Joakim's AP Macroeconomics Blog: 2017

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:

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

April 13, 2017 - Federal Reserve Scenario 3 Video Presentation

9:13 AM

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:

Medium of Exchange - Buy goods and services
Unit of Account - Measuring the value of goods and services
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:

Durability
Portability
Visibility of Value
Uniformity
Limited Supply
Acceptability

3 Types of Money Supply (Again):

Liquidity - Ease with which an asset can be accessed and converted into cash

M1 (High Liquidity) - Coins, currency and checkable deposits; demand deposits
M2 (Medium Liquidity) - M1 plus savings deposits, time deposits and mutual funds below $100k
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

March 6, 2017 - Fiscal Policy

11:06 PM

Fiscal Policy

To stabilize the economy, the Government has 2 tools:

Fiscal Policy - Actions by congress to stabilize the economy

Tool 1 - Taxes; Gov can increase or decrease taxes

Tool 2 - Spending:gov can increase or decrease spending

- Fiscal policy is enacted to promote our nations economic goals; full employment, price stability and economic growth

Deficits, surpluses and Debt

- Balanced budget: Revenues = Expenditures

- Budget deficit: Revenues less than expenditures

- Budget surplus: Revenues greater than expenditures

- Gov Debt: Sum of all deficits - Sum of all surpluses

- Gov can borrow money from: individuals, corporations, financial institutions and foreign entities

Fiscal Policy - 2 Options

- Discretionary fiscal policy - action

- Expansionary fiscal policy - think deficit

- Contractionary fiscal policy - think surplus

- Non-Discretionary fiscal policy - no action

Three types of taxes

1- Progressive Taxes - Takes a large percent of income from high (rich) income groups

2- Proportional Taxes - Takes same percentage of income from all income groups

3- Regressive Taxes - Take larger percentage from low income groups

Contractionary Fiscal Policy (The Brake) - Laws that reduce inflation and decrease GDP

- Lowers gov spending

- Tax increases

- Combinations of the two

Expansionary Fiscal Policy (The Gas) - Laws that reduce unemployment and increase GDP

- Increase gov spending

- Decrease taxes on consumers

February 29, 2017 - MPC/MPS Multipliers

10:43 PM

MPC/MPS Multipliers

The Spending Multiplier Effect - An initial change in spending causes a larger change in aggregate or aggregate demand

- Multiplier = Change in AD / Change in Spending

- Multiplier = Change in AD / Change in C, I, G or Xn

Why It Happens? - Because expenditures and income flow continuously which sets off a spending increase in the economy.

Calculating the Spending Multiplier

Multiplier = 1/1 - MPC or 1/MPS

-Multipliers are (+ )when there is an increase in spending and (-) when there is a decrease.

Tax Multiplier = -MPC / 1 - MPC or -MPC/MPS

- When the gov taxes, the multiplier works in reverse because money is how leaving the circular flow

- If there is a tax cut, then the multiplier is (+) because there is more money in the circular flow

February 23, 2017 - Consumption and Saving

9:48 PM

Consumption and Saving

Disposable Income (DI) -

- Income after taxes or net income

- DI =gross income - taxes

2 Choices (With Disposable Income)

- With DI, households can either Consume or Save

Consumption

- Household spending

- Ability to consume is constrained by the amount of available DI or the propensity to save

Saving

- Household not spending

- The ability to save can be constrained by the amount of available DI and the propensity to consume

-Households do not save if DI = 0

Determinants of Consumption and Saving

1. Wealth

2. Household Debt

3. Taxes

4. Expectations

February 21, 2017 - Aggregate Supply

9:37 PM

Aggregate Supply

Aggregate Supply - The level of real GDP that firms will produce at each price level (PL)

Long Run vs Short Run

Long Run - Period of time where input prices are completely flexible and adjust to changes in price level.

- The level of real GDP supplied is independent of price level

Short Run - Period of time where input prices are "sticky" and do not adjust to changes in the price level.

