Unit 7: Absolute and comparative advantage

May 10, 2016

Absolute advantage

• individual- exists when a person can produce more of a certain good/ service than someone else in the same amount of time.
• national- exists when a country can produce more of a good/service than another country can in the same time period.

Comparative advantage

• a person or a nation has a comparative advantage in the production of a product when to can produce the product ONLY when lower domestic opportunity cost than can a trading partner.
• EX. output- tons per acre, miles per gallon, words per minute, tv's produced per hour.
• EX. input- number of hours to do a job, numbers of acres to feed a horse, 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 Lets talk about FOREX

April 28,2016
Mechanics of federal foreign exchange

• The buying and seeking of currency.
• any transaction that occurs in the balance of payments necessities foreign exchange.
• the exchange rate is determined in the foreign currency markets.

Change in exchange rates

• exchange rates are a function of the supply and demand for currency.
• an increase in the supply of currency will increase the exchange rate of currency.

1. decrease in supply of currency will go up
2. an increase in demand for currency will go up
3. a decrease in demand for currency will go down

appreciation and depreciation

• appreciation of currency occurs when the exchange rate of currency increases.
• depreciation occurs when the exchange rate decreases.

exchange rate determinants

• consumer trades
• relative income
• relative price level
• speculation

exports and imports

• The exchange rate is a determinant of both exports and imports
• appreciation causes American goods to be relatively cheaper thus reducing exports and increasing imports.
• depreciation cause american goods to be relatively more expensive thus increasing exports and reducing imports.

Unit 7: introduction to balance and trade

April 26, 2016
Balance of payments
-measure of many inflows and outflows between the U.S. and the rest of the world.

• inflows are credits
• outflows are debits

3 different balance of accounts

1. current account
2. capital/ financial account
3. official reserves account

Current account
-balance of trade or net exports

• exports (credit)
• imports (debit)

exports of goods/services-imports of goods/services
exports create a credit to balance payment

Net foreign income

• income earned by the U.S. owned foreign assets

Net transfers

• foreign aid= a debit to the current account 

Capital/financial account

• balance of capital ownership
• includes the purchase of both real and financial assets
• direct investment by U.S. firms/ individuals in a foreign country are debits to capital account.
• purchase of domestic financial assets by foreigners represents a credit to the capital account.

Relationships between current and capital account

• remember double bookkeeping 
• the current account and capital account should zero each other out.
• that is if the current account has a negative balance and capital has a positive balance. 

Official reserves

• Foreign currency holders of the U.S. federal reserve system.
• when there is a balance pf payment surplus the fed accumulates foreign currency and debits the balance of payment..

Active vs passive official reserves

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

Unit 5 Inflation is in the house!

April 11, 2016
Inflation 

• Inflation- a general rise in price levels
• deflation- a general decline in the price level
• disinflation- reduction in the inflation rate from year to year
• stagflation- unemployment and inflation increase at the same time

real interest rates= nominal-inflation rate

buying bonds helps you prevent high % rate. Increases money supply.

Unit 5: More of the long run phillips curve

April 8, 2016

Natural rate of unemployment is held constant

• Because the long run phillips curve exists at the natural rate of unemployment, structural changes int he economy that affect Un will also cause the LRPC to shift.
• increase in Un will shift LRPC right
• Decrease in Un will shift LRPC left

relating phillips curve to AS/AD

• changes in the AS/AD model can also be seen in the phillips curve

Phillips curve

• The economy produces at the full employment output level
• represented by a vertical line
• it occurs at the natural rate of unemployment

NRU= frictional + structural + seasonal
FE= 4-5%
Major LRPC assumption is:

• more work. benefits create higher natural rates and fewer benefits create more natural rates.

Unit 5 Introduction to demand/pull and short run

April 7, 2016

Short run aggregate supply

• In macroeconomics this is the period in which wages remain fixed as price level increases or decreases.

