Notes, summaries, assignments, exams, and problems for Economics

Reconstructing the Gold Standard

After World War I, there was a widespread willingness to return to stable currencies through a gold standard or an equivalent system. This led to the Gold-Exchange Standard, where currencies were backed not only by gold but also by "hard currencies" (like the British Pound Sterling and the US Dollar) that were convertible into gold. A central question was at which parity to return. Significant differences in wartime inflation had left various currencies at different distances from their pre-war parity with gold.

The Challenge of Setting Parity

If a country wanted to return to its pre-war parity but its currency was inflated, it had to revalue its currency upwards. This required deflating the economy to attract...

Vertical Integration

The process in which several steps in the production and/or distribution of a product or service are controlled by a single company or entity, in order to increase that company's or entity's power in the marketplace.

Horizontal Integration

Much more common and simpler than vertical integration, Horizontal integration (also known as lateral integration) simply means a strategy to increase your market share by taking over a similar company. This take over / merger / buyout can be done in the same geography or probably in other countries to increase your reach.

Merger

An agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning...

Determining Income Tax Expense

The formula to determine income tax expense is: Income before income tax expense (from the income statement) multiplied by the income tax rate.

Southern Corporation has a pretax accounting income of $575,000 and a taxable income of $560,000. The company's income tax rate is 35%. Income tax expense for the firm is: Income Tax Expense $201,250.

Discontinued Operations

The discontinued operations section of the income statement refers to the: disposal of a segment of a business.

Statement of Stockholders' Equity

The financial statement that reports the changes in all categories of equity during the period is called the: statement of stockholders' equity.

Comprehensive Income

Comprehensive income is not used to determine

Financial Statement Calculation Flow

The following outlines the calculation of key profitability metrics:

EBITDA Calculation

EBITDA =

• (1) Revenue
• +- (2) Changes in Inventories of Finished Goods and Work in Progress
• + (3+5+9+10) Other Operating Revenue
• - (4) Supplies
• - (6) Personnel Expenses
• - (7) Other Operating Expenses
• +- (11b) Results Arising from Fixed Assets

Operating Result Before Exceptional Items

Operating Result Before Exceptional Items =

• EBITDA
• - (8+11a) Amortization, Depreciation, and Impairment

EBIT Calculation

EBIT =

• Operating Result Before Exceptional Items
• +- (12+14+15+16) Returns on Financial Investments

EBT Calculation

EBT =

• EBIT
• - (13+15) Financial Expenses

Profit/Loss from Ordinary Activities (Net of Tax, Pre-Exceptional)

Profit/Loss from Ordinary

Tax Deductions for Business Operations

You can write off operational expenses from your taxes for the year in which they occur. This means you can deduct 100 percent of your daily expenses each year.

Operational Expenses vs. Capital Expenditures

• Operational Expenses (Write-offs): Offer the most advantageous tax deductions for the short term, allowing a 100% deduction in the year incurred.
• Capital Expenditures (Depreciation): Must be depreciated. This means you can deduct only a part of the cost of the asset each year over the life of the asset.

Understanding Risk Aversion

Risk Averse: Investing conservatively, avoiding risk unless there is adequate compensation.

Standard Deviation and Investment Volatility

Standard Deviation is applied to the annual...

Inflation

Inflation is an increase in the average level of prices of goods and services.

Types of Inflation

• Demand-Pull Inflation: This occurs when various factors increase aggregate demand, leading to inflation.
• Cost-Push Inflation: This is a decrease in the supply of goods caused by an increase in the cost of production.

Causes of Inflation

• Increase in the cost of raw materials
• Increase in the cost of inputs (land, labor, capital)
• Increase in the cost of borrowing by producers
• Natural calamities, floods, earthquakes

Consequences of Inflation

• Price effect: Consumer consumption will go down.
• Income effect: Real income may decrease.
• Saving effect: Consumer saving declines.
• Wealth effect: The value of assets like land, cash, stocks, bonds, and bank deposits

Financial & Banking Acronyms

1. ALM: Asset-Liability Management

2. AML: Anti-Money Laundering

3. KYC: Know Your Customer

4. ASBA: Application Supported by Blocked Amount

BSBDA: Basic Savings Bank Deposit Account

5. IFSC: Indian Financial System Code

6. CBS: Core Banking Solution

7. RTGS: Real Time Gross Settlement

8. SLR: Statutory Liquidity Ratio

9. CAR: Cash Adequacy Ratio

10. MSF: Marginal Standing Facility

11. NBFC: Non-Banking Financial Companies

12. PIN: Personal Identification Number

Economic & Regulatory Terms

13. CCEA: Cabinet Committee on Economic Affairs

14. CECA: Comprehensive Economic Cooperation Agreement

15. CEPA: Comprehensive Economic Partnership Agreement

16. DTAA: Double Taxation Avoidance Agreement

17. ECBs: External Commercial Borrowings

18.

Business Structures

Sole Traders

A sole trader is any business that is owned and controlled by one person.

Advantages of Sole Trader

• It is easy to set up as no formal legal paperwork is required.
• Generally, only a small amount of capital needs to be invested, which reduces the initial start-up cost.
• As the only owner, the entrepreneur can make decisions without consulting anyone else.

Disadvantages of Sole Trader

• The sole trader has no one to share the responsibility of running the business with. A good hairdresser, for example, may not be very good at handling the accounts.
• Sole traders often work long hours. They may find it difficult to take holidays or time off if they are ill.
• They face unlimited liability if the business fails.

Partnerships

Partnerships...