Unit 7 Absolute and Comparative Advantage (5-11-16)

Unit 7

Absolute and Comparative Advantage

Absolute Advantage

• Individual- exists when a person can produce more of a certain good/service than someone else in the same amount of time (or can produce a good using the least amount of resources).

• National- exists when a country can produce more a good/service than another country can in the same time period.

Comparative Advantage
A person or a nation has a comparative advantage when it can produce the product at a lower domestic opportunity cost than can a trading partner.

         Examples of output problems
1.      Words per minute.
2.      Miles per gallons.
3.      Tons per acre
4.      Apples per tree
5.      Televisions produced per hour

         Examples of input problems
1.      Number of hours to do a job.
2.      Number of acres to feed a horse
3.      Number of gallons of paint to paint a house.

 Specialization and trade

•  Gains from trade are based on comparative advantage, not absolute advantage.

Unit 7 Mechanics of the Foreign Exchange (FOREX) [5-3-16]

Unit 7

Mechanics of the Foreign Exchange (FOREX)

•  The buying and selling of currency. 

•  Any transaction that occurs in the balance of payments necessitates foreign exchange.

•  The exchange rate (e) is determined in the foreign currency markets.

 Changes in exchange rates

•   Exchange rates (e) are a function of the supply and demand for currency. 

•   An increase in the supply of a currency will decrease the exchange rate of a currency. 

•   A decrease in supply of a currency will increase the exchange rate of a currency.

•   An increase in demand for a currency will increase the exchange rate of a currency.

•   A decrease in demand for a currency will decrease the exchange rate of a currency

Appreciation and depreciation

•        Appreciation of a currency occurs when the exchange rate of that currency increases. (e increases)
•        Depreciation of a currency occurs when the exchange rate of that currency decreases (e decreases)

Determinants of Exchange rate

1.      Consumer tastes (buyers taste)

2.      Relative income

3.      Relative price level

4.      Speculation

Exports and imports
The exchange rate is a determinant of both exports and imports.

·         Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper, thus reducing exports and increasing imports.

·         Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive, thus increasing exports and reducing imports.

As two currencies trade:
1.      One supply line will change; the other demand line will change.

2.      They will move in the same direction.

3.      One currency will appreciate, the other will depreciate.

Flexible rate
Based on the supply and demand of that currency versus the other currency. It is very sensitive to the business cycle and it provides options for investment.

Fixed rates
It is based on a countries willingness to distribute currency and to control the amount.

Unit 7 The Balance of Payments (4-27-16)

Unit 7

The Balance of Payments

·         Measures of money inflows and outflows between the united states and the rest of the world (ROW).

• Inflows are referred to as credits
• Outflows are referred to as debits

The balance of payment is divided into three accounts:
1.      Current account

2.      Capital/financial account

3.      Official reserves account

Double entry book keeping

Every transaction in the balance of payments is recorded twice in accordance

Current account

•  Balance of trade or Net exports

      -  Exports of goods/services- import of goods/services.
      -  Exports create a credit to the balance of payments.
      -  Imports create a debit to the balance of payments.

•  Net foreign income

      -   Income earned by the U.S. owned foreign assets
      -   Interest payments on U.S. owned foreign assets- Interest payments on German-owned U.S treasury bonds.

•  Net transfers (tend to be Unilateral).

      -    Foreign aid- a debit to the current account.
      -    Example- Mexican migrant worker sends money to family.

Capital / Financial Account

·         The balance of capital ownership.

·         Includes the purchase of both real and financial assets

•   Direct investment in the United States is a credit to the capital account.

-          For example the Toyota company in San Antonio.

• ·         Direct investment by United States firms/individuals in a foreign country are a debit to the capital account.

               - Intel factory construction in Germany

• ·         Purchase of foreign financial assets represents a Debit to the capital account. 

                -   Warren buffets buys stock in Petrochina.

• ·         Purchase of domestic financial assets by foreigners represents a credit to the capital account.

                -  The UAE sovereign wealth fund purchases a large stake in the NASDAQ.

 Relationship between current and capital account

·         The current account and the capital account should zero each other out.

·         That is….if the current account has a negative balance (deficit) then the capital account should then have a positive balance (surplus).

 Official reserves

•   The foreign currency holdings of the U.S. fed.