Effects over short run

• In the short run price level changes allow for companies to exceed normal outputs and hire more workers b/c 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 extended model means the inclusion of both the short run and long run AS curve
• the long AS curve is represented

Demand pull inflation in the AS

• Prices increase based on increase in aggregate demand
• in the short run, demanded pull will drive up prices and increase production
• In the long run increase. in aggregate demand will eventually return to previous levels.

Cost push- arises from factors that will increase per unit costs such as increase in the price level of key resource
Dilemma for the government

• in an effort to fight cost push, the government could react in two different ways.
• Action such as spending by the govt. could begin an inflationary spiral.
• No action however could lead to recession by keeping production and employment levels declining.

Unit 4: question 3 monetary policy the federal fund rate

unit 4: Final notes

March 29, 2016

Single bank
- loan money from excess reserves (ER)

Banking system
- ER x multiplier
*total money supply ER x multiplier x DD

IT ONLY CHANGES 

1. the composition of money 
2. excess reserves 
3. required reserves

*when a customer deposits cash or withdraws cash from their demand deposit act. It has NO effect on money supply.

FED- when the FED buys or sells bonds, ER is created

unit 4: Reserve Requirement

March 21, 2016

I. Reserve requirement
-only a small percent of your deposit is in the safe. The rest of your money has been loaned out.
-The FED sets the amount that banks must hold.
-The reserve requirement is the % of deposits that banks must hold in reserve and not loan out.

1. If there's a recession we should decrease reserve ratio.

-banks held less money and have more excess reserves
-banks create more money by loaning out excess

-money supply increases interest rates fall, AD goes up

  2. If there's inflation increase in RR
-banks hold more money and have less ER
-banks create less money
-money supply decreases, interest rates goes up, AD goes down

II. Discount rate
-the interest rate that the FED charges commercial banks.
-To increase the MS, the FED should decrease the discount rate.
- To decrease the MS, the FED should increase the discount rate.

III. Open market operations
-The FED buys/sells government bonds (securities)
- This is the most important and widely used monetary policy.
-To increase the MS, the FED should buy government securities.
- To decrease the MS, the FED should sell government securities.

unit 4: Reserve requirment

March 10, 2016

Reserve requirment
-The fed requires banks to always have some money readily available to meet consumers demand for cash
-around,set by the fed is required reserve ratio
-RRR is the % of the demand deposits (checking account balances) loaned out
-typically the required reserve ratio = 10% 

3 types of multiple deposit expansion

• type 1- calculate initial change in excess reserves (amount single bank can loan from initial deposit)
• type 2- calculate the change in loans in banking system
• type 3- calculate the change in the money supply (sometimes 2 and 3 will have the same result) IF NO FEDS IS INVOLVED 

I. bank can lend ER

II. total change

III. owner equity

unit 4: Feds and function

March 10, 2016

FEDS and the functions

1. control money supply
2. issue paper currency
3. set the reserve requirements and hold reserved of banks
4. lend money to banks and change interest
5. they are a check clearing service for banks
6. acts as a personal bank for government
7. supervises member banks

unit 4: Time value of money

March 9, 2016
Time value of money

• Is a dollar worth more than a dollar tomorrow? yes, inflation and opportunity cost. This is the reason for charging ad paying interest.

V= future value of money
P= present value of money
r= real interest rate (nominal rate- inflation rate)
expressed as a decimal
n=years
k= # of times in interest is credited per year

• The simple interest formula 

v= (1+r)^n*p

• v=(1+r/k)^nk*p

Demand for money has an inverse relationship between nominal rate and the quantity of money demanded.

Money demand

Increase in money supply

increase $ supply > decrease interest rate > increases investment > increases AD

or

Decrease $ supply > increase interest rate > decrease investment > decrease AD

Assets= what you own (when you die the rest of the stuff is an asset)

Liability= what you owe (groceries, clothes)

Stocks- ownership (owner of a company)

*not actual owner

Bond- loaning  money to government hoping you get it back.