-The level of real GDP supplied is directly related to the price level

Long Run Aggregate Supply (LRAS) - Marks the level of full employment in the economy

Short Run Aggregate Supply (SRAS) - Because input prices are "sticky"

Changes in SRAS - Increase is a shift to the right and Decrease is a shift to the left

Per Unit Production Cost = total input cost / total output

Determinants of SRAS

1. Input Prices

2. Productivity

3. Legal Institution Environment

1. Input Prices (Domestic Resource Prices)

- Wages (75% of all business cost)

- Cost of capital

- Raw Material

Foreign Resource Prices

- Strong Money = Lowers foreign resource prices

- Weak Money = Higher foreign resource prices

Market Power

- Monopolies and cartels that control resources control the price of those resources

2. Productivity

- productivity = total outputs / total inputs

- more productivity = lower production cost

- lower productivity = higher production cost

3. Legal Institutional Environment

- Taxes and subsidies on businesses increase per unit production cost

- Subsidies to business reduce per unit production costs

Government Regulation - Creates a cost of compliance

Deregulation - Reduces compliance costs

February 21, 2017 - The AS/AD Model

9:16 PM

The AS/AD Model

The equilibrium of AS and AD determines current output

Full Employment - Equilibrium exists where AD intersects SRAS and LRAS of the same point.

Inflationary Gap - Output is high and unemployment is less than NRU.

Recessionary Gap - Output low and unemployment is more than NRU

February 15, 2017 - Aggregate Demand curve

9:11 PM

Aggregate Demand Curve

Aggregate Demand Curve - The demand by consumers, businesses, government and foreign countries.

- Changes in the price level can cause a move along the AD curve, but not a shift

Aggregate Demand (AD) - Shows the amount of real GDP that the private, public and foreign sector collectively desire to purchase at each possible price level.

- Relationship between price level and level of real GDP is INVERSE

3 Reasons Why AD is Downwards Sloping

1. Wealth effect

- Higher prices reduces purchasing power of money

- Decreases quantity of expenditures

- Lower price levels increase purchase power and increase expenditures

2. Interest-Rate Effect

- As price level increase, lenders need to charge higher interest rates to get a REAL return on loans

- Higher interest rates discourage consumer spending and business investment

3. Foreign Trade Effect

- When U.S price level rises, foreign buyers purchase fewer U.S goods and Americans buy more foreign goods

- Exports fall and imports rise causing real GDP demanded to fall

Shifts in Aggregate Demand

- The 2 parts to a shift in AD are:

1. A change in C,I,G and/or Xn

2. A multiplier effect that produces a greater change than the original change in the 4 components

Determinants of AD

- Consumption (C)

-Gross private investment

- Gov spending

- Net Exports

1. Change in Consumer Spending

- Consumer Wealth (boom in stock market)

- Consumer Expectations (people fear a recession)

- Household indebtedness (more consumer debt)

- Taxes (decease in income taxes)

2. Change in investment spending

- Real interest rates (price of burrowing money)

- Future business expectations (high expectations)

- Productivity and technology (new robots)

3. Changes in gov spending

- War, nationalized healthcare and decrease in spending

4. Change in net exports

- Exchange rates (u.s dollar depreciates relative to the euro)

- National income compared to abroad (if major importer has a recession)

February 10, 2017 -FRQ Formulas Review

7:53 PM

FRQ Review - 2/10/17

Included in GDP - Newly produced goods, goods and services produced and sold by foreigners within our domestic borders. Both tangible goods and intangible services (haircut, housecleaning). Measures only productions within the confines of the country.

Excluded from GDP - Intermediate goods and services, which are used in the production of final goods and services, goods produced in previous years, and foreign products.

