Unit 7 cont. - Absolute & Comparative Advantages

Unit 7 - Absolute & Comparative Advantages


Absolute Advantage: -Individual- exists when a person can produce more of a certain good/ service than someone else in the same amount of time (or can produce a good using the least  amount of resources.)
 National-exists when a country can produce more of a good/ service than another county can in the same time period.

Comparative Advantage:

-A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner.

               

Specialization and Trade:

-Gains from trade are based on comparative advantage, not absolute advantage.

Examples of Output Problem:

- per acre 

-miles per gallon

-word per minute

-apple per tree

-television produced per hour

Examples of Input Problems:

-number of hours to do a job

-number of acres to feed a horse

-number of gallons of paint to paint a house

https://www.youtube.com/watch?v=Pd_qs8ueIWw

Visit the link provided to learn more.

Unit 7- Foreign Exchange

Unit 7 - Foreign Exchange

Foreign Exchange:

-  Buying and selling of currency-Any transactions that occurs in the balance of payments necessitates foreign exchange-Exchange Rate : is determined in the foreign currency markets

Changes in Exchange Rates:

-Exchange rates (e) are a function of supply and demand for currency- an increase in the supply of a currency- a decrease in supply of a currency will increase the exchange rate of currency- increase in demand for currency will increase the exchange rate of currency- decrease in demand for a currency will decrease the exchange rate of currency
Appreciation and Depreciation:·         Appreciation of currency occurs when exchange rate of that currency increases (e^)
·         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:·         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

Floating/ Flexible Rates:

Depends upon supply and demand of that currency vs. other currencies. Very sensitive to business cycle / provide options for investments
Fixed Rates: Based on a country's willingness to distribute currency and to control the amount
As two currencies trade:

1.    One supply line will ∆, the other demand line will ∆.
2.    They will move in the same direction
3.    One currency will appreciate, the other will depreciate

Unit 5 cont.- Balance of Payments

Unit 5 - Balance of Payments

What is it? Measure of many 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 
Balanced of payments is 8 into 3 accounts
-current
-capital/financial
-official reserves

Current Account

Balance of trade or net exports
-Exports of goods/services.
-Exports create a credit to balance of payments.
-Imports create a debit to the balance of payments. 
-Net foreign income
-Income earned by U.S foreign held U.S assets.
-Net transfers (Tend to be unilateral)
-Foreign aid-debit to the current account

Capital/Financial Account

-Balance of capital ownership 
-includes purchase of both real and financial assets.
-Direct investment in the U.S is a credit to the capital account.
-Direct investment by the U.S firms/ individuals in a foreign country are debits to the capital account. 
Purchase of domestic financial assets by foreigners represents a credit to the capital account.
-United Arab Emirates \wealth funds purchases a large state in the NASPAQ 

Relationship between current and capital account

-Remember double entry bookkeeping.

Current account and capital account should zero each other out. 

-That is if current account has a negative balance (deficit), then the capital account should then have a positive balance (Surplus)

Official Reserves

 Foreign currency holdings of the U.S Federal Reserve System 

When there is a balance of payments surplus the Fed accumulates foreign currency and debits the balance of payments. 

When there is a balance of payments deficit the Fed depletes its reserves of foreign currency and credits the balance of payments. 

Official reserves zero the balance of payments. 

Active V. Passive Official Reserves

-U.S is passive in its use of official reserves. It does not seek to manipulate the money exchange rate.

• Balance of Trade

Goods + goods

Exports  Inputs

Balance on goods and serves

Goods + Services + Goods + service

Exports  Exports     Inputs     Inputs

Current Account

Balance on goods and services + Net investments + net transfer

Capital Account

Foreign Purchase + domestic purchase.

Unit 5- Aggregate Supply

Unit 5- Aggregate Supply

Short Run Aggregate Supply:

-Period in which wages and other input prices remains fixed as price level increase or decrease.

Long Run Aggregate Supply:

-Period of time in which wages have become fully responsive to change in price level.

Effects over short-run:

-In short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increase 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 curves.

The long run AS curve is representative with a vertical line.

Demand pull inflation in the AS model.

Demand pull : prices increase based on the increase in AB

In Short run, demand pull will drive up prices and increase production.

In long run, increase in AB will eventually return to previous level. 

Cost Push and the Extended Model:

Cost-push arises from factors that will increase per unit cost such as increase in the price of a key resource. 

Short run shifts left. What is important is that in this case, it is the cause of price level increase, not the effect. 

Problems for the Government:

In an effort to fight cost-push. The government can react in two different ways.

Action such as spending by the government could begin an inflationary spiral.

No action however could lead to recession by keeping production and employment levels declining. 

The Long-Run Phillips Curve:

Natural rate of unemployment is held constant.

Because the Long Run Phillips curve exists at the natural rate of unemployment (UN) Structural changes in the economy that UN will also cause the Long-Run Phillips Curve to shift.

Increase in UN will shift Long-Run Phillips Curve right.

Decrease in UN will shift Long-Run Phillips Curve left.

Short Run Phillips Curve:

Trade of between inflation and unemployment.

Long Run Phillips Curve:

NO trade of between inflation and unemployment in the long run.

Occurs at natural rate of unemployment.

Represented by vertical line.

Long Run Phillips Curve will shift if the LRAS shifts.

Natural rate of unemployment is equal to frictional +structural + seasonal unemployment.

Maj LRPC assumption is that more worker benefits creates higher natural rates and fewer worker benefits creates lower natural rates. 

Supply Shock: Rapid and significant increase in resource cost, which causes SRAS curve to shift.

-Most likely shift to left and SRPC will shift right. 

Misery Intex: combo of inflation and unemployment in any given year.

Single digit misery is good. 

Reaganomics/supply side economics 

Show change in AS not in AD, which determines the level of inflation, unemployment notes and economy growth.

Supply side economists, policies that promote GDP growth by arguing that high marginal tax votes along with the current system of transfer payments : Unemployment compensation welfare programs provide disincentive to work, invest, innovate and undertake entrepreneurial ventures. 

Low marginal tax rates induce more work, thus AS increase. 

-also makes leisure more expensive and work more attractive. 

Incentives to save and invest:

1) High marginal tax rates reduce the rewards for saving and investment.

2) Consumption might increase, but investments depend upon saving.

3) Lower marginal tax rates encourage savings and investing. 

Laffer Curve:

Theoretical relationship between tax rates and government revenue. 

-As tax rates increase from (0) tax revenues increase from 0 to some max level and then declines.