May 10, 2017

Comparative and Absolute Advantage

Specialization 

• 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 identifying absolute 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. 

May 8, 2017

Balance of Payments Formulas

Balance of Trade

Exports - Imports 

Balance of Goods and Services 

Goods Exports + Services Exports - Goods Imports + Services Imports

Balance of Current Accounts

 Balance of Goods and Services + Net Investment + Net Transfers

Balance of Capital Account

Domestic/Foreign Purchase

Official Reserves 

Current Account (+, -) + Capital Account (+, -) = 0 (theoretically) 

May 8, 2017

Foreign Exchange 

• The buying and selling of currency 
• Visiting Europe and exchanging dollars for Euros
• Any transaction that occurs in the Balance of Payments necessities foreign exchange
• The exchange rate (e) is determined in the foreign currency markets ---> (price of currency)

Changes in Exchange Rates

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

Appreciation and Depreciation

• Appreciation: When the exchange rate of currency increases
• Depreciation: When the exchange rate of that currency decreases

Exchange Rate Determinants

• Consumer Tastes
• Relative Income
• Relative Price Level
• Speculation

May 4, 2017

Balance of Payments

Balance of Payments

• Measure of money inflows and outflows between the United States and the Rest of the World (ROW)
• Inflows=Credit
• Outflow=Debit
• Divided into Three Accounts

1. Current Account
2. Capital/Financial Account
3. Official Reserves Account 

Current Account

• Balance of Trade (Net Exports)
• Exports of goods and services/Imports of Goods and Services 
• Exports become credit to balance of payments
• Imputed become debit to balance of payments
• Net Foreign Income
• Income earned by US owned foreign assets- Income paid to foreign held to US assets
• Net Transfers 
• Foreign Aid ---> A debit to the current account 
• Ex: Mexican migrant workers send $ to family in Mexico

Capital/Financial Account

• The balance of capital ownership 
• Includes the purchase of both real and financial assets
• Direct investment in US is credit to capital account
• Ex: Toyota factory in San Antonio
• Direct investment by US firms/individuals in a foreign country and debits to the capital account 
• Ex: Intel factory in Costa Rica
• Purchase of foreign financial assets represents a debit to the capital account
• Ex: Warren buys stock in Petrochina
• Purchase of domestic financial assets by foreigners represents a credit to the capital account 
• Ex: The United Arab Emrite Sovereign wealth fund purchases a large stake in NASDQ

Official Reserves 

• The foreign currency holdings of the United States 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 
• The Official Reserves zero out the balance of payments 

April 24, 2017

Supply Side Economics or Reaganomics 

• Manipulating AS by enacting policies to stimulate incentives to work, save, and invest
• Tax cuts to increase disposable income
• Hard to enact policy because disincentive, people take advantage of welfare

Laffer Curve: Displays theoretical relationships between tax cuts and government revenue.

• Criticisms of the Laffer Curve
1. Empirical evidence suggests that the impact of tax rates on incentives to work, save, and invest, are small
2. Tax cuts can also increase demand which can fuel inflation
3. Where the economy is actually located on the curve is difficult to determine

April 20, 2017

Inflation, Deflation, Disinflation, and Hyperinflation

Inflation

• When price levels increase

Deflation

• When price levels decrease

Disinflation

• The rate of inflation decreases

Hyperinflation

• Monetary inflation occurring at a high rate 

April 19, 2017

Short-Run Phillips Curve & Stagflation

• If inflation persists, and the expected rate of inflation rises, then the entire SRPC moves upwards

Stagflation

• Simultaneous rise in inflation and unemployment

Supply Shocks (Adverse Supply Shocks): 

• Rapid and significant increase in resource cost, which causes the SRAS to shift
• Depreciation of a Dollar
• Oil Embargo
• Rapid increase in price of gas

• If inflation expectations drop due to new technology, then SRPC will move downward

LRPC

• Natural Rate of Unemployment= Frictional, Seasonal, and Structural Unemployment

Missing Index

• A combination of inflation and unemployment in any given year. 
• Single digit misery is good

April 18, 2017

The Phillips Curve

In the Short Run

• The Phillips Curve represents a trade off between inflation and unemployment.
• Inverse Relationship
• Inflation Up, Unemployment Down
• Each point on the Phillips Curve corresponds to a different level of output. 

The Long Run Phillips Curve

• Occurs at the natural rate of unemployment
• Represented by a vertical line
• No trade off between inflation and unemployment
• Economy produces at the full employment output level
• The LRPC will only shift if the LRAS curve shifts
• Increases in unemployment LRPC ---->
• Decreases in unemployment LRPC <---
• Structural changes in the economy that affect unemployment will also cause the LRPC to shift