Course Content
TOPICS IN DEMAND AND SUPPLY ANALYSIS
This chapter is covered under Reading 12 of Study Session 4. After reading this chapter, a student shall be able to: a. calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure; b. compare substitution and income effects; c. distinguish between normal goods and inferior goods; d. describe the phenomenon of diminishing marginal returns; e. determine and describe break-even and shutdown points of production; f. describe how economies of scale and diseconomies of scale affect costs.
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THE FIRM AND MARKET STRUCTURES
This chapter is covered in reading 13 of study session 4 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. describe characteristics of perfect competition, monopolistic competition, oligopoly, and pure monopoly; b. explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure; c. describe a firm’s supply function under each market structure; d. describe and determine the optimal price and output for firms under each market structure; e. explain factors affecting long-run equilibrium under each market structure; f. describe pricing strategy under each market structure; g. describe the use and limitations of concentration measures in identifying market structure; h. identify the type of market structure within which a firm operates.
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AGGREGATE OUTPUT, PRICES, AND ECONOMIC GROWTH
This chapter is covered in reading 14 of study session 4 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. calculate and explain gross domestic product (GDP) using expenditure and income approaches; b. compare the sum-of-value-added and value-of-final-output methods of calculating GDP; c. compare nominal and real GDP and calculate and interpret the GDP deflator; d. compare GDP, national income, personal income, and personal disposable income; e. explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance; f. explain the IS and LM curves and how they combine to generate the aggregate demand curve; g. explain the aggregate supply curve in the short run and long run; h. explain causes of movements along and shifts in aggregate demand and supply curves; i. describe how fluctuations in aggregate demand and aggregate supply cause short-run changes in the economy and the business cycle; j. distinguish between the following types of macroeconomic equilibria: long-run full employment, short-run recessionary gap, short-run inflationary gap, and short-run stagflation; k. explain how a short-run macroeconomic equilibrium may occur at a level above or below full employment; l. analyze the effect of combined changes in aggregate supply and demand on the economy; m. describe sources, measurement, and sustainability of economic growth; n. describe the production function approach to analyzing the sources of economic growth; o. distinguish between input growth and growth of total factor productivity as components of economic growth.
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UNDERSTANDING BUSINESS CYCLES
This chapter is covered in reading 15 of study session 4 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. describe the business cycle and its phases; b. describe how resource use, housing sector activity, and external trade sector activity vary as an economy moves through the business cycle; c. describe theories of the business cycle; d. describe types of unemployment and compare measures of unemployment; e. explain inflation, hyperinflation, disinflation, and deflation; f. explain the construction of indexes used to measure inflation; g. compare inflation measures, including their uses and limitations; h. distinguish between cost-push and demand-pull inflation; i. interpret a set of economic indicators and describe their uses and limitations.
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MONETARY AND FISCAL POLICY
This chapter is covered in reading 16 of study session 5 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. compare monetary and fiscal policy; b. describe functions and definitions of money; c. explain the money creation process; d. describe theories of the demand for and supply of money; e. describe the Fisher effect; f. describe roles and objectives of central banks; g. contrast the costs of expected and unexpected inflation; h. describe tools used to implement monetary policy; i. describe the monetary transmission mechanism; j. describe qualities of effective central banks; k. explain the relationships between monetary policy and economic growth, inflation, interest, and exchange rates; l. contrast the use of inflation, interest rate, and exchange rate targeting by central banks; m. determine whether a monetary policy is expansionary or contractionary; n. describe limitations of monetary policy; o. describe roles and objectives of fiscal policy; p. describe tools of fiscal policy, including their advantages and disadvantages; q. describe the arguments about whether the size of a national debt relative to GDP matters; r. explain the implementation of fiscal policy and difficulties of implementation; s. determine whether a fiscal policy is expansionary or contractionary; t. explain the interaction of monetary and fiscal policy.
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INTERNATIONAL TRADE AND CAPITAL FLOWS
This topic is covered under Reading 17 of the study session 5 provided by the institute. The candidate should be able to: a compare gross domestic product and gross national product; b describe benefits and costs of international trade; c distinguish between comparative advantage and absolute advantage; d compare the Ricardian and Heckscher–Ohlin models of trade and the source(s) of comparative advantage in each model; e compare types of trade and capital restrictions and their economic implications; f explain motivations for and advantages of trading blocs, common markets, and economic unions; g describe common objectives of capital restrictions imposed by governments; h describe the balance of payments accounts including their components; i explain how decisions by consumers, firms, and governments affect the balance of payments; j describe functions and objectives of the international organizations that facilitate trade, including the World Bank, the International Monetary Fund, and the World Trade Organization.
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CURRENCY EXCHANGE RATES
This chapter is covered in Reading 18 of the study material provided by the institute. After reading this chapter, the student should be able to: a. define an exchange rate and distinguish between nominal and real exchange rates and spot and forward exchange rates; b. describe functions of and participants in the foreign exchange market; c. calculate and interpret the percentage change in a currency relative to another currency; d. calculate and interpret currency cross-rates; e. convert forward quotations expressed on a points basis or in percentage terms into an outright forward quotation; f. explain the arbitrage relationship between spot rates, forward rates, and interest rates; g. calculate and interpret a forward discount or premium; h. calculate and interpret the forward rate consistent with the spot rate and the interest rate in each currency; i. describe exchange rate regimes; j. explain the effects of exchange rates on countries’ international trade and capital flows.
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Economics
About Lesson

