Unit 7 Absolute Advantage

May 6, 2016

Balance of Trade

Individual:Exists when a person can produce more of a certain good/ service than someone else in the same amount of time ( or can produce a good using the least amount of resources) 

National:  When a country can produce more of a good/service than the another country can in the same time period.

Comparative Advantage

Person or nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than a trading partner.

         Input:

EX:  (TVs produced per hour,  Miles per gallon)

      Output:
EX:   (# of hrs. to do jobs,  # of acres to feed horses)

Specialization and Trade

              Gains from trade are based on comparative advantage, not absolute advantage. (countries should trade if they have a lower opportunity cost)

Unit 7 Balance of Payments

May 4, 2016

 Balance of Payments

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

Inflow = credits

Outflow = debits

Balance of payment divided:

1. Current Account

2. Capital/Financial Account

3. Official Reserves Account

Current Account: 

• Balance of Trade of Net Exports

             - Exports = credit to balance

              -Imports = debit to balance

• Net Foreign Income
• Net Transfers (tend to be unilateral)

               -Foreign Aid = debit to current account

Capital/Financial Account:

• Balance of capital ownership
• Includes the purchase of both real and financial assets 
• Direct investments in the US is a credit to the capital account
• Direct investment by US firms/individuals in a foreign country are debits to the capital account 
• Purchase of foreign financial assets represents a debit to the capital account 
• Purchase of domestic financial assets by foreigners represents a credit to the capital account.

               

         *Current Account and Capital account should zero each other out.*

Official Reserves 

The foreign currency holdings of the US Federal Reserve System

Balance of payments surplus = Fed accumulates foreign currency

BOP payments = Fed depletes its reserves of foreign currency 

*Official Reserves zero out BOP*

Active vs. Passive Official Reserves

• US is passive in its use of official reserves.
• It does not seek to manipulate the dollar exchange rate

Unit 7 Foreign Exchange

May 3,2016 

Foreign exchange (FOREX) 

• the 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 - [ex. the current exchange rate is approximately 8 yuan to 1 dollar] 

Changes is exchange rates 

• exchange rates (e) are a function of the supply and demand for currency 

• an increase in the supply of currency will decrease the exchange rate of a currency 
• A decrease in supply of a currency will increase the exchange rate of a currency 
• An increase in demand for a currency will increase the exchange rate of a currency 
• A decrease in demand for a currency will decrease the exchange rate of a currency 

Appreciation and depreciation 

• appreciation of a currency occurs when the exchange rate of that currency increases (e⬆️) 
• Depreciation of a currency occurs when the exchange rate of that currency decreases (e⬇️) 

Exchange rate determinants 

1. Consumer tastes 
2. Relative income 
3. Relative price level 
4. Speculation 

Exports and imports 

• the 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 this reducing exports and increasing imports 
• Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports 

Unit 5-6

April 7,2016

Unit 5-6

In macroeconomics this is the period in which wages (and other input prices) remain fixed as price level increases or decreases

Effects over short run

• in the short run price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant 
• in the long run wages will adjust to the price level and previous output levels will adjust accordingly 

Equilibrium in the extended model

• the long as curve is represented with a vertical line @ full employment level of real GDP 

Demand pull inflation in the AS model

• demand pull prices increase based on increase in aggregate demand 
• In the short run demand pull will drive up prices and increase production 
• In the long run, increases in aggregate demand will eventually return to previous levels 

Cost push and the extended model

• cost push arises from factors that will increase per unit costs such as increase in the price of a key resource 

Dilemma for the government

• in an effort to fight cost push the government can react in two different ways 
• Action such as spending by the gov. Could begin an inflationary spiral 
• No action however could lead to recession by keeping production and employment levels declining 

The long run Phillips curve 

Note: natural rate of unemployment 

Because the long run Phillips curve exists at the natural rate of unemployment (Un) structural changes in the economy that affect Un will also cause the LRPC to shift 

• increase in Un will shift the LRPC➡️
• Decreases in Un will shift LRPC⬅️

Long run Phillips curve

- no trade off between inflation and unemployment at LRPC

- Always vertical at the natural rate of unemployment

- Only shift if LRAS shifts

Natural rate of unemployment(4-5%) =frictional +structural+seasonal unemployment

The major LRPC assumption is that more worker benefits creat higher natural rates and fewer worker benefits creates lower natural rates

SRPC

- same as short run

Supply shocks

- rapid and significant increases in resource cost which causes the SRAS curve to shift

- SRAS is going to decrease

- SRPC is going to shift outward (increasing)

Misery index

- combination of inflation and unemployment in any given year

- Single digit misery is good

Inflation: General rate in the price level.

Deflation:General decline in price level.

Disinflation:Reduction in the inflation rate from year to year.

Stagflation: unemployment and inflation increase at the same time. 

• Changes in AS but not AD
• Determines the level of inflation, unemployment rates, and economic growth.
• Supply Side economists support policies that promote GDP growth that arguing that high marginal tax rates along with the current system of transfer payments provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures.

Incentive to save and invest

1. Higher marginal tax rates reduce the rewards for savings and investment.
2. Consumption might increase but investment depends upon savings.
3. Lower marginal tax rates encourage saving and investment.

