Unit 7 - Purchasing Power Parity & Absolute Advantage v. Comparative Advantage

April 27, 2015

When the currency rate are set by international markets, changes will be based on the actual purchasing power of the currency.

Why do we exchange Currency?

• To sell exports & buy imports
• To invest in another countries stock and bonds
• To build factories or stocks in other countries
• To speculate on currency value
• To hold currencies in bank accounts, for future exports, imports, and business loans.
• To control excessive imbalances, FED control imbalances via the method of payments.

April 29, 2015

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 the other country in the same amount of time period.

Comparative Advantage

• Individual/National - when an individual or nation can produce a good/service at a lower opportunity cost than can another individual or nation.

Input problems - This is where the country or individual can produce a set amount of something by using the least amount of resources, land, or time has the absolute advantage.

Chosen item

Forgone item

Output problem - looking at production, who can produce the best (the lowest opportunity cost)

What is given up

What is produced

Unit 7 - FOREX

April 15, 2015

Foreign Exchange (FOREX): The buying and selling of currency.

The exchange rate (e) is determined in the foreign currency market. (The exchange rate is the price of a currency)

Tips

• Always change the D line on the one currency graph, the S line in the other currency graph
• Moves lines of two currency graphs in the same direction and you will have the correct answer.
• If D on one graph moves up then so will the S on the other graph. And same if D on one graph moves left then S on the other graph will also move left.

Exchange rates are a function of the supply and demand for currency.

• Increasing of supply in a currency will make it cheaper to buy one unit of that currency.
• Decreasing in supply of a currency will make it more expensive to buy one unit of that currency.
• Increase in demand for a currency will make it more expensive to buy one unit of that currency.
• Decrease in demand for a currency will make it more cheaper to buy one unit of that currency.

Appreciation: Appreciation of a currency occurs when the exchange rate of that currency increases

Depreciation: Depreciation of a currency occurs when the exchange rate of that currency decreases.

Exchange rate determinants

• Consumer taste
• Relative income
• Relative price level

Unit 7 - Balance of Payments

April 9, and April 13, 2015

Measure of $ inflows and outflows between the U.S and the rest of the world.

• Inflows are referred to as credits
• Outflows are referred to as debits

Balance of payments are divided into three accounts

• Current account
• Capital/Financial account
• Official reserves account

Double entry book keeping: Every entry in the balance of payments is recorded twice in accordance with standard accounting practice.

Current Account: Balance of trade or net exports

•  Balance of trade or net exports: Exports of goods and services - imports of goods and services - exports create a credit to the balance of payments - imports (Create Debt)
• Net foreign income: Income earned by U.S owned foreign assets - income paid to foreign held U.S assets.
• Net transfers: Foreign aid > Debit to the foreign account

Capital/Financial Account: The balance of capital ownership includes the purchase of both real and financial assets. Direct investments in the U.S is a credit to the capital account. Purchase of foreign financial assets represent debit to the capital account.

(relationship between current and capital account: Current and capital account should zero each other)

Official Reserves: The foreign current holdings of the U.S federal reserves system.

Active Vs. Passive: U.S is passive in its use of official reserves, doesn't seek to manipulate the dollar exchange rate.

Unit 5 & 6 - The LRPC & Supply side economics

April 6, 2015

Since the LRPC exists at the NRU structural changes in the economy that affect unemployment (Un) will also cause the LRPC to shift.

• Increase in Un will shift LRPC > 
• Decrease in Un will shift LRPC <

Supply side economics - It is the belief that the AS curve will determine levels of inflation, unemployment, economic growth. To increase economy shift AS curve to the right. Supply side economics focus on the (marginal tax rate) : The amount paid on the last dollar earned or on each additional dollar earned. They believe that lower taxis is an incentive for business to invest in the economy, also believe that lower taxes is an incentive for workers to work hard, thereby becoming more productive. Also that lower taxes incentive for people to increase savings, and therefor create lower interest rates, which causes and increase in business investment.

• Support policies that promote GDP growth by arguing that high marginal tax rates, along with the current system of transfer payment such as, unemployment compensation and welfare provide disincentives to work, invest, innovate, and under take entrepreneurship ventures. 

Reagan economics

• Lowered the marginal tax rate to get the U.S out of a recession. (Deficit) 

The Laffer Curve: Is a trade of between tax rate and government revenue used to support the supply side argument. As tax rate increase from 0% tax revenue increase to a maximum level then decline.

Criticism

• Research suggest that tax rate on incentives to work save and incest small.
• tax cuts also increase demand, which can fuel inflation, thus creating a situation were demand excessed supply.
• Were the economy is actually on the curve is difficult to determine.
  

Unit 5 & 6 - Phillip's Curve

April 2, 2015

Phillips Curve: Represents the ralationship between unemployment and inflation.

LRPC: Occurs at the NRU (seasonal, frictional, 4-5%) Represented by a vertical line. There is no trade of between unemployment and inflation. Economy produces at the full employment level (will only shift if the LRAS curve shift). LRpC major asumption is that more woker benefit creeate higher natural rates, and fewer worker benefit create lower natural rates.

SRPC:  There is a trade off between inflation and unemployment (only occur in SR) Inverse relationship. High Inflation = Low unemployment, Lower Inflation = High Unemployment
The SRPC relevance to Oakum's law. Since Wage are sticky, inflation changes more the points in the SRPC.

• If inflation persist and the expected rate of inflation rises, then the entire SRPC moves upward, which causes stagflation.
• If inflation expectation drops due to new tech or economic growth, then the SRPC moves downward.

AS (shots - Rapid and significant increase in resource cost) Cause the rate of inflation and rate of unemployment to increase. The misery index is a combo of inflation and unemployment  in any given year. Single digit misery is good.