Individuals and countries can be made better off if they will produce in what they have a comparative advantage and then trade with others for whatever else they want/need.
Absolute Advantage
The producer that can produce the most output OR requires the least amount of inputs (resources).
Comparative Advantage
The producer with the lowest opportunity cost.
*Countries should trade if they have a relatively low opportunity cost.
Input vs Output
Output Problem: Presents the data as products produced given a set of resources.
Ex: Number of pens produced
Input Problem: Presents the data as amount of resources needed to produce a fixed amount of output.
Ex: Number of labor hours to produce 1 bushel
*When identifyingabsolute advantage, input problems change the scenario from who can produce the most to two can produce a given product with the least amount of resources.
A single bank can create $ by the amount of its excess reserves
The banking system as a whole can create $ by a multiple of the excess reserves
*MM x ER = Expansion of Money
*Money Multiplier = 1/RR
New vs. Existing $
If the initial deposit in a bank comes from the Fed, or bank purchase of a bond or other money out of circulation (buried treasure), the deposit immediately increases money supply
The deposit then leads to further expansion of the money supply through the money creation process
*Total change in MS if initial deposit is new $ = Deposit + $ created by banking system
If a deposit in a bank is existing $ (already counted in M1; ex: currency or checks), depositing the amount does not change the MS immediately because it is already counted.
Existing currency deposited into checking account changes only the composition of the money supply from coins/paper $ to checking account deposits
*Total Change in the MS if deposit is existing $ = Banking System Created Money Only
Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded (vise versa):
When interest rates rise, the quantity demanded of money falls because individuals would prefer to have interest earning assets instead of borrowed liabilities.
When interest rates fall, quantity demanded increases. No incentive to convert cash into interest earning assets.
Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers
Calculating the GDP: Expenditures and Income Approach
Expenditure Approach:
C + Ig + G + Xn (export-imports)
Income Approach:
W- Wages (Compensation of Employees/Salaries) + R- Rent + I- Interest (Money you have to borrow/Money in bank earning interest) + P- Profits + Statistical Adjustment
Budget Surplus/Deficit:
Government Purchases of Goods and Services + Government Transfer Payments - Government Tax and Fee Collections
+ = Deficit
- = Surplus
Trade Surplus/Deficit:
Exports - Imports
+ = Surplus- = Deficit
National Income:
1. Compensation of Employees + Rental Income + Interest Income + Proprietors Income + Corporate Profits
2. GDP - Indirect Business Taxes - Depreciation - Net Foreign Factor Payment
Disposable Personal Income:
National Income - Personal Household Taxes + Government Transfer Payments