What banks do

- A bank is a financial intermediary 

• uses liquid assets (i.c. bank deposits) to finance the investments of borrowers.
• A process is known as fractional reserve banking

-a system which depository institutions hold  liquid assets less than the amount of deposits

-can take form of:

1. currency in bank vaults
2. bank reserves- deposits held at a federal reserve

Basic accounting review

T-account (balance sheet)

-statements of assets and liabilities

UNIT 4: Money

March 3, 2016
Money:
I. Uses for money

• money of exchange 
• unit of account
• store of value

Unit of account
-economic worth in the exchange process.
-store of value- money holds its value over a period of time where as products may not.

II. Types of money

• Commodity money- gets its value from type of material from which it is made (silver coins, gold coins)
• Representative money- paper $ that is backed by something tangible that gives it value.
• Flat money- money because the government says so.

III. Characteristics of money

• durable
• portable
• $ is scarce 
• divisible  (able to use coins, half dollars etc.)
• acceptable (cash is acceptable)
• uniform

IV. Money supply

• M1 money- 1. Currency (coins and cash) 2. Checkable deposits or demand deposits 3. traveler's checks. *75% M1 money is mostly liquid and is easy to convert into cash*
• M2 money- consists of M1 money + savings account + money market accounts + deposits held by banks outside of the U.S.
• M3 money- M2 money + certificate deposit (cd's) *penalized from your own money*

AP MACROECONOMICS UNIT 4 VIDEOS

AP Macroeconomics Unit 4 - Part 1

·           Types of money:

1.commodity money- A good that has other purposes that also functions as money. Ex. Cows as money (MOST PREMATIVE)

2. Representative money- whatever you use as currency, represents a specific quantity of a precious medal. (gold Standard) drawback, value of the medal changes, effects value of currency.

3.Fiat money- money that is not backed by precious medal, legal tender, money must be accepted by transactions, value backed by the government.

·           Functions of money:

1.Medium of exchange- through money that exchanges happen.

2.Store of value- expect money to be stable. Putting money aside.

3.Unit of account-priceàworth (quality) ex. Named Brands

‪AP Macroeconomics Unit 4 - Part 3

·           price- interest rate (X axis)

·           Quantity- Y Axis

·           Demand slopes down (DM-demand for money)

·           Supply of money is vertical (Fixed unless FED moves it)- doesn’t vary on interest rate

·           FED government tax credit for 1^st home buyer- increase demand for money

-When you increase demand you put upward pressure on interest rate

·           if FED wants to bring interest rate down, shift the supply of money to the right.

·           FED want to stabilized interest rate, if not then you cannot predict the level of investment and the level intransitive consumer spending, thus not able to manipulate aggregate demand to give you the right kind of economic change at the time.

‪AP Macroeconomics Unit 4 - Part 4

·           The FED: Tools of Money Policy-

Expansionary (Easy Money) increase		Contractionary (Tight Money) decrease
Reserve Requirement	Lower it	Raise it
Discount rate	Lower it- Doesn’t mean banks will borrow money (an Incentive)	Raise it
(Most Used) Buy/Sell gov’t bonds/ securities	FED buys bonds (buy bonds= Big bucks)	FED sells Bonds (FOMC does this)

·           Discount rate- the rate at which banks can borrow money from the FED.

Why? Short term- bank needs to meet its liquidity need.

·           Function of the FED- Lender as a last resort.

·           Federal Funds Rate- rate a which banks borrow money from each other.

AP Macroeconomics Unit 4- part 7

• When the interest rate is low people demand more money and when the interest rate is high people get discouraged from borrowing money. 
• Decrease in supply it reduces the national supply of loanable funds it decreases amount available in savings.
• The money people save becomes more money for the banks to use as loans.
• Increase in demand for loanable funds increases the interest rate.

