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

monetary money

Monetary policy-controlled by the feds

• influencing the economy through changing and reserve wit influence te money supply and available credit

options of monetary policy

• Reserve requirement-% that set by the feds of the minimum of reserves a bank must have
• discount rate-banks borrow money from the federal reserves
• federal fund rate-banks loan out loans to each other
• OMO (open market operation)- security/bonds

Expansionary ( easy money)

• OMO- Buy bonds
• Discount rate- decreases
• federal fund rate- decreases
• require reserve ratio- decreases

Contractionary (tight money)

• OMO-Sell bonds
• Discount Rate- increases
• Fed fund rate- increases
• Required reserve ratio-increases

Helpful formulas
-Excess reserves (ER)=actual reserves (AR)- Required reserves (RR)
-Required reserves= amount of deposit x required reserve ratio
-Maximum amount a single bank can loan=the change in excess reserves caused by a deposit
-the money multiplier= 1/required reserve ratio
-total change in loans= amount a single bank can lend x money multiplier
-total change i the money supply= total change in loans + amount of fed action
-total change in the demand deposit= total change in loans+ any cash deposited

Multiple deposit expansion

Reserve requirement

• The fed requires banks to always have some money readily available to meet the customers need
• The amount set by the fed is the required reserve ratio
• Require reserve ratio-the percent of demand deposit that must not be loaned out
• Usually the required reserve ration is 10%

Money multiplier

• Money multiplier shows a change in demand deposit on loans and eventually the money supply
• 1/required reserve ratio
• Ex if the reserve ratio is 20% then the multiplier is 5 ( 1/.20=5)

3 types of multiple deposit expansion

• Type 1: calculate the initial change in excess reserves ( amount a single bank can loan from the initial deposit)
• Type 2:calculate the change in loans in the banking system
• Type 3: calculate the change in money supply

Example 1: Given a required reserve ratio of 20% assume the federal reserve purchases $100 million worth of US treasury securities on the open market from a primary security dealer. Determine the amount that a single bank can lend from this federal reserve purchase bonds.

• amount of new demand deposit - required reserve= initial change in excess reserve
• $100mill-(.2 X $100mill)
• $100mill-$20 mill= $ 80mill in er

Example 2: given a required reserve of 20% assume the federal reserve purchases $100 million worth of US treasury securities on the open market from a primary security dealer. Determine the maximum total change in loans the banking system from this federal reserve purchases of bonds.

• the inital change in excess reserves (money multiplier)=max change in loans
• $80mill(1/20%)
• $80mill (5)=$400 mill in new loans

Unit four money

1 Unit of money

• Medium of exchange-trade or barter
• unit of account-establishes economic worth
• store of value-money holds its value over a period of time

2 Type of money

• commodity-gets value from material that it is made of ( gold and silver coins)
• representative money-backed up by something tangible
• Fiat money-its money because the government said it was so

3 characteristics of money

• Durability-last through many transactions
• portability-able to transport it easily
• uniformity-Even (they look alike)
• divisibility-can divide bills into smaller units
• scarcity-might not have money at that time
• acceptability- accepted everywhere

M1 Money-75% of money in circulation

• Liquid-easily converted to cash
• consist of

               -currency-cash/coins
                -checkable/demand deposits-checking accounts
                -travelers checks

M2 Money-25% of money  in circulation

• consist of:

• -savings accounts
• market money accounts
• CD-certification of deposit 
• M1 money and deposits held by banks outside the U.S

• Assets=liabilities+net worth
• bank deposits are subjected to reserve requirement
• reserve ration=commercial banks requires reserves/commercial banks checkable deposits liabilities
• excess reserves= Actual reserves- requires reserves
• banks create money by lending excess reserves and destroy it by loan repayment. Purchasing bonds also creates money.

video notes

Unit 4 part 1

Money MKT
-types of money

• commodity money-a good that has another purpose. It can stand for money
• Representative Money-what every you use as currency represents a specific quantity of a purchased money. Ex: Backed by gold or silver.. when the value of the metal changes so does the money. It wont be stable
• Fiat money-not backed by metal. Backed up by the word of the government

-functions of money

• Medium of exchange- Medium ( substance through. witch are passed) Through money things happen.
• Store of value-put money away you expect it to be stable
• Unit of account-we think price=worth. If something cost more we think we are getting more for our money. We assume prices implies worth.

Unit 4 part 3

Graphs

 1 Axis

• Vertical- price that is paid to get money- interest rate
• Horizontal- Quantity money

2. Demand slopes down WHY?

• when price is high quantity demanded is low
• when price is low quantity demand is high
• LAW OF DEMAND
• when interest rate is low we have an incentive to borrow more

3. Supply of money is vertical WHY

• does not vary based on the interest rate. (Set by the feds)

Manipulation of the graph

• incentive for more money: increase the demand for money
• Upward pressure on interest rate
• Quantity is the same because supply is fixed (vertical)

2 ways to think about the money supply:

                1. In terms of quantity

    2. In terms of interest rates

Fed tries to stabilize interest rate, because if interest rate is unstable you can’t predict level of investment, consumer spending or manipulate aggregate demand

Unit 4 part 4

The fed: tools of Money policy

-Expansionary money ( easy money)

• RR- Lowering  puts more available money for loan
• Discount rate ( when the bank borrows money from fed)- Lowered: encourage borrowing
• Buy/sell bonds/securities- Buys bonds public gets the money. "BUY BONDS=BIG BUCKS"

-Contractionary money ( tight money)

• RR-Higher: less money to loan
• Discount rate: Higher: discourages borrowing
• Sell Bonds: feds takes the money witch means less for the people

Unit 4 part 7

Lon-able funds- money that is available in the banking system for people to borrow

GRaph

SLF - comes from the amount of money in banks. Dependent of savings

•  Government deficit in loanable funds market can shown two ways: increase in demand or decrease in supply.

