Unit 7: Comparative Advantage 5/10/17

Specialization: Individuals and countries can be made better off if they will produce in what they have a comparative advantage and then trade with others for whatever else they want/need.

Absolute Advantage:The producer that can produce the most output or requires the least amount of inputs (resources)

Comparative Advantage: The producer with the lowest opportunity cost.

Countries should trade if they have a relatively lower opportunity cost.
- They should specialize in the good that is "cheaper" for them to produce.

Input vs. Output:
- Output problem presents the data as products produced given a set of resources (ex: # of pens produced)
- Input problem presents the data as amount of resources needed to produce a fixed amount of output (ex: # of labor hours to produce 1 bushel)
- When identifying absolute advantage, input problems change the scenario from who can produce the most to who can produce a given product with the least amount of resources.


VIDEO:

Unit 7: Mechanics of foreign exchange (FOREX) 5/8/17

- 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
- The exchange rate is the price of a currency

Changes in Exchange Rates:
- Exchange rates (e) are a function of the supply and demand for currency
- An increase in 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 of a currency will increase the exchange rate of a currency.
- A decrease in demand of 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
- 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:
- 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


VIDEO:

Unit 7: The Balance of Payments 5/4/17

Balance of Payments: Measure of money 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

The Balance of Payments is divided into 3 accounts:
1) Current Account
2) Capital Financial Account
3) Official Reserves Account

Current Account:
Balance of Trade (Net Exports)
- Exports (-) Imports
- Exports create a credit to the balance of payments
- Imports create a debit to the balance of payments

Net Foreign Income:
-Income earned by U.S owned foreign assets - Income paid to foreign held U.S assets.

Net Transfers (tend to be unilateral):
Foreign Aid --> a debit to the current account

Capital/Financial Account:
- The balance of capital ownership.
- Includes the purchase of both real and financial assets.
- Direct investment in the U.S is a credit to the capital account.
- Direct investment by U.S firms/individuals in a foreign country are debits to the capital account.
- Purchase of foreign financial assets represents a debit to the capital account.
- Purchase of domestic financial assets by foreigners represents a credit to the capital account.

Official Reserves:
- Foreign currency holdings of U.S federal reserve system
- Balance of payments surplus- Fed accumulates foreign currency and debits the balance of payment
- Balance of payments deficit- Fed depletes its reserves of foreign currency and credits the balance of payment
- Official reserves zero out the balance of payments

VIDEO:



   

Unit 5: Supply-Side Economics 4/24/17

Supply-Side Economics: They manipulate aggregate supply by enacting policies designed to stimulate incentives to work, save, and invest.
Ex: Tax cuts


Laffer Curve: Theoretical relationship between tax rate and government revenues.

Criticisms of the Laffer Curve:

1) Impossible evidence suggests that the impact of tax rates on incentives to work, save, and invest are small.

2) Tax cuts also increase demand which can fuel inflation.

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




VIDEO:

Unit 5: The Phillips Curve 4/19/17

Phillips Curve: Inverse relationship between inflation and unemployment. There is no trade-off.
- Each point on the Phillip's curve correspond to a different level of output.


Long Run Phillips Curve:

-Occurs at the natural rate of unemployment
-Represented by a vertical line
-No trade-off between unemployment and inflation, in the long run because the economy produces at the full employment level.
-LR Phillips curve will only shift if the LRAS shifts
-Increase in Un will shift LRPC -->
-Decrease in Un will shift LRPC <--

Natural Rate of Unemployment = Frictional, Seasonal, Structural Unemployment




Short- Run Phillips Curve:

-Since wages are sticky, inflation changes moves the points of the SRPC.
-If inflation persists and the expected rate of inflation rises then the entire SPRC moves upward.

Stagflation: Unemployment and inflation simultaneously rises.



Supply Shocks: Rapid and significant increases in resources costs.
-If inflation expectations drop due to new technology or efficiency, then the SRPC will move downward.

Misery Index: Combination of inflation and unemployment in any given year.
-Single digit misery is good.