Unit VII (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 o a good/ service than another county can in the same time period.

• Comparative Advantage:

-A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner.

                                       

• Specialization and Trade:

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

• Examples of Output Problem:

- per acre 

-miles per gallon

-word per minute

-apple per tree

-television produced per hour

• Examples of Input Problems:

-number of hours to do a job

-number of acres to feed a horse

-number of gallon of paint to paint a house

Unit VII (Foreign Exchange)

• Foreign Exchange:

-  Buying and selling of currency-Any transactions that occurs in the balance of payments necessitates foreign exchange-Exchange Rate (ex): is determined in the foreign currency markets

• Changes in Exchange Rates:

-Exchange rates (e) are a function of supply and demand for currency- an increase in the supply of a currency- a decrease in supply of a currency will increase the exchange rate of currency- increase in demand for currency will increase the exchange rate of currency- decrease in demand for a currency will decrease the exchange rate of currency
Appreciation and Depreciation:·         Appreciation of currency occurs when exchange rate of that currency increases (e^)
·         Depreciation of a currency occurs when the exchange rate of that currency decreases

• Exchange Rate Determinants:

-Consumer tastes-Relative income-Relative price level-Speculation
-Exports and Imports:·         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

• Floating/ Flexible Rates:

Depends upon supply and demand of that currency vs. other currenciesVery sensitive to business cycle / provide options for investments
Fixed Rates:Based on a country's willingness to distribute currency and to control the amount
As two currencies trade:1.    One supply line will ∆, the other demand line will ∆.
2.    They will move in the same direction
3.    One currency will appreciate, the other will depreciate

Unit V( Balance of Payments)

• Definition: Measure of many inflows and outflows between the U.S and the rest of the world (ROW)

Inflows are referred to as CREDITS
Outflows are referred to as DEBITS 
Balanced of payments is 8 into 3 accounts
-current
-capital/financial
-official reserves

• Current Account

Balance of trade or net exports
-Exports of goods/services.
-Exports create a credit to balance of payments.
-Imports create a debit to the balance of payments. 
-Net foreign income
-Income earned by U.S foreign held U.S assets.
-Ex: interest payments on U.S owned Brazilian bonds-interest payments on German owned U.S Treasury bonds
-Net transfers (Tend to be unilateral)
-Foreign aid-debit to the current account
Ex: Mexican migrant workers send money to their families in Mexico.

• Capital/Financial Account

-Balance of capital ownership 
-includes purchase of both real and financial assets.
-Direct investment in the U.S is a credit to the capital account.
-Ex: Toyota Factory in San Antonio
-Direct investment by the U.S firms/ individuals in a foreign country are debits to the capital account. 
-Ex: Wareen Buffet by stock in Perochina 
Purchase of domestic financial assets by foreigners represents a credit to the capital account.
-United Arab Emirates \wealth funds purchases a large state in the NASPAQ 

• Relationship between current and capital account

-Remember double entry bookkeeping.

Current account and capital account should zero each other out. 

-That is if current account has a negative balance (deficit), then the capital account should then have a positive balance (Surplus)

• Official Reserves

 Foreign currency holdings of the U.S Federal Reserve System 

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. 

Official reserves zero the balance of payments. 

• Active V. Passive Official Reserves

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

• Balance of Trade

Goods + goods

Exports  Inputs

• Balance on goods and serves

Goods + Services + Goods + service

Exports  Exports     Inputs     Inputs

• Current Account

Balance on goods and services + Net investments + net transfer

• Capital Account

Foreign Purchase + domestic purchase.

 

Unit V (Extending the Analysis of AS)

• Short Run Aggregate Supply:

-Period in which wages and other input prices remains fixed as price level increase or decrease.

• Long Run Aggregate Supply:

-Period of time in which wages have become fully responsive to change in price level.

• Effects over short-run:

-In short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increase 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 extended model means the inclusion of both the short run and long run AS curves.

The long run AS curve is representative with a vertical line.

Demand pull inflation in the AS model.

Demand pull : prices increase based on the increase in AB

In Short run, demand pull will drive up prices and increase production.

In long run, increase in AB will eventually return to previous level. 

• Cost Push and the Extended Model:

cost-push arises from factors that will increase per unit cost such as increase in the price of a key resource. 

Short run shifts left. What is important is that in this case, it is the cause of price level increase, not the effect. 

• Dilemma for the Government:

In an effort to fight cost-push. The government can react in two different ways.

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

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

• The Long-Run Phillips Curve:

Natural rate of unemployment is held constant.

Because the Long Run Phillips curve exists at the natural rate of unemployment (UN) Structural changes in the economy that UN will also cause the Long-Run Phillips Curve to shift.

Increase in UN will shift Long-Run Phillips Curve right.

Decrease in UN will shift Long-Run Phillips Curve left.

• Short Run Phillips Curve:

Trade of between inflation and unemployment.

