EC250 Chapter Notes - Chapter 6: Nominal Interest Rate, Business Cycle, Inventory Investment

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22 Dec 2016

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Investment is important b/c: adds to the productive capacity of the economy and is quite volatile during the business cycle. I(cid:374)(cid:448)est(cid:373)e(cid:374)t (cid:373)ea(cid:374)s the p(cid:396)odu(cid:272)tio(cid:374) of goods that i(cid:374)(cid:272)(cid:396)ease the e(cid:272)o(cid:374)o(cid:373)y"s capital stock and that contribute to production capacity in the future. Examples: construction of a new factory building, buying new machinery, renovating existing machinery, residential construction, accumulation of inventories: business fixed investment, inventory investment, and residential construction. In economics, we consider investment that are newly produced assets. Ipo, bonds and stocks are not an investment . A sale of an old or new building is an ownership change, not an investment. Things that people buy with the aim of selling them in the future are not investment. Expectations about the future state of the economy. ** investment is forward-looking and crucial information is not available at the time of making investment decisions. Compare the cost of the investment with the additional profits it will earn.

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Question 1 Gross domestic product (GDP) measures the economy's production of

A) final goods and services.

B) intermediate goods.

C) consumer goods and services.

D) capital goods.

Question 2 Because GDP is measured in dollars per year, GDP is called a

A) stock.

B) flow.

C) cycle.

D) chain.

Question 3 Which of the following would not be included in the gross private domestic investment (I) category of GDP?

A) A retailer's additions to its inventories.

B) A bakery's purchase of a new oven.

C) A trader's purchase on NASDAQ stocks.

D) Newly built residential construction.

Question 4 Which of the following government payments would be included in the government consumption expenditures and gross investment (G) category of GDP?

A) A firefighter's monthly paycheck.

B) A retired grandmother's Social Security check.

C) A retired colonel's veteran's benefits.

D) A laid-off auto worker's unemployment conpensation check.

Question 5 The largest component in the income approach to measuring GDP is

A) compensation of employees.

B) rents.

C) profits.

D) net interest.

Question 6 Which approach to calculating GDP attempts to measure employee compensation, rents, profits, and net interest?

A) The circular-flow approach.

B) The product-market approach.

C) The income approach.

D) The expenditure approach.

Question 7 In recent years, people have benefited from greater amounts of leisure time. This trend

A) has caused GDP to rise.

B) has caused GDP to fall.

C) made GDP fluctuate randomly.

D) is not accounted for in the GDP statistic.

Question 8 National income (NI) is calculated by adjusting GDP for

A) depreciation of capital.

B) investment and net exports.

C) Social Security insurance contributions and transfer payments.

D) corporate and personal income taxes.

Question 9 If an economy's real GDP has increased, we can conclude that the economy

A) is inflationary.

B) has increased its production.

C) suffers from recession.

D) needs a tax cut.

Question 10 In the circular flow model, investment, government spending, and exports are classified as

A) injections.

B) leakages.

C) transfers.

D) consumption expenditures.

1- Milton Friedman viewed current income as the sum of permanent income and:

A) bonus income. B) transitory income. C) temporary income. D) surprise income.

2- Permanent and transitory income differ in the way that permanent income is ______ than is transitory income.

A) larger B) more persistent C) taxed at a higher rate D) more variable

3- If consumers have rational expectations and follow the permanent-income hypothesis, their current consumption will increase when:

A) previously announced tax reductions are implemented.

B) they receive an anticipated raise.

C) they receive an unexpected inheritance.

D) they make the last payment on their automobile loan

4- Consumers with time-inconsistent preferences:

A) base consumption decisions on transitory rather than permanent income.

B) seek to consume more in retirement than during their working years.

C) may alter decisions simply because time passes.

D) face borrowing constraints that prevent rational behavior.

5- The most volatile component of real GDP is:

A) consumption spending. B) government spending. C) investment spending. D) net exports.

6-If the capital stock is fixed and something happens to raise the marginal product of capital (MPK) for any given quantity of capital, then the real rental price of capital will:

A) remain the same. B) rise. C) fall. D) fall and then rise.

7- The investment spending component of GDP includes all of the following except:

A) business fixed investment. B) net foreign investment. C) residential investment. D) inventory investment.

8- The real cost of capital is the:

A) purchase price of a unit of capital divided by the price level.

B) purchase price of a unit of capital minus the rate of inflation.

C) cost of a unit of capital less the marginal product of capital.

D) cost of buying and renting out a unit of capital measured in units of the economy's output.

9- The profit rate of a firm that rents capital is equal to:

A) the marginal product of capital minus the cost of capital.

B) the cost of capital minus the marginal product of capital.

C) zero.

D) a negative number, if it is adding to its capital stock.

10- Other things being equal, the neoclassical model of investment predicts that net investment will increase when the:

A) marginal product of capital falls.

B) price of new capital goods rises.

C) real interest rate falls.

D) depreciation rate rises.

11- If Tobin's q is greater than 1, then managers should:

A) increase the capital stock of the firm.

B) maintain the existing capital stock of the firm.

C) allow inventories to run down.

D) decrease the capital stock of the firm.

12- According to Keynes, movements in stock prices:

A) follow a random walk.

B) reflect rational valuations of underlying economic fundamentals.

C) result when new information becomes available.

D) are often driven by irrational waves of optimism and pessimism.

