part 3 d – 1 v3.0 the iia’s cia learning system tm section topics 1.impact of government...
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Part 3 D – 1V3.0
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Section Topics
1. Impact of government legislation and regulation on business
2. Trade legislation and regulations
3. Taxation schemes 4. Contracts 5. Nature and rules
of legal evidence 6. Key economic
indicators
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Governments affect businesses through economic and trade policies, taxes, subsidies, legislation, and regulations in order to ensure stability and equality in markets and to advance agendas.
Impact of Government Legislation and Regulation
Common government interventions:
Antitrust policies
Employment laws
Financial and security
laws
Market controls
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Direct Market Controls
Price Floors Price Ceilings RationingLegal minimum on price of goods and services:
• Minimum wage• Agricultural prices
supports or subsidies
Legal maximum on price of goods and services:
• Rent controls• Credit card interest
rate ceilings
Government control of the quantity supplied of a specific item.
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For Enforcement Against Enforcement• Monopolies and oligopolies are
inefficient, produce excess profits.
• Price fixing and collusion serve no social purpose.
• Antitrust laws ban deceptive or unfair practices, help consumers make educated decisions.
• Trust busting increases competition.
• Big is not necessarily bad.
• Antitrust legislation penalizes successful, efficient organizations that make better and/or cheaper products. Regulating these firms to enhance competition is counterproductive.
• International markets favor large, integrated organizations. Other governments support such firms.
Arguments For and Against Antitrust Enforcement
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Major US Antitrust Legislation
Sherman Act of 1890: Cornerstone of antitrust legislation; declares monopolies in restraint of interstate trade illegal.Clayton Act of 1914: Prohibits specific practices that lead to the creation of monopolies.
Federal Trade Commission Act of 1914: Created the Federal Trade Commission, which enforces antitrust laws.
Robinson-Patman Act of 1936: Makes it illegal to discriminate in price to different purchasers of same item.
Wheeler-Lea Act of 1938: Expanded FTC’s responsibilities concerning false advertising and product claims.
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International Laws Regulating Competition
Competition Act (Canada): Oldest antitrust statute in the western world; covers all aspects of competition in Canada, from cartels to merger review, and applies to nearly every business in Canada.
European Community Treaty (EU): Articles 81 and 82 prohibit cartels and other “concerted practices” that distort competition and the willful acquisition or maintenance of monopoly power; new 2004 regulations strengthen the EU’s Competition Commission and allow the EU to block mergers that would lessen competition.
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Law Description
1935 act that protects rights of workers to organize, create unions, and bargain collectively.
1938 act that established a minimum wage for certain classes of workers.
1964 act that prohibits discrimination in the workplace.
1990 act that establishes rights for disabled individuals.
1993 act that guarantees rights to employees eligible for parental and family leave.
US Employee and Human Rights Laws:Fill in the blanks
National Labor Relations Act
Title VII of the Civil Rights Act
Fair Labor Standards Act
Americans with Disabilities Act
Family and Medical Leave Act
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Law Description
Consolidates all protections of Americans with Disabilities Act, Age Discrimination in Employment Act, and Title VII of Civil Rights Act. (Canada)
Provides right to challenge statutory provisions or government programs that discriminate or fail to afford equal treatment. (Canada)
Protects fundamental rights such as gender and racial equality, employment equality, nondiscrimination, and data privacy. (EU)
International Employee and Human Rights Laws:Fill in the blanks
Ontario Human Rights Code
Treaty of Amsterdam
Charter of Rights and Freedoms
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US Legislation Affecting Financial Systems Controls and Security Issues
Securities and Exchange Act of 1934: Gave SEC power and responsibility for setting accounting and reporting standards.
US RICO Act of 1970: Anti-racketeering legislation.
US PATRIOT Act of 2001: Expanded the authority of US law enforcement for the stated purpose of fighting terrorism in the US and abroad.