Unit four part 8

• Bank creates money by making loans
• the feds control rr
• Multiplier: 1/RR
• EX: RR: 20%. The bank make a loan of $ 500. How much money total will be created? 
• 1/.2=5 X Loan=$2500
• Bob gets $500 -> Bank
•  Loan to Joe, $400 -> Bank
• Loan to Suzie $320 -> Bank

                                                 Add ALL potential loans ($2500)               *

Unit four part 9

• Change in supply of money is equivalent to change in price.
• Fisher Effect - interest and price level are connected. As interest goes up, price level also goes up. 
• Ex: 1% increase in interest = 1% increase in price level.

Fiscal policy

Fiscal Policy
-Fiscal Policy: changes in expenditures or tax revenues of the federal government
       2 tools of fiscal Policy:
                1) Taxes-government can increase or decrease 
                2) Spending-government can increase or decrease spending

Deficits, Surplus, and Debt
-Balanced Budget

•       Revenues = Expenditures

-Budget Deficit

•       Revenues < Expenditures

-Budget Surplus

•        Revenues > Expenditures

-Government Debt

•        Sum of all DEFICITS - Sum of all SURPLUSES

-Government must barrow money when it runs a budget deficit
       Barrows from:
                -Individuals 
                -Corporations
                -Financial Institutions
                -Foreign entities or foreign governments
Fiscal Policy Two Options
-Discretionary Fiscal Policy (action)

•        Expansionary fiscal policy-Think DEFICIT
•        Contractionary fiscal policy- Think SURPLUS

-Non-discretionary Fiscal Policy (NO action)

Discretionary v. Automatic Fiscal Policies
-Discretionary

•        Increasing or decreasing Government Spending / taxes in order to return the economy to full employment

-Automatic

•  transfer payments,unemployment, marginal tax rates

Contractionary v. Expansionary Fiscal Policy
-Contractionary fiscal policy: policy designed to DECREASE aggregate demand (AD)

•        Strategy for controlling inflation
•        Inflation countered with contractionary fiscal policy

                -Decrease government spending 
                -Increase taxes
-Expansionary fiscal policy: policy designed to increase aggregate demand (AD)

•       Strategy for increasing GDP, combating a recession, and reducing unemployment
•       Recession is countered with expansionary policy

                 -Increase government spending 
                 -Decrease taxes

Automatic or Built-In Stabilizers
-Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers
-Progressive Tax System

•       Average tax rate (tax revenue / GDP) RISES with GDP

-Proportional Tax System

•       Average tax rate remains constant as GDP changes

-Regressive Tax System

•       Average tax rate Falls with GDP

Investment

Investment demand /Interest rate

• money spent on expenditures
• New plants
• capital equipment
• technology
• New homes
• Inventories

Expected rate of returns
  - How does business make investment decisions?

• cost/benefit analysis

-How does business determine the benefits?

• expected rate of return

-How does Business count the cost?

• interest cost

- How does business determine the amount of investment they undertake

• compare expected rate of return to interest rate
• if expected> interest cost, Invest
• If expected< interest cost, don't invest

Real (r%) vs Nominal (i%) interest rate

-Nominal - observable rate of interest.

-Real - subtracts out inflation(π %) and is only known ex post facto.

• Real interest rate (r %)
• r % = i % - π %

downward sloping- when interest rates are high fewer investment are profitable,when interest rates are low more investments are profitable.

Shifts in investment demand

- cost of production l

  lower cost -->, higher cost <--

-Business tax

-technological changes

-stock of capital

-Expectation

classsical vs keynesian

consumption and savings

Disposable Income (DI) - amount of money after taxes/net incomes.

•  DI = gross income -taxes.
•  2 Choices : Spending/Consumption and Saving.

Consumption - household spending.

• The ability to consume is constrained by:

                 -the amount of DI.

               -the propensity to save.

• Do household consume if DI = 0?

             -autonomous consumption

              -dis-saving

• APC = (C / DI) = DI that is spent.

Saving - household not spending.

• The ability to save is constrained by:

             -the amount of DI.

             -the propensity to consume.

• Do household consume if DI = 0? No

• APS = (S / DI) = DI that is not spent.

APS & APC 

•  APS + APC = 1
•  1 - APS = APC 
•  1 - APC = APS 
•  APC > 1 .: Dissaving
• APS .: Dissaving

MPC & MPS

• Marginal propensity to consume.

             -change in C / change in DI

               -% of every extra dollars earned that is spent.

• Marginal propensity to save.

              -change in in S / change in in DI

               -% of every extra dollar earned that is saved.

• MPC + MPS = 1
• 1- MPC = MPS
• 1- MPS = MPC

Determinants of Consumption and Saving

•   wealth
•   expectations
•   household debts
•  taxes

Spending multiplier effect - an initial change in spending (C, Ig, G, Xn) causes a larger change in AD.

• Multiplier: change in AD/change in spending.
• Multiplier: change in AD/change in C, Xn, G, Ig.

  Why does this happen?
    . expenditures and income glow continuously which sets off a spending increase in the economy

Calculating the spending multiplier

•  Multiplier: 1 / 1-MPC
•  Multiplier: 1 / MPS

    . multipliers are (+) when there is an increase in spending & (-) when there is a decrease

Calculating the tax multiplier

•   -MPC / 1 - MPC
•   -MPC / MPS
•  if there is a tax cut then the multiplier is +, because now there is more money in the circular flow.