• Long Run Phillips Curve:

NO trade of between inflation and unemployment in the long run.

Occurs at natural rate of unemployment.

Represented by vertical line.

Long Run Phillips Curve will shift if the LRAS shifts.

Natural rate of unemployment is equal to frictional +structural + seasonal unemployment.

Maj LRPC assumption is that more worker benefits creates higher natural rates and fewer worker benefits creates lower natural rates. 

Supply Shock: Rapid and significant increase in resource cost, which causes SRAS curve to shift.

-Most likely shift to left and SRPC will shift right. 

Misery Intex: combo of inflation and unemployment in any given year.

Single digit misery is good. 

• Reaganomics/supply side economics 

Show change in AS not in AD, which determines the level of inflation, unemployment notes and economy growth.

Supply side economists, policies that promote GDP growth by arguing that high marginal tax votes along with the current system of transfer payments : Unemployment compensation welfare programs provide disincentive to work, invest, innovate and undertake entrepreneurial ventures. 

Low marginal tax rates induce more work, thus AS increase. 

-also makes leisure more expensive and work more attractive. 

• Incentives to save and invest: 

1) High marginal tax rates reduce the rewards for saving and investment.

2) Consumption might increase, but investments depend upon saving.

3) Lower marginal tax rates encourage savings and investing. 

• Laffer Curve:

Theoretical relationship between tax rates and government revenue. 

-As tax rates increase from (0) tax revenues increase from 0 to some max level and then declines. 

• Criticism of Laffer Curve:

Research suggests that the impact of the tax rates on incentives tow work, save, and invest are small.

Tax cuts increase demand, which can fuel inflation and demand may exceed supply.

Where the economy is actually located on the curve is difficult to determine. 

UnitI V (withdrawals and banking system)

• When a customer deposits cash or withdraws cash from their demand deposit, it has NO EFFECT on MONEY SUPPLY 

* It only changes
1. The composition of money
2. Excess reserves
3. Required reserves 

• Single bank (Chase) 

- can only loan money from excess reserves 

• Banking system (Chase, Wells Fargo, BOA, Fidelity)  

- ER x Multiplier (also equals total money supply) 
FED- When the FED buys or sells bonds, ED is created 
200 x Multiplier 

Monetary Policy

Unit 4 (Money & Banking / Monetary Policy Summaries)

Part 1: There are three types of money: commodity, representative, and fiat. Commodity money is a good that has other purposes other than money (i.e a farm animal). Representative money is money backed by something tangible (i.e gold coins). Fiat Money is money that has value because the Government says so. The three functions of money are: medium of exchange, store of value, and unit of account. Medium of exchange simply means we get what we pay for with money as a currency. Money is used because it has a store value, its worth stay stable fits is saved. Money is a unit of account, we use it to determine worth. 

Part 3: In money market graphs Demand slopes downward as it did in the supply and demand graphs because price and demand have an inverse relationship. The x-axis is labeled interest rates and the y-axis is labeled quantity. The supply of money is vertical because it does not vary based on the interest rate and it is fixed by the Fed. Certain factors that can shift the Demand is if there was an incentive to want more money via loans and etc. If people borrowing and spending more money, then the Demand will shift right. In effect it would put upward pressure on the interest rate. If the Fed wants to lower the interest rates in certain times such as an recession, they would in crease the money supply. 

Part 4: The Fed's tools of monetary policy are discount rates,  required reserves, and buy/sell government bonds and securities. In certain cases the Fed will increase or decrease the tools. If the Fed wants to expand the money supply they would decrease RR, buy bonds, and decrease discount rates. While, in an effort to contract the money supply the FED would increase the RR, increase, discount rates, and sell bonds. Reducing "interest rates" basically means buying or selling bonds to put downward or upward pressure on the Federal Fund Rate.

Part 7: On the loanable funds graph has the same axes as the Money Market graphs. Demand for loadable funds is downward sloping because when interest rates are lower, people demand more money and vice versa. Supply is upward sloping and it also dependent on savings.Savings is a positive factor in this market because the more people save, the more banks will have available. In order to shift the Supply curve left or right there must be an incentive or an lack of a incentive for people to save.  The money market and loanable funds are connected, loanable funds is the source of money for the money market. 

Part 8: Banks create money by making loans. Required Reserves are used as a tool to create money via loans, the RR takes a certain percentage out of deposits. Another way money is created is multiple deposit expansion. With one initial deposit from one person, the bank can loan a certain amount to another customer which they can put in their account, there is ann accumulation of money being circulated and created. 

Part 9: The money market, loanable funds market, and AD/AS market have affects on each other, The money market is where the government gets the money, the demand for loans increase for another source of money(government spending), and the AD increases because government spending is a determinant for the AS/AD market. The equation of exchange is MV=PQ can be used to explain the relationship, as price levels increase the interest rates increase. This can be explained by the "fisher effect." It ultimately means that there is a 1:1 ratio.