Question

Suppose you have invested in a new computer company whose profitability depends on two factors: (1) whether the U.S. Congress passes a tariff raising the cost of Japanese computers and (2) whether the U.S. economy grows slowly or quickly. What are the four mutually exclusive states of the world that you should be concerned about?

Short answer

The four mutually exclusive states of the world to be concerned about are: 1. Tariff Passed, Slow Economy; 2. Tariff Passed, Quick Economy; 3. No Tariff Passed, Slow Economy; 4. No Tariff Passed, Quick Economy.

Step-by-step solution

Identifying Factors

The exercise presents us two factors that may influence the profitability of the investment in a new computer company: (1) whether the U.S. Congress passes a tariff initiating the cost of Japanese computers, and (2) the pace of U.S. economy growth, which can either be slow or fast.

Formulating Scenarios

Different scenarios arise from the interaction of these factors. Starting first with the decision of the Congress, they might either pass the tariff or not. This results in two scenarios. But in each of these, the economy might either be growing slow or fast. Therefore, you have four different mutually exclusive states in total.

Listing All Possible Scenarios

Let's list the four mutually exclusive states: \n\n1. The US Congress passes the tariff and the US economy grows slowly. \n2. The US Congress passes the tariff and the US economy grows quickly. \n3. The US Congress doesn't pass the tariff and the US economy grows slowly. \n4. The US Congress doesn't pass the tariff and the US economy grows quickly.

Key concepts

Understanding Economic Factors

When discussing the intricacies of making an investment, understanding economic factors is crucial. Economic factors are the elements that impact the performance of industries and markets. These may include government policies, such as tariffs, market trends, the rate of economic growth, and industry health. In our exercise, the profitability of a new computer company is contingent upon two primary economic factors: government action on tariffs and the rate of economic growth.

In the case of tariffs, they can significantly alter the competitive landscape. If the US Congress were to pass a tariff on imported computers, for example, it could make foreign goods more expensive, potentially benefitting the domestic company if it faces competition from abroad. On the other hand, the pace of economic growth affects consumer spending and business investment. A rapidly growing economy may imply greater demand for computers, while slow growth could lead to cautious spending and reduced demand.

The Role of Economic Growth

Economic growth is a dynamic factor that can dramatically influence a company's success. It reflects the increase in the value of goods and services produced by an economy over time, typically measured through Gross Domestic Product (GDP) growth rates. High economic growth often translates into higher incomes, increased consumer spending, and business expansion, all of which can result in heightened demand for products.

The exercise improvement advice highlights the importance of considering whether the economy is growing slowly or quickly. In our exercise's context, swift economic growth could stimulate the sales of computers due to more robust consumer financial health, while slow growth might dampen sales as businesses and individuals tighten their belts.

Understanding Market Behavior During Economic Swings

Investment in a tech industry such as the computer sector typically involves speculating how the market will behave during different economic cycles. Thus, an investor should keep a keen eye on economic indicators to anticipate and respond to shifts in growth.

Impact of Government Tariffs

Government tariffs are taxes imposed on imported goods and services. They're used as a tool for trade policy to protect domestic industries from foreign competition and to generate revenue for the government. The imposition of tariffs can make foreign products more expensive and less attractive to consumers, thus providing an advantage to domestic producers.

In our exercise scenario, a tariff on Japanese computers could mean an increase in sales for the new US-based computer company due to decreased competition. However, tariffs can also trigger retaliation from other countries, potentially leading to a trade war that could affect multiple sectors of the economy.

Strategic Business Planning

Investors often have to navigate the uncertainties of government policies. When tariffs are involved, it's essential to analyze not only the immediate impact on competition but also to strategically plan for potential long-term repercussions on the global supply chain and the overall business climate.