ABSOLUTE AND COMPARATIVE ADVANTAGE

Absolute Advantage

-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- exists when a country can produce more a good/service than another country can in the same time period.

Comparative Advantage
A person or a nation has a comparative advantage when it can produce the product at alower domestic opportunity cost than can a trading partner.

Examples of output problems
1. Words per minute.
2. Miles per gallons.
3. Tons per acre
4. Apples per tree
5. Televisions produced per hour

Examples of input problems
1. Number of hours to do a job.
2. Number of acres to feed a horse
3. Number of gallons of paint to paint a house.

Specialization and trade
-Gains from trade are based on comparative advantage, not absolute advantage.

MECHANICS OF THE FOREIGN EXCHANGE

-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.

Changes in exchange rates

Exchange rates (e) 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 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 increases)
Depreciation of a currency occurs when the exchange rate of that currency decreases (e decreases)

Determinants of Exchange rate
1. Consumer tastes (buyers taste)

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, thus 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.

As two currencies trade:
1. One supply line will change; the other demand line will change.

2. They will move in the same direction.

3. One currency will appreciate, the other will depreciate.

Flexible rate
Based on the supply and demand of that currency versus the other currency. It is very sensitive to the business cycle and it provides options for investment.

Fixed rates
It is based on a countries willingness to distribute currency and to control the amount

UNIT 7- BALANCE OF PAYMENTS

-Measures of money inflows and outflows between the united states and the rest of the world (ROW).

-Inflows are referred to as credits-
-Outflows are referred to as debits-


The balance of payment is divided into three accounts:
1. Current account

2. Capital/financial account

3. Official reserves account


Double entry book keeping
-Every transaction in the balance of payments is recorded twice in accordance

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 the U.S. owned foreign assets
-Interest payments on U.S. owned foreign assets- Interest payments on German-owned U.S treasury bonds.

Net transfers (tend to be Unilateral).
-Foreign aid- a debit to the current account.
-Example- Mexican migrant worker sends money to family.

Capital / Financial Aid
-The balance of capital ownership.
-Includes the purchase of both real and financial asset


Direct investment in the United States is a credit to the capital account.
-For example the Toyota company in San Antonio


Direct investment by United States firms/individuals in a foreign country are a debit to the capital account.
-Intel factory construction in Germany


Purchase of foreign financial assets represents a Debit to the capital account.
-Warren buffets buys stock in Petrochina.


Purchase of domestic financial assets by foreigners represents acredit to the capital account.
-The UAE sovereign wealth fund purchases a large stake in the NASDAQ.

Relationship between current and capital account
-The current account and the capital account should zero each other out.
-That is….if the current account has a negative balance (deficit) then the capital account should then have a positive balance (surplus).

Official reserves
-The foreign currency holdings of the U.S. fed.
-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.


Active v. passive official reserves
-The U.S. is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate.
-The People's Republic of China is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate w/ the United States.


Formulas

1. Balance of trade:
- Good exports + goods imports

2. Balance on goods & services:
- Goods exports + service exports + goods imports + service imports.

3. Current Account:
- Balance on goods and services + net investment + net transfers

4. Capital account:
- Foreign purchases + domestic purchases.

UNIT 6 PRODUCTIVITY AND ECONOMIC GROWTH

Economic Growth
-sustained increase in real GDP over time as well as per capita over time
-growth leads to greater prosperity for society
-lessons burden of scarcity


Conditions for Growth
•Rule of Law
•Sound Legal and Economic Institutions
•Economic Freedom
•Respect for Private Property


•Political & Economic Stability
–Low Inflationary Expectations
•Willingness to sacrifice current consumption in order to grow

•Saving

•Trade


Physical capital
-tools, machinery, and factories
-physical capital is a product of investment
-it takes capital to make capital


Technology and Productivity
-research and development innovation and invention yield increase in tech
-more tech= more productivity
-more productivity=economic growth


Human Capital
-people are a country's most important resource
-education
-economic freedom
-incentives
-clean water
-stable food supply


Hindrances to growth
-economic and political stability
-absence of the rule of law
-diminished private property rights
-negative incentives
-lack of savings
excess current consumption
-failure to maintain existing capital
-crowding out of investment

A.S ANALYSIS

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

Long Run Aggregate Supply
-Period of time in which wages have become fully responsive to changes in price level.

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 run AS Curve is represented with a vertical line at full employment level of real GDP.

Demand Pull Inflation
-Demand pull- prices increases based on an 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 & the Extended Model
-Cost push inflation arises from factors that will increase per unit costs such as increases in the price of a key resource.

Dilemma for the Government
-In an effort to fight cost-push, the government can react.
-Action such as spending by the government could begin an inflationary spiral.
-No action however could lead to a recession by keeping production and employment levels declining.

FOREIGN EXCHANGE MARKET

-buying and selling of currency

-any transaction that occurs in the balance of payments necessitates foreign exchange

-the exchange rate is determined in the foreign currency markets

Changes in exchnage rates

-exchange rates are a function of the supply and demand for currency

-/\ supply of currency will \/ exchange rate

-\/ supply of currency will /\ echange rate

-/\ demand for curency will /\ exchange rate

-\/ demand for currency will \/ exchange rate

Appreciation and depreciation

-appreciation will happen when /\ exchange rate 

-depreciation will happen when \/ exchange rate

Exchange rate determinants

-consumer taste

-relative income

-relative price level

-speculation 

Exports and imports

-the exchange rate is a determinant of both exports and imports

-appreciation of the dollar causes American goods to be relativley more expencive and foreign goods to be relatively cheaper thus reducing exports and increasing imports

-depreciation of the dollar causes american goods to be relatively cheaper and foreign goods to be relatively more expencive thus increasing exports and reducing imports

BALANCE OF PAYMENTS

Measure of money inflows and outflows between US and the rest of the world

-inflows are referred to as credits

-outflows are reffered to as debits

Current account

-Balance of trade or net exports

.exports of goods/services-inports 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 the us owed foreing assets-income paid to foreign held U.S assets

-Net transfers

.foreign aid-> a debit to current account

Capital financial account

-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

-direct investment by U.S firms/individuals in a foreign country are debits the capital account

-purchase of foreign financial assets represents a debit to the capital account

-purchase of domestic fiancial assets by foreigners representatives a credit ro the capital account

Relationship between current and capital

-they must be equal to zero

-that is if current has a negative balance, then the capital account should then have a positive balance 

Official reserve account

-the foreign currency holdings of the United States federal reserve system

-when there is a balance of payments surpls the fed accumulates foreign currency and debits the balance of payments

-when there is a balance of payments defitcit the fed depletes its reserves kf foreign currency and credits the balance lf payments 

-OR will zero out balance of payments

Active vs passive official reserve

-the united states is passive in its use of official reserves it does not seek to manipulaye the dollar exchange ratel