AP Macroeconomics unit 4- part 8

• In the money creation process banks create money by making loans.
• More money is made due to multiplier deposit expansion and adding loans would give the same amount of money if we don't use excess reserves.
• If a certain amount of money is deposited into a bank than the bank can loan less money until there isn't any more money left from that original deposit. 
• By adding the all the loans given you get your potential total increase

AP Macroeconomics unit 4- part 9

• In deficit spending government borrows money from americans. 
• In a MKT graph demand for money increases in interest rates.
• When the demand for money increases national supply in loanable funds is reduced.
• The Fisher effect is the rule of interest rate and inflation rate being equal to each other 

Automatic or built-in-stabalizers

February 29, 2016

Automatic or built-in-stabilzers

• anything that increases the governments budget deficit during a recession and increases it's budget surplus during inflation.
• DOES NOT REQUIRE GOVERNMENT ACTION
• Unemployment compensation, Medicaid, Medicare, Wellfare, VA Benefit, Social Security

• progressive tax system 

- Average tax rate (tax revenue/ GDP) rises with GDP
GDP rises = tax rises

• Proportional tax system

-average tax rate remains constants GDP Changes

• Regressive tax system 

-average tax rate falls with GDP

Discretionary v. Automatic fiscal policies

February 29, 2016

Discretionary v. Automatic fiscal policies

• Discretionary- increasing or decreasing government spending taxes in order to return economy to full employment involves policy makers to solve problems
• Automatic- unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effect of excision and inflation automatic fiscal policy takes place without policy makers

Fiscal Policy

February 29, 2016

Fiscal policy

• Expansionary and contractionary policy deficits and surpluses built-in-stabality

What it does:

• changes in the expenditures or tax revenues of the federal government

-2 tools of fiscal policy

1. Taxes- government can increase or decrease taxes
2. spending- government can increase or decrease spending

Deficits, surpluses, and dept

• Balanced budget

-revenues = expenditures

• Budget deficit

-revenues < expenditures

• Budget surplus

-revenues > expenditures

• Government debt

-sum of all deficits- sum of all surpluses

• government must borrow money when it runs a budget deficit
• government borrows from

-individuals

-corporations

-financial institutions

-foreign entities or foreign

Fiscal policies two options

• Discretionary fiscal policy (action)
• Expansionary fiscal policy: think deficit
• Contractionary fiscal policy: think surplus
• Non- Discretionary fiscal policy ( no action)

Spending multiplier effect

February 25, 2016

Spending multiplier effect

• An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or Aggregate demand (AD)

-multiplier = change in AD/ change in spending
-multiplier = change in AD/ change in C, I, G or X

Calculations for spending multiplier

• get calculated from MPC or the MPS
• multiplier= 1/r-MPC or 1/MPS
• multipliers are (+) when there is an increase in spending and (-) when there is a decrease

Calculating tax multiplier 

• When the government taxes, the multiplier works in reverse
• Money is leaving the circular flow
• tax multiplier is negative
• =-MPC/1-MPC or -MPC/MPS
• Tax-cut then the multiplier is +, because now there is more in the circular flow

Consumption and Savings

February 25, 2016
Disposable income (DI)

• income after taxes or net income
• DI = gross income-taxes

(spender save)

2 choices 

• with disposable income, households can either

-consume (spend money on goods and devices)
-save ( not spend money on goods and services)


Consumption

• Household spending
• ability to consume is constrained by

-The amount of disposable income
-propensity to save

• Do households consume if DI= 0

-automatics consumptions

Savings

• household NOT spending
• ability to save is constrained by

-the amount of disposable income
-propensity to consume

• Do households save if DI= 0 no.