Hyflux dips toes into wellness, beauty market /
Hyflux banks on oxygenated water for consumer market
In City Square Mall, a new store offering bath facilities has opened its doors to shoppers.
This marks Hyflux, the company better known for its desalination plants, first foray into the
brick-and-motar retail sector with its budding consumer business. The Singapore-listed
company will open Elo Lab officially on 8 September 2016. This retail outlet is a physical
representation of Hyfluxâs bet on the consumer water business â in particular, on a special
oxygenated water termed Elo Water.
Said to contain three times more oxygen than tap water, Elo Water was the reason
behind Hyflux's US$8 million investment in European firm Kaqun Europe in November
2015. It also forms the basis for the group's new bath facilities, as well as bottled
drinking water and skincare gels that it sells online. "Oxygen can increase the cell's ability to
generate more energy," Hyflux group chief financial officer Lim Suat Wah explained in an
interview with The Business Times. "A cell with sufficient oxygen can actually generate 15
times more energy than a cell without sufficient oxygen. So this Elo Water puts the two
together, the water element as well as the oxygen."
The venture into the consumer business came as Hyflux sought to see how water, besides
being used for daily needs, could also be used to improve health. It conducted a research and
uncovered a company which produced similar oxygenated water in the US a few years ago,
but the oxygen level in the water produced with their technology wasn't stable. On the other
hand, Kaqun was able to produce oxygenated water that contains stable oxygen levels which
can be easily absorbed into the body. This has been shown to reduce mental and physical
tiredness, according to Kaqun's website.
The oxygenated water is said to have been developed from more than 10 years of research
work by a group of doctors. Hyflux holds the exclusive rights to manufacture, sell and market
Elo Water in the Asia-Pacific, Middle East and Africa. It holds a 70 per cent stake in
Elo Water Pte Ltd with Kaqun Europe owning the rest.
"We're quite excited about this business," said Ms Lim. The group hopes to add its
proprietary membrane expertise to purify the water and also use its know-how to scale up
production of Elo Water while ensuring consistency in quality. For a start, Hyflux has
commenced clinical trials to test the properties of Elo Water. The first of these have just been
concluded, with observations of improved skin condition after the use of Elo Gel.
The clinical study, conducted by Seoul-based clinical trial institute, involved 22 women aged
49 to 52 years old who applied Elo Gel every morning and night on half their face for eight
straight weeks. During this period, skin wrinkles, colour elasticity, hydration and radiance
were observed to be "significantly improved" on the side of their faces treated with Elo Gel.
The study validated some of the observations that they have been hearing from people who
have already used it.
But even before conclusive trial results on the drinking water and bath come in â expected to
be only in 2017 â news of the products and their effects have travelled by word of mouth.
Bottles of Elo Water and Elo Gel have been snapped up, causing the company to run out of
stock of the products on occasions. A pack of six 1.5-litre bottles of Elo Water costs S$63.80
and a single tube of Elo Gel, S$68, according to its website. Still, Hyflux will not actively
market the products until it has more substantial trial results. Currently, the business in Elo
Water still remains small, as Hyflux only sells them in Singapore via an online channel.
The firm is hoping that Elo Water might bring a new breath of life to its business and
broaden Hyflux's reach to a new group of customers â consumers. How large the business
could grow into would depend on the number of cities Hyflux moves into. More investment
will also be needed in marketing, IT systems and building up a logistics network.
Singapore will be the starting point for sales, and a valuable one given its credibility and
governance. "If it can be established in Singapore, then other cities and countries will look at
(Elo Water) with more trust." In 2017, the group plans to expand sales to other Asian
countries such as Malaysia and Indonesia. China, too, is on the radar, said Ms Lim. The Elo
Water is also generating interest from consumers in countries like Australia, Hong Kong,
Thailand and China. The firm has already received enquiries on when its Elo products will be
marketed there.
Hyflux is also hoping for positive clinical trial results to give the products more credibility,
especially within the medical field. Anecdotally, users have said that Elo Water helps to
improve certain medical conditions, and some medical clinics are already ordering the gel
and drinking water through the Elo Water website. Said Ms Lim: "Some heard from their
patients who tried it and went back to them, so they know that there's some effect there. But
they can't actively promote it at this time (without the clinical trial results)."When the resul ts
come out, "hopefully, at that point in time, it will take off on a larger scale", she said. In the
coming months, Hyflux will be conducting clinical trials to determine if the water can help
benefit those with diabetes and prediabetes (blood glucose levels that are higher than normal,
but not yet high enough to be diagnosed as diabetes).
For individuals such as homemaker Audrey Koh, however, personal experience alone
suffices. The 49-year-old has been drinking Elo Water for the last six months and also
finished a cycle of soaking sessions for 14 straight days. "People who have not seen me for a
year or even six months and saw me recently remark that I look as though I have lost weight,"
she said, adding her complexion has improved, and body more toned.
Asked whether the price tag would deter her from continuing on another cycle of soaking
sessions or drinking Elo Water, she said the opportunity cost of being ill is higher than the
cost of water. Ms Koh added: "How do you place a price on health?
(Adapted for academic purposes: âHyflux dips toes into wellness, beauty market / Hyflux banks on
oxygenated water for consumer market,â by Andrea Soh, The Business Times, 6 September 2016.)

Analyse three (3) possible social and personal factors that can have an impact on a
consumerâs decision to purchase the Elo brand of oxygenated water for personal
consumption.
(30 marks)

EC250 Chapter Notes - Chapter 6: Nominal Interest Rate, Business Cycle, Inventory Investment

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