1.1.         GNP Vs. GDP

a.  We can measure the aggregate output of a country by using the gross national product (GNP) or the gross domestic product (GDP), which differs with respect to goods and services produced by foreigners and by its citizens abroad.

b.  GDP, which is more commonly used as a measure of the national income, is the market value of final goods and services, produced by the factors of production, located within a country or economy. It is the total value of all goods and services provided by a country during a specific period of time.

c.  Whereas, GNP is the market value of final goods and services, produced by the factors of production, supplied by the citizens of a country either in or out of a country. It is the total value of all goods and services consumed, government outlays, investments, and exports less

d.  Therefore:

     i.  The production of goods and services by foreigners in the country is included in the GDP but not in the GNP.

    ii.  And, production outside the country by its citizens is included in the GNP but not in GDP.

e.  Thus the relationship between the GDP and GNP can be explained as follows:

Particulars

Gross National Product (GNP)

Add:

Production of Goods and Services by Foreigners Within the Country

Subtract:

Production of Goods and Services by the Country’s Citizens Outside the Country

Equals:

Gross Domestic Product (GDP)

 

f.  The difference between the two measures of performance relates to international trade.

1.2.         Other Terminology

a.  Imports are goods and services that a domestic economy purchases from other countries.

b.  Exports are goods and services that a domestic economy sells to other countries.

c.  The value of exports minus the value of imports in a country is called its net exports.

Net Exports = Exports – Imports

     i.  If the value of net exports is zero, then it is the situation of balanced trade.

    ii.  If net exports are greater than zero then there is a surplus.

   iii.  If the net exports are less than zero then there is a deficit.

d.  The terms of trade are the ratio of the price of exports to the price of imports. It can be calculated as follows:

Terms of Trade = (Export Price Index) / (Import Price Index)

This index is set to 100 in some base year.

     i.  If the value of this index is greater than zero, it indicates increasing terms of trade. It means fewer exports are needed to pay for the same level of imports.

    ii.  If the value of this index is less than zero, it indicates decreasing terms of trade. It means more exports are needed to pay for the same level of imports.

e.  A country that does not trade with other countries is referred to as a closed economy or being in autarky; the price of goods and services is the autarkic price.

f.  An economy that is not closed is an open economy.
If there are no restrictions on trade, the price of goods and services in the world price.

g.  Free trade is the case in which there are no restrictions on a country’s trade with other countries.
Here, the global aggregate demand and global aggregate supply determine the equilibrium level of quantity and equilibrium prices of exports and imports.

h.  Trade protections are restrictions on trade that prevent pricing based on supply and demand, in the form of tariffs, quotas, etc.
Capital restrictions are limits on the flow of funds into or out of a country.

i.  The degree of foreign trade can be measured using one of the two benchmarks:

     i.  Trade as a percentage of GDP.

   ii.  Foreign direct investment (FDI), that is, the amount of investment by a firm in one country in the assets in another country.

j.  A multinational corporation (MNC) is a company that operates in more than one country.

k.  A foreign portfolio investment (FPI) is a short-term investment in foreign financial instruments.