Absolute and Comperative 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 o a good/ service than another county can in the same time period.

Comparative Advantage

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

Examples of Output Problem:

• word per minute

• miles per gallon

• tons per acre 

• apple per tree

• television produced per hour

Examples of Input Problems:

• number of hours to do a job

• number of acres to feed a horse

• number of gallon of paint to paint a house

Specialization and Trade
Gains from trade are based on comparative advantage, not absolute advantage (who can do what in a certain amount of time)

 For more information on absolute & cooperative advantage you watch this video:
https://www.youtube.com/watch?v=Pd_qs8ueIWw

Mechanic of Exchange (Unit 7)

Foreign Exchange (FOREX)

• The buying and selling of currency*example: in order to purchase souvenirs in France, it is first necessary for Americans to sell their dollars and buy Euros

• Any transactions that occurs in the balance of payments necessitates foreign exchange

• Exchange Rate (e) is determined in foreign currency markets

• Exchange rates (e) are a function of supply and demand for currency- an increase in the supply of a currency- a decrease in supply of a currency will increase the exchange  rate of currency- increase in demand for currency will increase the exchange rate of currency- decrease in demand for a currency will decrease the exchange rate of currency

•  Appreciation of currency occurs when exchange rate of that currency increases (e^)

• Depreciation of a currency occurs when the exchange rate of that currency decreases

• Consumer tastes

• Relative income

• Relative price level

•  Speculation

•  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

Flexible Rates

• Depends upon supply and demand of that currency vs. other currencies

• Very sensitive to business cycle / provide options for investments

Changes in Exchange Rates

• Exchange rate (e) are a function of the supply and demand for currency.

Appreciation and Depreciation

• Appreciation of a currency occur when the exchange rate of that currency goes up.
• Depreciation of a currency occur when the exchange rate of that currency goes down.

Exchange Rate Determinants

• Consumer tastes
• Relative income
• Relative price level
• Speculation

Export and Import

• The exchange rate is a determinant of both exports and import.

The balance of payment (Unit 7)

The balance of payment

Measure of money inflows and outflows between the US and the Rest of the World (ROW)

• Inflows ---> CREDITS
• outflows ---> DEBITS

The balance of payments is divided into 3 accounts
      1. current account
      2. capital/ financial accounts
      3. official reserves accounts

Current Accounts

• Balance of trade or net exports
• Net foreign income
• Net transfers (tend to be unilateral)

Capital/ Financial Accounts

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

Official Reserves 

• Foreign currency holdings of US Federal Reserve System
• When there is a balance of payments surplus the FED accumulates foreign currency and debits balance of payments
• When there is a balance of payments deficit FED depletes its reserves of foreign currency and credits balance of payments

Active VS Passive Official Reserves

• The US is passive in its use of official reserves

Formulas

Balance of Trade

Good Exports + Goods Imports

Balance of Goods and Services

Goods Exports + Service Exports   +   Goods imports + Service Imports

Current Account

Balance on goods and services + Net Investments and Net Transfers

Capital Account

Foreign Purchases + Domestic Purchases

Inflation (Unit 5)

Inflation

• Inflation - is a general raise in the price level.
• Deflation - a general declare in the price level.
• Disinflation - decrease in rate of inflation overtime.
• Stagflation - unemployment & inflation increase in the same time.

Supply side economics

• Supply side economics - make change in AS but not AD, and determend the level of inflation, unemployment rate & economic growth.
• Lower marginal tax rate induce more work tto work for a long time.
• Also make things more expensive and worth more opportunity. 

• Supply side economics support policy that promote GDP grow by arguer high marginal taxes rate along with the current such as unemployment, compensation, to work in vest innovate, and undertake entrepreneur gesture.  

Incentive to save

1.  High marginal tax rate can reduce the reward for saving & investment.
2. Consumption might increase but investment depend upon saving.
3. Lower marginal taxes rate encourage saving & investment.

• Laffer curve - it depit a teoradical relationship between tax rate & govt revenue increase from zero to some maximum level and then declain 

Creations of laffer curve

1. Reseache suggest that the important of tax rate on incentive to work, save, & invest are small.
2. Tax court also increase demand with can fuel inflation, which cause demand to exceed supply.
3. worth economy is actual locate on the curve, is different to determined.

Extending the Analysis of Aggregate supply (Unit 5)

Extending the Analysis of Aggregate supply

• SRAS: in macroeconomics this is the period in which wages (and other input price) remain fixed as price level increase or decreases.
• LRAS: period of time in which wages have become fully responsive to changes in price level.

Effect over Short - Run

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

 

Equilibrium in the extended model

• The extended model means the inclusion of both the short run and LRAS come.
• The long aggregate supply curve is represented with a vertical line @ full employment.

 

Demand pull inflation

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

 

Cash push & the extended model

• Cost - push arises from factor that will increase per unit costs such as increase in the price of a key resource.

 

Dilemma for the Gov't

 

• In an effort to fight cost - push, the gov't can react in two different ways.
• Action such as spending by the gov't could begin an inflationary spiral.
• No action however  could lead to recession by keeping product and employment levels declining.

 

 

• LR Phillips curve

 

 

 

• Natural rate of unemployment is held constant.

• Because the LRPC exists at the natural rate of unemployment, structural change in the economy that affect unemployment will also cause the LRPC to shift.
• Increase in unemployment shift LRPC to the right
• Decrease in unemployment shift LRPC to the left