APS & APC

• APC+APS=1
• 1-APC=APS
• 1-APS=APC
• APC >1 : dissaving
• -APS : dissaving

(MPC) Marginal propensity to consume

• fraction of any change in disposable income that is consumed
• mpc= change in consumption/ change in disposable income

Marginal propensities

• MPC+ MPS= 1
• MPC = 1-MPS
• MPS= 1-MPC
• EITHER SPEND OR SAVE

Classical and Keynesian Schools

February 24, 2016

Classical school

• competition is good
• believe in the indivisible hand
• economy will balance at full employment
• economy is always to or at full employment
• trickle down effect

Keynesian school

• competition is flawed
• AD is the key NOT AS
• leaks and savings cause recessions
• ratchet effects and sticky, wages bucks say's law
• in the long-run we are dead

What is investment

February 23, 2016
What is Investment

• money spent or expenditures on:

(new plants, factories)
-capitol equipment
-technology (hardware and software)
-new homes
-inventories (goods sold by producers)

Expected rates of return

• 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 expenditure rate of return to interest cost

• expected return > interest cost. INVEST, expect return < interest cost DO NOT INVEST

REAL (r%) v. NOMINAL (i%)

• What's the difference?

-nominal is observable rate of interest. Real subtracts put inflation (n%) and is only known ex post facto.

• How do you compute the real interest rate (r%)?

-r%= i% -n%

• What then determines the cost of an investment decision?

-The interest rate (r%)
Investment demand curve
Shape of the demand curve
-downward sloping

• Why?

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

Shifts investments demand (ID)
-costs of production
-lower costs shifts ID ->
-higher cost shift ID <- p="">
business taxes
-low business ID ->
-higher business ID <- p="">-technological change
-New technology ID ->
-lack of tech. ID <- p="">-stuck of capital
-economy is low on capital ID ->
-economy has much capital ID <- p="">expectations

• positive expectations shift ID ->
• negative expectations shifts ID <- li="">

Input prices

February 22, 2016

Input Prices

Domestic resource prices

-wages (75% of all business costs)

-capitol cost

-raw materials (commodity prices)

Foreign resources prices

-strong $ = low foreign resource price

-weak $ = higher foreign resource prices

Market power

-increase in resource prices = SRAS ß

-decrease in resource prices = SRAS à

Productivity

Total output/total inputs = productivity

·           More productivity = lower unit production cost = SRAS 

·           Lower productivity = higher unit production cost = SRAS 

Legal- institutional environment

·           taxes and subsidies

-taxes ($ to government) on business increase per unit production cost = SRAS 

-subsidies ( $ from government) to business reduce per unit production cost = SRAS 

Government regulation

-government regulation creates cost compliance = SRAS 

-deregulation reduces compliance cost = SRAS 

Full employment

·             Full employment occurs where AD intersects SRAS and LRAS at the same point

Recessionary gap

·             Recessionary gap exists when equilibrium occurs below full employment output

Inflationary gap

·             An inflationary gap exists when equilibrium occurs beyond full employment output 

Changes in AD

·           Change in consumption (c)

-c ^: AD : GDPr ^ & PL ^: U% v 

-c v: AD 

·             Change in gross private investment (Ig)

-Ig ^: AD 

-Ig v: AD 

·             Government spending (G)

- G ^ : AD 

- G v : AD 

·             Net exports (Xn)

-Xn ^ AD 

-Xn v AD 

Changes in SRAS

·             Input prices

- input prices v : SRAS 

- input prices ^ : SRAS 

·             Productivity

-productivity ^ : SRAS 

-productivity v : SRAS 

·             Legal-institutional environment

- deregulation : SRAS 

- regulation : SRAS 

 Nominal wages- the amount of money received by a worker per unit of time (how much you make)

Real wages- amount of goods and services that a worker car purchase with their nominal wages (purchasing power of nominal wages)

Sticky wages-  nominal wage level that is set according to an initial level and does not vary due to labor contracts or other restrictions.

Output- depends upon changes in the employment level. Output depends upon changes in price and employment level output is independent in changes in price level.

Keynasian Range Classical range		price	Wages	Employment level	implications
	recession	fixed	fixed	flexible
	Intermediate	flexible	fixed	flexible
	inflation	flexible	flexible	fixed