Sarbanes-Oxley Act of 2002: Provides oversight of management and auditor abuses in reporting and disclosing financial information.
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International Laws Affecting Security Issues
Anti-terrorism Act of 2001 (Canada): Defines terrorism and makes it a punishable offense within Canada’s Criminal Code.
Treaty of Amsterdam (EU): Outlines reforms to the common foreign security policy that establishes anti-terrorism policies and encourages cooperation to safeguard security in Europe.
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Theory of Comparative Advantage
Country X Country Y
Imports bananas from Country Y because growing them would cost too much.
Exports bananas because growing them is cheap. Has a comparative advantage in growing bananas.
Exports tractors made in specialized factories. Has a comparative advantage in making tractors.
Imports tractors from Country X because making them would cost too much.
Differences in opportunity cost and comparative advantage create the gains from trade.
Opportunity cost of two producers
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Which of the following trade barriers impose excise taxes on imported goods?
A. Tariffs
B. Import quotas
C. Nontariff trade barriers
D. Dumping
Answer: A. Tariffs are imposed to create national revenues or to protect specific industries from competition.
Discussion Question
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• Imported products become more expensive and imports drop.• Domestic producers sell more products if demand remains the
same.• Consumers pay higher prices since domestic prices rise
against increased demand.• Domestic producers can produce more units at the same cost
and sell at a higher price.• Income is transferred to the government from consumers
through tariff revenues.• Inefficient industries expand and resources are shifted away
from industries that may have a better comparative advantage internationally.
Impact of Tariffs and Quotas
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Supporting Free Trade Supporting Protectionism• Facilitates maximization of the
world’s resources and brings a higher income level for all.
• Promotes competition and prevents monopolies.
• Increases the variety of available goods.
• Lowers costs through economies of scale.
• Enhances the flow of ideas and facilitates the spread of technology.
• International trade destroys domestic jobs and gives jobs to foreign workers.
• Firms don’t all play by the same rules and get unfair competitive advantage by paying workers less and not enacting pollution control laws.
• Strong domestic industries are vital for national security.
• New industries need temporary trade restrictions at the start.
Arguments Supporting Free Trade and Protectionism
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Agreement Description
Sets forth binding tariffs between member countries, which generally means countries cannot raise their tariffs from the agreed-upon levels; continuing trade rounds negotiate tariff reductions.
Administers trade agreements, provides a forum for negotiations, and handles disputes between trading partners.
Lowered trade barriers among the US, Mexico, and Canada in 1993, making this the largest geographical free trade zone in the world.
Customs and economic union of 27 independent, democratic European countries supporting free trade and fixed exchange rates.
International Trade Agreements:Fill in the blanks
GATT
NAFTA
WTO
EU
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International Financial Organizations
World Bank
Transnational corporations
International Monetary
Fund
European Investment
Bank
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Which of the following is true of floating exchange rate systems?
A. They establish clear rules for long-termviability.
B. They do not diminish trade growth.
C. They resolve payment imbalances amongnations.
D. They do not result in volatile exchange rates.
Answer: B. These systems encourage trade growth but can result in volatile exchange rates.
Discussion Question
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Tax Classifications
Progressive Proportional Regressive
High-income taxpayers pay a larger fraction of income.
Low-income taxpayers pay a larger fraction of income.
High- and low- income taxpayers pay the same fraction of income.
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• Payroll tax: levied directly on wages and salaries; second most important source of federal revenue.
• Corporate income tax: levied on accounting profits of organizations.
• Sales tax: percentage of the amount paid for goods and services; most important source of revenue for states.
• Use tax: collected for a specific need like a gas tax levied to maintain roads.
• Value-added tax (VAT): equivalent of salestax on any action creating value.
Types of Taxes
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• Property tax: based on value of taxable property; important source of local government funding.
• Ad valorem tax: tax using base value of item.
• Capital gains tax: levied on the profit released upon sale of a capital asset.
