comparitive and absolute advantage

absolute advantage-one country has an absolute advantage over the other if it can produce same about of goods with fewer resourcs

comparative advantage- the production of a product can produce the product at a lower domestic opportunity cost than a trading partner

Terms of trade- the rate of exchange of two products is be determined through negotiation
Specialization and Trade

• Specialization based on comparative advantage improves global resource allocation.
• Specialization and trade - increase productivity and the standard of living within a nation.
• Because of specialization and trade, there will be a larger global output of goods and services.

Input and Output Approach

• Output problem - based on the most of an item producer can make if it specializes using a set amount of resources.
• Take B/A for comparative advantage and pick the highest amount for absolute advantage.
• Input problem approach -  based on the least resources producer needs to make a set amount of an item .
• Take A/B for comparative and pick lowest amount for absolute.

Foreign exchange market

Foreign exchange market

• A market in which various national currencies are exchanged for another
• Exchange rates: equilibrium prices in the markets

Two point

•  A competitive market:  real world foreign ecxchange market characterized by large numbers of buyers and sellers dealing in standardized products such as euro, yen, and dollar
•          Linkages to all domestic and foreign prices: Market price or exchange rate of a nation's currency is an unusual price that links all domestic prices with all foreign prices

Dollar-Yen Market

             U.S. firms exporting goods to Japan want payments in dollars, not yen

             The Japanese importers to those U.S. goods only possess yen, not dollars

            We then have a market in which "price" is in dollars and the "product" is yen

Depreciation and Appreciation

• Depreciation: the international value of the dollar has declined

             -When the dollar depreciates, demand increases and supply decreases

• Appreciation: the international value of the dollar has increased

            -When the dollar appreciates, demand decreases and supply increases

Balance of payments

Balance of Payments - the sum of all the transaction that takes place between its residents and the residents of all foreign nations.

Current Account - the US trade in currently produced goods and services.

• Export - credit (+)
• Import - debt (-)

A country's balance of trade on goods and services is the difference between the export and import of goods.

• Trade surplus = export > import.
• Trade deficit = export < import.

Official Reserves - the central banks of nations hold quantities of foreign currencies.

Balance of Payment Deficit and Surpluses - imbalance between current and capital accounts that causes a drawing down or building up of foreign currencies. 

Economic growth and productivity

Economic growth

• sustained increase in real GDP over time
• Sustained increase in real GDP per capital over time

Growth

• Leads to greater prosperity for society,lessens the burden of scarcity and increase the level of well being
• Conditions for growth
• rule of law
• sound and legal economic institutions
• economic freedom
• respect for private property
• political and economic stability
• willing to sacrifice current consumption
• saving
• Trade

Physical capital-product of investment (sensitive to interest rate and expected rate of return)

• Tools ,machinery and factories
• takes capital to make capital
• capital must be maintained

Technology and productivity

• More technology =increase productivity
• productivity-output per inut of input
• labor productivity-output per worker
• More productivity=economic growth

Human capital

• people are the most important resources
• education
• economic freedom
• private property
• incentive
• clean water and stable food
• access to technology

Obstacle to growth

• Economic and Political Instability – such as high inflation expectancy.
• No 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 – government deficits & debts increasing long term interest rates.
• Restrictions on free international trade.

Laffer curve and etc...

supply shock-rapid and significant increase in resources, Which causes the SRAS to shift resulting in a shift of the SRPC curve

• Could lead to stagflation-simultaneous increase in inflation and unemployment.

Disinflation-reduction in inflation from year to year which can be seen in the LRPC.

supply Side Economics and Reaganomics - tends to believe that the AS curve will determine level of inflation, unemployment, and economic growth.

• To increase economy - AS shifts -->.
• Companies benefit - AS.
• Consumers benefit - AD.
•  marginal tax rate - amount of tax paid on additional dollar of income.
• By reducing the marginal tax rate, it will encourage more people to work longer.High 

Laffer Curve 

• Tax Rates and Government Revenue have an inverse or a trade off relationship.
• High tax rate = Low government revenue.
• There is a U-shaped, because it always tries to maximizes government revenue.
• As tax rate increase from 0, tax revenue increases from 0 to some maximum number then they decline.

3 Criticisms of the Laffer Curve

• Where the economy is located on the curve is difficult to determine.
• Tax cuts also increase demand, which can fuel inflation and demand may exceed supply.
• Research state that tax rate impact people's incentive to

Phillips curve

Phillips curve- deals with inflation and unemployment


3 generalizations 

• inverse relationship between inflation and unemployment
• AS shock can cause both higher rates of inflation and unemployment
• there is no trade of between the two in the long run

Movement of short run Philips curve

• Increase in AD (Ig,C,G,Xn)-up and left along srpc
• Decrease in AD-down and right along SRPC
• Increase in AS- SRPC moves <--
• decrease in AS-SRPC moves -->

Long Run Phillips Curve

• vertical at full employment
• Major Assumptions:

            -More worker benefits create higher natural rate of unemployment and fewer worker benefits create lower natural rates of unemployment

            -LRPC shifts due to advances in technology (same as LRAS)

Misery Index

• Combination of Inflation and unemployment in a given year; single digit misery is good

Unit 5

Short run AS- Time too short for wages adjust to the price level

Nominal wages-The amount of money revived per hour,per day,per week.

Real wage- adjusted for inflation,taxes.


Long run as-time long enough for wages to adjust to the price level.

• Key assumptions
• wages in price-flexible
• changes in wages and price offset each other
• LRAS is represented by a verticle line

		PL	WL	Employment Level	Implications
Horizonatal orKeynesianRange	1	FIXED	FIXED	FLEXIBLE	Output depends upon changes in employment
IntermediateRange	2	FLEXIBLE	FIXED	FLEXIBLE	Output depends on changes in PL and employment
Vertical or Classical Range	3	FLEXIBLE	FIXED	FIXED	Output depends on changes in PL