in terms of the country’s own currency

What is ‘off-shoring’? Off-shoring is the process of sending manufacturing abroad eg to make use of cheaper labour rates.

What is the purpose of trade agreements? Trade agreements are treaties between countries on their reciprocal tariffs, quotas etc. The purpose of the agreements is to reduce the barriers to trade and simplify international trade, improve economic efficiency and provide consumers with more choice. They reduce protectionism.  

What is the formula for return on equity?   100 x Operating profit after interest and before tax/Shareholders’ equity

What is PESTEL? PESTEL is a way of appraising the macro-environment. The environmental influences are:

• Political
• Economic
• Social
• Technological
• Environmental/ecological
• Legal

 

What is the formula for return on capital employed?   100 x Operating profit before tax and interest/Capital employed

What is an ‘organisation’? A social arrangement which pursues collective goals, which controls its own performance, and which has a boundary separating it from its environment

What are the three classes of stakeholder? Internal, connected, external

What is the formula for the price elasticity of demand? The price elasticity of demands=

The proportional (or percentage) change in demand

The proportional (or percentage) change in price

A price elasticity of demand of <1 means what? The item is showing inelastic behaviour. A rise in price will affect demand relatively little and revenue will increase.  

What is a natural monopoly? A natural monopoly is a type of monopoly that exists due to the high start-up costs or powerful economies of scale of conducting a business in a specific industry. A company with a natural monopoly might be the only provider or a product or service in an industry or geographic location.  

What are public goods? A public good is a product or service that one individual can consume without reducing its supply to another individual, and from which no one is excluded. Examples include public roads, street lighting, defence and law enforcement.

What is an externality? An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Externalities interfere with the ability of market forces to optimise the allocation and use of resources.  

What is the ACCURATE mnemonic for good information?

• Accurate
• Complete
• Cost-beneficial
• User-targeted
• Relevant
• Authoritative
• Timely
• Easy-to-use

What are the two types of common chart used to display frequency distributions?

• Histograms
• Ogives (cumulative frequency curves)

What are the four Vs of big data?

• Volume
• Variety
• Velocity
• [Veracity]

 

What is meant by the term ‘longitudinal study’? In a longitudinal study, measurements are taken of the same variable at different points in time. For examples, sales each month, profit over a number of years occurrence of illness in a sample of people as they age.

What is meant by the term ‘cross-sectional’ study? In a cross-sectional study data from a number of members of a population is examined at a single point in time. For example, the gross profit percentage achieved by 12 branches of a company in 2020.

Linear regression will give constants which fit a line of the type: y = ax + b. Which of y or x should be the independent variable?   x. Essentially the value of x drives the value of y

What are four purposes of money?

• A means of exchange
• A store of value
• A unit of account
• A means of deferred payment

 

When is Spearman’s rank correlation coefficient of particular use? When items can be ranked (ie placed in order) but assigning a score or value to each item is difficult.

What are five functions of banks? Any five of:

• Safe storage: banks store cash in their vaults and can impose strict security.
• Risk reduction: if a bank is lending money it has expertise to properly appraise the borrower.
• Maturity transformation: for example, banks can make use of lots of short-term deposits to create long-term loans.
• Consolidation: lots of small deposits allow several large loans.
• Credit creation: by issuing credit cards and organising loans and overdrafts, banks help to ‘create’ money.
• Intermediation: borrowers and lenders are matched.
• Transfer of money: eg between purchaser and supplier.

 

What is a debenture? A financial instrument recording a debt. Debentures can be secured on assets and can be redeemable or irredeemable. Fixed amounts of interest must be paid, usually every 6 months.  

What is a convertible? Convertibles start life as debentures but give investors the option of converting the debentures to shares. This allows investors to take a ‘wait-and-see’ approach. Invest in safe debentures, then convert to shares if the company seems to be doing well.  

What are financial instruments? Financial instruments are assets that can be traded and which permit efficient flows of capital between investors and those needing capital for their operations. Financial instrument are contracts that create a financial asset of one entity and a financial liability or equity instrument of another entity

If there is a fixed interest Government bond with a coupon rate of 5%, what value per $100 nominal will this have if the current interest rate in the economy is 2%? $250. Check: $100 par of the bond will pay $5 annually ie 5% of the nominal value. If the bond actually costs $250 to buy then the return to the purchaser is 5/250 = 2%. Market prices move to provide the return required.

If the reserve ratio for banks is 30% (ie 30% of deposits cannot be lent out), how much credit is created in total if a customer deposits $12,000?   12,000/0.3 = $40,000  

What is the definition of the internal rate of return? IRR = the discount rate at which the project yields a zero NPV  

What is a forward exchange contract? A forward contract is a contract to exchange an agreed amount of currency at an agreed date in the future and an agreed exchange rate.  

Is the following statement true or false? If an option is allowed to lapse then the option premium is repaid. False. It’s like car insurance: the premium is not repaid even if you make no claim.  

What is a currency option? Currency options give their owner the right, but not the obligation, to buy or sell currency at an agreed price.

What is a forward rate agreement (FRA)? Forward rate agreements (FRAs) allow a borrower or depositor to fix a n interest rate for a period in the future eg starting in 6 months and ending after 12 months.

What are interest rate options? These are options to buy or sell interest rate futures and allow borrowers or depositors to enjoy favourable interest rate movements whilst protecting themselves against adverse movements. Upfront non-returnable premiums have to be paid to acquire the options that provide this protection.  

What are interest rate futures? These are traded on futures market. They are derivatives whose value depends on the interest rate. By arranging to buy or sell future contracts, profits can be made on the contracts that will largely compensate for any losses made on interest rate movements.