• Excise tax: levied on a particular commodity such as liquor; based on quantity ratherthan value.
Types of Taxes
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Which of the following is true of transfer pricing fortaxation?A. It allows firms to shift income to divisions in lower-tax
countries.
B. It is a critical part of a domestic tax minimization strategy.
C. Firms have total control in setting prices.
D. It raises a firm’s worldwide tax obligations.
Answer: A. Transfer pricing lowers a firm’s worldwide tax obligations.
Discussion Question
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Element Description
Express or implied agreement; must be evidence that parties understand and agree to contract obligations.
Something of value must be exchanged by both parties, such as cash, goods, or a promise to do something.
Parties must have the capacity to understand the terms of the contract.
The contract must have a lawful purpose.
Parties must have an equal right to remedy a breach of terms by the other party.
Contract Elements:Fill in the blanks
Mutual agreement
Competent parties
Consideration
Proper subject matter
Mutual right to remedy
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Types of Common Contracts
Fixed Price Cost Reimbursement • Price agreed to up front.
• Includes price adjustment and re-pricing provisions.
• Includes performance incentives.
• Specifies level of effort.
• Pays costs within a pre-determined ceiling.
• Requires only contractor’s “best efforts.”
• Appropriate when a fixed price cannot be accurately determined.
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Evaluating Contracts
When reviewing contracts for risks, weaknesses, and control issues, check items such as:
• Performance measurement methodology, project reporting, and work acceptance.
• Audit rights.
• Change orders, cost accounting, billing, insurance coverage, and substantial completion terms.
• Documentation requirements.
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Evidence Type Description
Includes physical objects such as clothing, weapons, tools, machines, photographs, maps, and models.
Representation of an object, such as photos, x-rays, movies, and maps.
Result of an experiment conducted outside or inside the court under circumstances similar to the case.
Most common type of trial evidence; includes written instruments like checks, receipts, and invoices.
When witnesses are called on to testify about all types of physical evidence, events, and facts.
Categories of Evidence:Fill in the blanks
Physical
Experimental
Demonstrative
Documentary
Testimony
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Evidence Type Description
Increasingly used, in the form of e-mail messages, digital photographs, spreadsheets, and databases.
Produced by expert scientific techniques such as experiments, chemical evaluation, and other tests.
Of an indirect nature that implies the existence of the main fact but doesn’t prove it; includes fingerprints and DNA evidence.
Out-of-court statement offered to prove the truth of a matter; typically inadmissible except for exceptions including business records and police statements.
Categories of Evidence:Fill in the blanks
Digital or electronic
Circumstantial
Scientific
Hearsay
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Which of the following is the highest quality, most persuasive audit evidence?
A. Statistical samples
B. Manufacturer’s own product quality report
C. Employee testimonials
D. Firm’s own inventory estimate
Answer: A. Statistical samples are more persuasive than nonstatistical samples.
Discussion Question
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Reinforcing Activity 3-10Part 3, Section D, Topic 5
Nature and Rules of Legal Evidence
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Economic Cycles
Peak Peak
Recession Recovery
Trough
Time
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Inflation is the decrease in the purchasing power ofmoney and the increase in the price level for goodsand services.
It is measured in two steps:• Calculate the average level of all prices using indices like
the CPI.• Calculate changes in price level over time.
Inflation
This Year's Index Last Year's IndexRate of Inflation =
Last Year's Index
Inflation Calculation
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Effects of High Inflation
Multiplier Effect
Money spent
Income created
Increases velocity of money and raises
demand
Increases employment and income
Prices rise
Demand falls
Multiplier effect short-circuited
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Effects of High Inflation
Rising prices
Declining exports, consumer
spending, and business growth
Demand-pull inflation:
Increase in aggregate demand increases prices.
Cost-push inflation:
Increase in production costs reduces supply and increases prices.
