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