Formulas

GDP = C+I+G+( X - M)

private consumption + gross investment + government investment + government spending +

Net exports (exports - imports)

Budget Deficit/Surplus = Gov purchases + Gov transfer payments - Gov tax/fee collection

Trade Surplus/Deficit = Exports - Imports

National Income = Wage of employee + Rent income + Interest income + Proprietors income + Corporate profits

Disposable Income = National income - Personal house taxes + Gov transfer payments

3. Employment Rate = In the labor force, includes part-time but not full-time students

# of unemployed / # of labor force (unemployed + employed) X 100

4. Inflation Rate = A general rise of prices; reduces the “purchasing power” of money

Current year price index - base year price index / base year price index X 100

5. Nominal and Real GDP -

Nominal GDP - The value of output produced in current prices; can increase from year to year if either output or prices increase.

Real GDP - The value of output produced in constant base year prices.

February 9, 2017 - Unemployment

7:42 PM

Unemployment

Unemployment Rate - The percent of people in the labor force who want a job but are not working.
Labor Force - Number of people in a country classified as employed or unemployed.

Employed -
-Works atleast one hour a month
-Considered temporarily absent from work
- Part-time; considered employed

Not in Labor force -
- Kids
- Full time students
- People in mental institutions
-Military personnel
-Stay at home moms/dads
-Retirees
- Incarcerated people
- Discouraged workers; people who are not looking for work or gave up

Employment Rate = # unemployed / # labor force X 100
(Labor Force = unemployed + employed)

Types of Unemployment's

1. Frictional - Being between jobs; people with transferable skills

2. Seasonal - Due to the time of year and nature of the job

3. Structural - Changes in the structure of the labor force and workers who dont have transferable skills.

4. Cyclical - Unemployment that results from economic downturns like a recession.
- When demand for goods fall, demand for labor falls
- Natural Rate of Employment (NRU) = Frictional + Structural

February 6, 2017 - Inflation

9:10 AM

Inflation

Inflation - A general rising level of prices.

- Reduces the "purchasing power" of money

3 Causes of Inflation

1. Printing too much money; the Quantity theory

2. Demand-Pull Inflation - Excess of demand over output that pulls prices upward

3. Cost-Push Inflation - Higher production costs increases prices

- Standard inflation rate = 2-3%

- Formula = Current year price index - Base year price index / Base year price index X 100

- Rule of 70 - It is used to calculate the number of years it will take for price levels to double at any given rate of inflation

- Formula = 70 / Annual Inflation Rate

Deflation - A general decline in the price level

Disinflation - It occurs when the inflation rate declines

Real Interest Rates - Percentage increase in "purchasing power" that a borrower pays to the lender; adjusted for inflation rate

- Formula = Nominal interest rate - expected interest rate

Nominal Interest Rates - Percentage increase in money that the borrower pays back to the lender; not adjusted for inflation

Unanticipated Inflation

Hurt by Inflation -

- Lenders: People who lend money at fixed interest rates

- People with a fixed income

- Savers

Helped by Inflation -

- Borrowers - People who borrow money

- A business where the price of the product increases faster than the price of resources

February 3, 2017 - Real and Nominal GDP

8:52 AM

Real and Nominal GDP

Nominal GDP - The value of output produced in current prices; can increase from year to year if either output or prices increase

Nominal GDP = Price X Quantity

Real GDP - The value of output produced in constant base year prices

- Adjusted for inflation

- Price X Quantity

- Can increase from year to year only if output increases

- Only in base year is Real GDP equal to Nominal GDP.

- If we want to measure economic growth, we look at Real GDP

- In years after the base year, Nominal GDP will exceed Real GDP. In years before the base year, Real GDP will exceed Nominal GDP.

GDP Deflator - Price index that is used to adjust from Nominal to Real GDP.

- GDP Def = Nominal GDP / Real GDP X 100

Consumer Price Index - Measures inflation by tracking changes in the price of a market basket of goods,

- CPI = Price of current market basket / Price of base year market basket X 100

January 27, 2017 - GDP Notes

8:39 AM

GDP Notes

GDP - Gross Domestic Product

GNP (Gross National Product) - Total value of all goods including production or income earned by Americans anywhere in the world.

