Comparative Advantage

Specialization

• Individuals and countries can be made better off if they will provide in what they have a comparative advantage and then trade with others for whatever else they want/need

Absolute advantage

• Producer that can produce the most output or requires least amount of inputs(resources)

Comparative advantage

• producer with the lowest opportunity cost
• countries should trade if they have a relatively lower opportunity cost 
• an output problem presents data as products produced given a set of resources
• input problem presents data as amount of resources needed to produce a fixed amount of output
• when identifying absolute advantage input problems change the scenario from who can produce a given product with the least amount of resources

Balance of Payments

5-4-17

• a measure of money inflows as well as outflows in the U.S. and the world

Three Accounts

• Current accounts
• net exports
• exports give credit
• imports give debit
• Net foreign income
• income that is earned by foreign assets
• Net transfers
• Foreign aid
• capital account
• balance of capital ownership
• investments in the U.S.
• Purchase of financial assets by the foreigners
• Official Reserves
• Foreign currency holdings given by the feral reserve sytm.

Balance of Goods and Services 

• goods exports +/- services + net investment + net transfers

Official Reserves

• current account + current capital = 0

Foreign Exchange

5-8-17

• Buying and selling of currency
• Any transaction that occurs in the Balance of payments necessitates foreign exchange
• The exchange rate(e) is determined in the foreign currency markets
• simply exchange rate is the price of currency

Change in exchange rate

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

Appreciation and Depreciation

• Appreciation of currency occurs when the exchange rate of that currency increase (e Increase)
• Depreciation of a currency occurs when the exchange rate of that currency decreases(e decreases)

Determinants

1. Consumer taste
2. Relative income
3. relative price level
4. 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 cheaper and foreign goods to be relatively more expensive this increasing exports and reduce imports

Supply side economics/Reaganomics

4-19-17

• Manipulate aggregate supply by enacting policies designed to stimulate incentives to work, save, and invest 
• ex: tax cuts= increase disposable income

Laffer Curve

• Theoretical relation between tax rate and govt revenue

Criticism of laffer curve

• 1- imperial evidence suggest that the impact of tax rates on incentives to work save and invest are small
• 2- tax cuts also increase demand which can fuel inflation
• 3- where the economy is actually located on the curve is difficult to determine 

Phillips curve

Phillips Curve

• Inverse relationship between inflation and unemployment
• trade off
• Each point of the Phillips curve corresponds to a different level of output

Long run Phillip curve

• occurs at natural rate of unemployment
• is represented by a vertical line
• no trade of between unemployment and inflation
• due to economy producing at full employment level
• only shift if LRAS shifts 
• NRU is equal to
• frictional, seasonal, and structural unemployment 

Short Run

• since wages are sticky inflation changes wages moves the point on the LRPC
• If inflation persist and expected rate of inflation rises then the entire SRPG moves upward
• Stagflation- unemployment and inflation simultaneously rises 
• Supply shock- rapid and significant increases in resource cost
• If inflation expectations drop due to new tech or efficiency then SRPC will move downward
• Misery index- combination of unemployment and inflation in any given year
• single digit misery is good

Long run extra

• increase in Un will shift LRPC right
• decrease in Un will shift LRPC left

loanable

Loanable Funds Market

4-3-17

• is interest rate of 50% good or bad
• bad for borrowers but good for lenders
• Loadable funds market is private sector supply and demand of loans
• this market brings together those who want to lend $1(savers) and those who want to borrow(firm with investment spending projects)
• This market shows effect of real interest rate 
• Demand- inverse relationship between real interest rate and quantity loan demanded
• Supply- direct relationship between real interest rate and quantity loans supplied
• supply is not vertical

Federal Funds rate

• interest rate that banks charge one another for overnight loans

Prime rate

• interest rate that the banks charge their credit worthy customers

Loadable Funds Market

4-3-17

Loadable Funds Market 

• IS interest rate of 50% good or bad?
• bad for borrowers but good for lenders
• loadable funds market is private sector supply and demand of loans 
• this market brings together those who want to lend money (savers) and those who want to borrow(firms with investment spending projects)
• this market shows effect of real interest rate
• demand- inverse relationship between real interest rate and quantity loan demanded
• Supply- direct relationship between real interest rate and quantity loans supplied
• supply is not vertical

Federal fund rate

• interest rate that banks charge one another for over night loans

Prime rate

• Interest rate that the banks charge their credit worthy customer