•   When there is a balance of payments surplus the fed accumulates foreign currency and debits the balance of payments.

•   When there is a balance of payments deficit, the fed depletes its reserves of foreign currency and credits the balance of payments.

Active v. passive official reserves

• The U.S. is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate.

• The People's Republic of China is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate w/ the United States.

Formulas

1.      Balance of trade:
-          Good exports + goods imports

2.      Balance on goods & services:
-          Goods exports + service exports + goods imports + service imports.

3.      Current Account:
-          Balance on goods and services + net investment + net transfers

4.      Capital account:
-          Foreign purchases + domestic purchases.

Unit 6 Economic Growth and Productivity (4-11-16)

Unit 6

Economic Growth and Productivity

Economic Growth
-sustained increase in real GDP over time as well as per capita over time

-growth leads to greater prosperity for society

-lessons burden of scarcity

credit to:http://lexxxeconomics.blogspot.com/2009_10_01_archive.html

Conditions for Growth

•Rule of Law

•Sound Legal and Economic Institutions

•Economic Freedom

•Respect for Private Property

•Political & Economic Stability

–Low Inflationary Expectations

•Willingness to sacrifice current consumption in order to grow

•Saving

•Trade

Physical capital

-tools, machinery, and factories

-physical capital is a product of investment

-it takes capital to make capital

Technology and Productivity

-research and development innovation and invention yield increase in tech

-more tech= more productivity

-more productivity=economic growth

Human Capital

-people are a country's most important resource

-education

-economic freedom

-incentives

-clean water

-stable food supply

Hindrances to growth

-economic and political stability

-absence of the rule of law

-diminished private property rights

-negative incentives

-lack of savings

excess current consumption

-failure to maintain existing capital

-crowding out of investment 

Unit 5 The Phillips Curve (4-8-16) & Inflation (4-11-16)

Unit 5

The Phillips Curve & Inflation

side note - misery index

The Long-Run Phillips Curve

• Measures unemployment and inflation.

• Note: Natural rate of unemployment is held constant.

• Because the Long-Run Phillips Curve exist at the natural rate of unemployment, structural changes in the economy that affect unemployment will also cause the LRPC to shift.

• Increases in unemployment will shift LRPC to the right
• Decreases in unemployment will shift LRPC to the left.

The Short-Run Phillips Curve

• SRPC has a trade-off between inflation and unemployment (when one increases the other decreases). (inverse relationship)

• LRPC: There is no tradeoff between inflation and unemployment.

          1. The economy produces at the full employment output level.

          2.It is represented by a vertical line.

          3. It occurs at the natural rate of unemployment.

• Natural unemployment rate (NRU)= Frictional +Structural +Seasonal

• Full employment = 4-5%

• LRAS shifters also shifts LRPC.

• The major LRPC assumption is that more worker benefits create higher natural rates and fewer worker benefits create lower natural rates.

The misery index:  A combination of inflation and unemployment in any given year.

• Single digit misery is good.

Inflation:

It is the general rise in the price level

Deflation:

A general decline in the price level

Disinflation:

Decrease in the rate of inflation over time

Stagflation:

Unemployment and inflation increasing at the same time.

Unit 5 Extending the Analysis of Aggregate Supply (4-7-16)

Unit 5

Extending the Analysis of AS

In macroeconomics, this is the period in which wages (and other input prices) remain fixed as price level increases or decreases.

 Long Run Aggregate Supply

• Period of time in which wages have become fully responsive to changes in price level.

Effects over Short-Run

• In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant.

• In the long run, wages will adjust to the price level and previous output levels will adjust accordingly.

Equilibrium in the Extended Model

• The long run AS Curve is represented with a vertical line at full employment level of real GDP.

Demand Pull Inflation

• Demand pull- prices increases based on an increase in aggregate demand.

• In the short run, demand pull will drive up prices, and increase production.

• In the long run, increases in aggregate demand will eventually return to previous levels.

Cost push & the Extended Model

• Cost push inflation arises from factors that will increase per unit costs such as increases in the price of a key resource.

Dilemma for the Government

• In an effort to fight cost-push, the government can react.

• Action such as spending by the government could begin an inflationary spiral.

• No action however could lead to a recession by keeping production and employment levels declining.