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Types of Unemployment
Frictional unemployment: Short-duration unemployment caused by the normal workings of the labor market such as temporary layoffs and workers changing jobs.
Structural unemployment: Type of demand doesn’t match the available labor force (too many computer programmers or auto workers) and is caused by changes in the overall economy such as population and technology.
Cyclical unemployment: Caused by ups and downs in the business cycle, specifically by a lack of demand for labor.
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An increase in real GDP over a period of time expressed as an overall increase in GDP or the increase in real GDP per capita.
Elements of economic growth• Physical capital: Assets must be available with which to produce
goods and services and to make workers more productive.
• Technological knowledge: Technological improvements tend to increase productivity.
• Human capital: Labor quality is higher when the workforce has skills and knowledge acquired through education, training, and experience.
• Natural resources: Renewable and nonrenewable resources can impact standards of living and productivity around the world.
Economic Growth
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Demand-side economic policies attempt to increase or decrease demand by
A. creating incentives for business to expand.
B. deregulating industries.
C. lowering taxes.
D. decreasing government spending.
Answer: C. Lowering taxes gives consumers more take-home pay, causing them to spend more.
Discussion Question
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Gross Domestic Product (GDP)The total value of all goods and services produced during the year.
Households
Businesses
Markets for Production
Factors
Markets for Goods and
Services
Income = GDP
Wages, rent, and profit = GDP
Flow of goods and services
Flow of dollars
Spending = GDP
Revenue = GDP
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Calculating the GDP
Expenditures approach:
Household Expenditures
+ Business Expenditures
+ Government Purchases
+ Foreign Expenditures
= GDP
Income approach: Wages
+ Rents
+ Interest
+ Profits
+ Nonincome Charges
GNP
+ Net Foreign Income
= GDP
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Types of Economic Indicators
Coincident
Changes withthe economy:
• GDP
• Manufacturing and trade sales
• Industrial production
• Personal income
Lagging
Changes afterthe economy:
• Unemployment rate
• Bank prime rate
• Outstanding bank loans
• Unemployment duration
Changes aheadof the economy:
• Building permits
• Money supply
• Stock prices
• Unemployment claims
Leading
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Indicator + for GDP – for GDP
Unemployment claims Decrease Increase
Stock market prices Increase Decrease
Housing starts/building permits Increase Decrease
Money supply Increase Decrease
Inventory Decrease Increase
Industrial production Increase Decrease
New orders for consumer goods Increase Decrease
Leading Economic Indicators
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Which of the following is the major task of the Federal Reserve Board?
A. Acting as fiscal agent for the government
B. Providing a system for check collection
C. Controlling the money supply
D. Supervising member banks
Answer: C. The tools the Fed uses to control the money supply can have powerful effects on the economy.
Discussion Question
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Tools of U.S. Monetary Policy
Changing reserve requirements: Increasing or decreasing the minimum amount of resources that banks must hold against deposits. This has a significant impact on the money supply and is a tool of last resort for monetary controls.
Changing the discount rate: Increasing or decreasing the interest rate on loans the Fed makes to commercial banks. This has a minimal effect on the economy, and the Fed wants commercial banks to consider it the lender of last resort.
Conducting open-market operations: The Fed buys or sells government securities (bonds, notes, bills) in the open market from the public. This is the most frequently used monetary control.
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Strengths Weaknesses• Can be altered relatively quickly
compared to fiscal policy, which requires legislation.
• Is immune to interference from Congress and is less influenced by political consequences.
• Is generally more conservative than fiscal policy.
• Control of money supply can be unpredictable due to changes in banking regulations.
• Fed actions may not have desired consequences since it can’t control banks and individual behavior.
• Uncertainty and time lags create problems in implementing policy.
• Cannot force an expansion of the money supply; cannot force the public to borrow money from banks.
• Monetary policy may be subordinated to fiscal policy.
Strengths and Weaknesses of US Monetary Policy
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Questions?
End of Section D
Part 3, Section D