Formulas

GDP = C + Ig + G + Xn

C = Consumption

Ig + Gross Domestic Private Investment

G = Gov Spending

Xn = Net Exports

January 26, 2017 - Circular Clow

8:05 PM

Circular Flow

Circular Flow - Represents the transactions in an economy by the flows around a circle

Economic Actors

1. Households - Person or group of people who share their income

2. Firms/Business - Organization that produces goods and services for sale

January 25, 2017 - Circular Flow Model Charts

8:01 PM

January 19, 2017 - Factors of Supply and Demand

7:58 PM

Factors of Supply and Demand

Equilibrium - The point in which a supply curve intersects with the demand curve.

Excess Demand - When quantity demanded is greater than quantity supplied; result in a shortage.

Price Ceiling - When the government puts a legal limit on how high the price of a product can be.

Excess Supply - It occurs when quantity supplied is greater than quantity demanded; results in surplus

Price Floor - Lowest legal price a commodity can be sold at.

January 11, 2017 - Elasticity of Demand

10:08 AM

Elasticity of Demand

Elasticity of Demand - A measure of how consumers react to a change in price

Elastic Demand - Demand that is very sensitive to change in price
- Product not a necessity
- Available substitutes
- It is greater than 1
- Ex: Steak, clothes and soda

Inelastic Demand - Demand that's not sensitive to a change in price
- Product is a necessity
- Few to no substitutes
- It is less than 1
- Ex: Gas and insulin

Unitary Elastic - It is equal to 1

2017

January 10, 2017 - Macroeconomics Quiz Notes

9:07 AM

(Just as a disclaimer, these are not notes that were given in the AP class, these are just notes I typed and prepared for a quiz)

Macroeconomics Notes - Quiz (1/10/17)

Factors of Production - Land, Labor, Capital and Entrepreneurship

Land - Includes any natural resource used to produce goods and services. Includes not just land, but anything that comes from land like water,oil, coal.
Labor - The effort that people contribute to the production of goods and services. Like being paid for a service or creation of something.
Capital - The machinery, tools and buildings that humans use to contribute to the production of goods and services.
Entrepreneurship - A person who combines the other factors of production (land, labor, capital) to earn a profit.The most successful are innovators who find new goods and services to bring to the market.

Normative vs. Positive Statements

Positive - The attempt to describe the world as it is and is very descriptive and collects/presents facts.

Normative - Attempts to prescribe how the world should be and is opinion based, so it cannot be proved or disproved.

Scarcity vs. Shortage

Scarcity - A naturally occurring limitation on the resource that cannot be replenished. The most fundamental economics problem facing all societies.

Shortage - A market condition/state of a particular good at a particular price. When demand exceeds quantity available.

Trade-off vs. Opportunity Cost

Trade Off - Involves a sacrifice that must be made to get a certain product or experience

Opportunity Cost - When the most potential alternative is lost as a result of a decision

Law of Increasing Opportunity Costs - A principle that states that once all factors of production (land, labor, capital) are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well.

2017

January 9, 2017 Notes - Supply and Demand

8:02 PM

Supply and Demand

Demand

(An example of a Demand Schedule and Demand Curve)

Demand - The quantity’s that people are willing and able to buy at various process.

Law of Demand - There is an inverse relationship between price and quantity demanded.

What causes a “change in quantity demanded”?

A: Change in price

What causes a “change in demand”?

Change in number of buyers (population)
Change in buyers taste
Change in income

Normal goods - Inferior goods

4. Change in price of related goods

Substitute goods - Complementary goods

5 - Change in expectations (future)

Supply

Supply: The quantities that producers or sellers are willing and able to produce and sell at various prices.

The Law of Supply: There is a direct relationship between price and quantity supplied.
But what causes a change in quantity supplied? Again, a change in price.

What causes a change in supply?

1. Change in number of sellers
2. Change in cost of production
3. Change in technology
4. Change in taxes or subsidies
5. Change in weather
6. Change in expectations

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