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.