May 12, 2017 - Comparative Advantage

8:50 AM

Comparative Advantage



I. 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.

II. Absolute Advantage
-The producer that can produce the most output or requires the least amount of inputs (resources)

III. Comparative Advantage
- The producer with the lowest opportunity cost.
•Countries should trade if they have a relatively lower opportunity cost.

- They should specialize in the good that is "cheaper" for them to produce.

IV. Input vs. Output:
- Output problem presents the data as products produced given a set of resources (ex: # of pens produced)

- Input problem presents the data as amount of resources needed to produce a fixed amount of output (ex: # of labor hours to produce 1 bushel)

- When identifying absolute advantage, input problems change the scenario from who can produce the most to who can produce a given product with the least amount


May 8, 2017 - Foreign Exchange (FOREX)

10:56 PM

  • The buying and selling of currency
  • Ex: in order to purchase souvenirs in France, it is first necessary for Americans to sell their Dollars and buy Euros. 
  • 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
  • Simply put, the exchange rate is the price of a currency 

Changes in Exchange Rates
  • Exchange rates are a function of the supply and demand for currency. 
  • An increase in the supply of a 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 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 
  • Depreciation of a currency occurs when the exchange rate of that currency decreases 
  • Ex: If German tourists flock to America to go shopping, then the supply of euros will increase and the demand for Dollars will increase. This will cause the Euro to depreciate and the dollar to appreciate. '
Exchange Rate Determinants
  • Consumer Tastes
  • Relative Income 
  • Relative Price Level
  • Speculation 

May 4, 2017 - Balance of Payments

10:54 PM

Measure  of money inflows and outflows between the United States and the Rest of the World

  • Inflows are referred to as CREDITS
  • Outflows are referred to as DEBITS 
The Balance of Payments is divided into 3 accounts
  • Current Account
  • Capital/Financial Account
  • Official Reserves Account 
Current Account
  • Balance of Trade or Net Exports
    • Exports of Goods/Services - Import of Goods/Services 
    • Exports create a credit to the balance of Payments 
    • Imports create a debit to the balance of payments 
  • Net Foreign Income 
    • Income earned by U.S. owned foreign assets -Income paid to foreign held U.S. assets
    • Ex. Interest payments on U.S. owned Brazilian bonds - Interest payments on German-owned U.S. Treasury bonds
  • Net Transfers (tend to be unilateral) 
    • Foreign Aid -> a debit to the current account 
    • Ex. Mexican migrant workers send money to family in Mexico 
Capital/Financial Account
  • The balance of capital ownership
  • Includes the purchase of both real and financial assets
  • Direct investment in the United States is a credit to the capital account
    • Ex. The Toyota Factory in San Antonio
  • Direct Investment by U.S. firms/individuals in a foreign country are debts to the capital account 
    • Ex. The Intel Factory in San Jose, Costa Rica 
  • Purchase of foreign financial assets represents a debt to the capital account 
    • Ex. Warren Buffet buys stock in Petrochina 
  • Purchase of domestic financial assets by foreigners represents a credit to the capital account 
    • The United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ
Current Account with Financial Account = 0 

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 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
Balance of Trade: Exports - Imports 
Balance of Goods and Services: (Goods Exports + Services Exports) - (Goods Imports + Services Imports)
Balance on Current Account: Balance of goods and services + Net investments  + Net transfer
Balance of Capital Account: Direct investment and purchase of stocks and bonds 
Official Reserves: Current Account + Capital Account = 0

April 24, 2017 - Phillips Curve/Laffer Curve

10:53 PM

In the short run: the Phillips curve represents a trade-off between inflation and unemployment

  • As inflation increases, unemployment decreases 
Each point on the Phillips Curve corresponds to a different level of output.

Long run Phillips curve: 
  • it occurs on the natural rate of unemployment, 
  • it is represented by a vertical line. 
  • There is no tradeoff between inflation and unemployment 
  • the economy produces at a full ouput level 
  • The LRPC (Long run phillips curve) will only shift if the LRAS curve shifts. 
  • Increases in unemployment, it will shift LRPC ->
  • Decreases in unemployment, it will shift LRPC 

Supply side Economics/ Reaganomics: to stimulate active policy, to stimulate  , to work save and invest

includes tax cuts, which increases disposable income

Laffer curve: it displays the theoretical relationship between tax rates 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 also increase demand which can fuel inflation 
  3. Where the economy is actually located on the curve is difficult to determine 

March 20, 2017 - Money

8:43 PM

Money
Why do we use it? What would happen if we didn't use money?
The Barter System - Goods and services are traded directly; no money involved
What is Money?
  • Anything that is generally accepted in payment for goods and services
  • Money is not the same as wealth or income
Wealth - Total collection of assets that store value
Income - A flow of earnings per unit of time
Money can be used as:
  1. Medium of Exchange - Buy goods and services
  2. Unit of Account - Measuring the value of goods and services
  3. Store of Value - Savings and “storing” things of value
3 Types of Money:
Representative Money - Represents something of value; IOU’s
Commodity Money - Something that performs the function of money and has alternative uses; salt, gold and silver
Fiat Money - Money because the gov says so
Characteristics of Money:
  1. Durability
  2. Portability
  3. Visibility of Value
  4. Uniformity
  5. Limited Supply
  6. Acceptability
3 Types of Money Supply  (Again):
Liquidity - Ease with which an asset can be accessed and converted into cash

  1. M1 (High Liquidity) - Coins, currency and checkable deposits; demand deposits
  2. M2 (Medium Liquidity) - M1 plus savings deposits, time deposits and mutual funds below $100k
  3. M3 (Low Liquidity) - M2 plus time deposits above $100k

March 7, 2017 - Government Stabilizers and Payments

11:12 PM

Automatic or built in Stabilizers - Anything that increases the gov's budget deficit during a recession and increases it's budget surplus during inflation without explicit action

Transfer Payments -
1. Welfare checks
2. Food stamps
3. Unemployment checks
4. Corporate dividends
5. Social Security
6. Veterans Benefits

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