Laffer Curve

• There is a theoretical relationship between tax rates and Govt. revenue. 
• As tax rates increase from 0, Govt. Revenue increase from 0 to max level but then decline.

Criticism of Laffer Curve

• Research suggests that the impact of tax rates on incentives to work, save, and invest is small. 
• Tax cuts also increase demand which fuels inflation and causes demand to exceed supply. 
• Where the economy is located on the curve is difficult to determine.

Unit 4 fiscal notes

When a customer deposits cash or withdraws cash from their demand deposits account, it has no effect on the money supply:

• It changes:
1. The composition of money
2. Excess Reserves
3. Required Reserves

*When the FED buys or sells bonds, ER is created

                 

ER x Multiplier

• find the multiplier (1/reserve ratio)

Single Bank

• Loan money from ER

Banking System

• ER x Multiplier= Total Money Supply

Unit 4 tools of monetary policy

March 10, 2016

Federal Reserve Bank (FED)

Functions of FED

•  Issue paper money
•  Sets reserve requirements and holds reserves of the bank
•  Lends money to banks and changes their interest
•  Check clearing service for bank
•  Acts as personal bank for government
•  Supervises member banks
• Control money supply

     The Reserve Requirement

•  Only a small % of your bank deposit is in the safe, the rest of your money has been loaned out (Fractional Reserve Banking)
•  FED sets the amount that banks must hold
•  Reserve Requirement (reserve ratio) is the percent of deposits that banks must hold in reserves and NOT loan out)
• When the FED increase the money supply it increases the amount of money held in banks deposits
• 
  
• 
  

 If there is a recession, what should the FED do to the reserve requirement?

·         Decrease Ratio Rate

o   Banks hold less money and have more excess reserves

o   Banks create more money by loaning out excess

o   Money supply increases, interest rate, AD goes up

If there is in inflation, what should the FED do to the reserve requirement?

·         Increase ratio rate

o   Banks hold more money and have less excess reserves

o   Banks create less money

o   Money supply decreases, intrest rate go up, AD goes down

The Discount Rate

: The Discount Rate is the interest rate that the Fed charges commercial banks

 If Bank of America needs 10 billion dollars, they must pay it back with interest

·         To increase money supply, the FED should decrease the discount rate (Easy Money)

·         To decrease money supply, the FED should increase the discount rate (Tight Money)

     Open Market Operations (OMO)

: The FED buys/sell government bonds (securities)

• This is the most important and widely used monetary policy
• To increase the money supply the FED should BUY government securities
• To decrease the money supply the FED should SELL government securities

Federal Fund Rate: FDIC member banks make overnight loans to other banks

Prime Rate: Interest rate the banks charge to their most credit worthy customers

Monetary Policy	Easy Money (Expansionary/ Recession)	Tight Money (Contractionary, inflation)
OMO	Buy Bonds	Sell Bonds
Discount rate	Decrease	Increase
Reserve Requirement	Decrease	Increase
MS	Increase	Decrease
AD	Increase	Decrease
GDP	Increase	Decrease
Loans	Increase	Decrease
Interest Rates	Decrease	Increase

Financial Sector Unit 4

March 9, 2016

·         Is a dollar today worth more than a dollar tomorrow?

• YES
• WHY? Inflation/Opportunity Cost
• The reason for charging and paying interest

Time Value of Money

• Let V = future value of $
• P = present value of money
• r = real interest rate (nominal rate-inflation rate) expressed as a decimal
• N = years
• K = number of times interest is credited per year

The simple Interest formula

                V=(1+r)^n * p

The compound interest formula

                V=(1+r/k)^nk * p

Demand for money has an inverse relationship between  nominal rates and the quantity of money demanded

• if interest rates increase quality of demanded money decreases

1. What happens to the quantity demanded of money when interest rate increase?

• Quantity demand fall because individuals would prefer to have interest earning assets instead of borrowing liability.

2. What happens to the quantity demanded of money when interest rate decreases?

•                 Quantity demanded increases there is no incentive to convert cash into interest earning assets

Financial assets: stocks or bonds that provide expected future benefits

• it benefits the owner only if the issuer of the asset meet certain obligations
• injured by the issuer of the financial asset to stand behind the issues asset
• (Assets what you own, liability is what you owe)

Interest rate: price paid for the use of a financial asset

Stocks: financial asset that convey ownership in a corporation

Bonds: It is the promise to pay a certain amount of money plus interest in the future 

What do banks do? - basic accounting review

• T account (balance sheet)
• statements of assets and liabilities
• Assets (amounts owed) 
• items to which a bank holds legal claim
• The uses of funds by financial intermediaries
• Liabilities (amounts owed) 
• The legal claims against a bank

March 10, 2016

3 types of Multiple Deposit Expansion

The FED requires bonds to always have cash ready for customers

The amount set by the FED is the required ratio 

The Required Reserve ratio is the percent that must not be loaned out (typically 10%)

3 Types of Multiple Deposit Questions

1.  Calculate initial change in excess reserves 
• The amount a single bank can loan from the initial deposit
2. Calculate changes in loans in the banking system
3. Calculate changes in money supply
• Sometimes type 2 and 3 will have the same result (no fed involvement)