1. Government and the Economy
&
International Economics

2.  Sole Proprietorship- Business owned and
operated by a single person
Advantages Disadvantages
Easy to start Unlimited liability
Little government Limited business
regulation life
Owner keeps profits Difficult to raise
funds
Lower taxes Risk of loss is
not shared

3.  Partnership- Business owned by 2 or
more people who share all decisions
Advantages Disadvantages
Easy to start Profits must be shared
Little government Limited business life
regulation
Not difficult to raise Unlimited liability
funds
Combination of skills Disagreements between
owners may occur

4.  Corporation- Business owned by many
who act as a legal entity
Advantages Disadvantages
Easy to raise funds Difficult to start
Limited liability Less direct
control
Unlimited business life Double
taxation
Risks are shared Limited
activities

5. Corporations raise money in two ways:
◦ Bonds: Earn interest by lending money to
corporations
◦ Stocks: Gives stockholder partial
ownership in the corporation
Stocks are considered very risky because
they don’t guarantee a return on
investment

6.  Market organizations have five
characteristics that differentiate each
market into one of the four:
◦ Perfect Competition
◦ Monopolistic Competition
◦ Oligopoly
◦ Monopoly

7. Perfect Competition Monopolistic Competition
Great many sellers Many sellers
Sells homogeneous (similar) Sells differential product (not
products the same, but can be used as a
substitute)
Easy to get in and out of Relatively easy to enter industry
industry
Information is complete in Information is reasonably
market complete
No price control (price taker) Some price control
Ex. Gas Stations Ex. Restaurants

8. Oligopoly Monopoly
There are few and 1 dominant firm controls
interdependent firms industry
Sells homogeneous and Sells unique products
differential products
It is difficult to enter and exit Very difficult to enter and exit
market market
Incomplete information Compete information
Price control varies in degree Great deal of price control
and is often considerable
Ex. Pure= American steel Ex. Electric power
industry
Differential=American car
industry

9.  Ways of settling business disputes:
◦ Strike- Employees refuse to work until demands are
met
◦ Lockout- Closing workplace to put pressure on union
and workers
◦ Mediation- Third neutral
party works to settle
disputes between
employees (doesn’t have
to be accepted)
◦ Arbitration- Third party
decides on terms of
agreement and it must be accepted by both sides

10. Wage determination can be based on
any of the following:
◦ Supply and Demand
◦ Skilled worker vs. Unskilled worker
(Amount of experience)
◦ Blue collar (construction
worker) vs. White collar
(lawyer)

11. The Gross Domestic Product (GDP) measures the
economy’s health and how it is performing
The government uses the GDP to do the following:
1. Determine comparisons from year to year in the
country
2. Determine comparisons with other countries
 The GDP is not the “perfect” measuring stick
because it doesn’t take into account nonmarket
activities of underground economy

12.  Nominal GDP- Measures the total dollar
amount of final goods and services produced
within the United States
 Real GDP- Determines the factors in inflation
 Per Capita GDP

13.  Consumer Price Index (CPI) shows how the
average price of a certain group of goods
changes over time
 Hyperinflation- inflation out of control
(money loses much of its value and leads to
total economic collapse)

14. There are 4 phases in a business cycle:
1. Expansion- Economic growth measured by a
rise in real GDP (plenty of jobs, falling
unemployment rate,
2. Peak- Height of economic expansion
3. Contraction- Economic decline marked by
falling real GDP (unemployment rises)
4. Trough- Economy bottoms out where real
GDP stops falling

15. Contractions can be described in the following
ways:
1. Recession- Prolonged economic contraction of
at least 6 months
2. Depression- Recession that is especially long
and severe
3. Stagflation- Decline in real GDP (output) with a
rise in inflation

16.  The Federal Reserve, considered “the banker’s
bank”, manages and monitors the country’s
economy, regulating the money supply, banking
system, and serving the banks
 What makes up the Reserve
is a board of governors
who make decisions for
the Fed and 12 district
banks that are responsible
for monitoring and
reporting economic and
banking conditions

17.  Monetary Policy- The actions the Federal
Reserve takes to control the nation’s money
supply and interest rates
 Fiscal Policy- The use of government
spending and taxing to achieve economic
objectives

18. Types of unemployment include:
 Frictional- People take time to find a job (laid off,
change jobs, etc.)
 Seasonal- Season change causes change in
production (farmers, ski lodges, swimming pools)
 Structural- Caused by mismatch between job
seekers and job openings
 Cyclical- Rises during economic downturns and
falls when economy improves
 Full Employment- When there is no cyclical
unemployment

19.  Countries trade to take  Tariff- A tax on
advantage of strengths imported goods
of different countries  Trade Surplus- When a
(Comparative Advantage) country exports more
 Free Trade- Minimal than it imports
restrictions on  Trade Deficit- When a
imports/exports to country imports more
encourage international than it exports
trade  Outsourcing-
 Export- Good sent to Goods/services being
another country supplied by someone
 Import- Good sent from outside of the
another country company/country

20.  The government tries to ensure fair business
practices to make sure that one company won’t
create a monopoly. To do this, they have created
these anti-trust acts:
1. Sherman Anti-Trust Act- Outlaws mergers and
monopolies that restrain trade between states
(1890)
2. Clayton Anti-Trust Act- Outlaws practices that limit
competition or lead to a monopoly (1914)
3. Robinson-Patman Act- Defines and outlaws several
forms of price discrimination (1936)
4. Cellar-Kefauver Act- Allows government to stop
mergers that hurt competition.
 NAFTA- North American Free Trade Agreement-
Agreement among Canada, USA, and Mexico

21. Types of taxes include: brought into the
1. Excise Tax- Tax on country
the sale/manufacture 5. Income Tax- Tax on
of a good (gasoline) individuals or
2. Estate Tax- Tax on corporations
total value of money 6. Sales Tax- Tax on
and property of a goods
person who has died 7. Property Tax- Tax on
3. Gift Tax- Tax on houses, boats, and
money or property cars
given to another 8. Corporate Tax- Tax
4. Import Tax (Tariff)- on value of
Tax on goods corporation’s profits

22. 1. Simplicity- Easy to understand and keep
records of the tax
2. Efficiency- Must be able to pay and collect
without wasting too much time
3. Certainty- Should be clear when, how
much, and how it should be paid
4. Equity- No one should bear too much or too
little of the burden

23.  Exchange Rate- Ratio of value between 2 different
currencies
 Protective Tariff- Tax on imported goods to
strengthen domestic production
 Specialization- Focusing of labor on a portion of a
larger task to increase productivity
 Competition- When multiple businesses improve
quality and/or decrease prices to increase sales
 Protectionism- Increasing tariffs on imports in
order to encourage the purchasing of domestic
products
 Quota- A minimum amount set on production

24.  Macroeconomics- The study of countries’
economics, entire industries, and global
interdependence
 Standard of Living- Measure of productivity
of a nation based on individuals’ lifestyles
 Stock Market- Place where shares of
corporations are bought and sold
 Interest Rate- The percentage cost of
borrowing money
 Economic Interdependence- The economics
of countries worldwide are impacted by the
economic conditions in other countries

25. Study hard and always follow Coach East’s
directions (or else!)