Unit Seven: Comparative and Absolute Advantage

Comparative and Absolute Advantage

Notes 5/9/16

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 of a good/service than another country 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

Output Problems: Tons/ acre, MPG, Words Per Minute, Apples Per Tree, Televisions produced per Hour

Input Problems: Number of hours to do a job, Number of acres to feed a horse, Number of gallons to paint a house

Specialization and Trade

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

-Companies should trade if they have a relatively lower opportunity cost

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get  it?  

Unit Seven: Mechanics of Foreign Exchange

Mechanics of Foreign Exchange (FOREX)

Notes from 5/3/16

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

Change in e 

-e are a function of the supply and demand for currency

-An increase in the supply of a currency ---> Decrease in e

-A decrease in the supply of a currency ---> Increase in e

-An increase in the demand of a currency ---> Increase in e

-A decrease in the demand for a currency ---> Decrease in e

Appreciation v. Depreciation

+ Appreciation- Occurs when the e of that currency increases

+ Depreciation- Occurs when the e of that currency decreases

Exchange Rate Determinants

1. Consumer's Tastes

2. Relative Income

3. Relative Price Level

4. Speculation

Exports and Imports

-The e 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 increasing imports

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Seven: The Balance of Payments

The Balance of Payments

Notes from 4/27/16

Balance of Payments- Measure of money inflows and outflows between the United States and the rest of the worlds

-Inflows---> CREDITS

-Outflows---> DEBITS

Balance of Payments is divided into 3 accounts

1. Current Account

2. Capital/ Financial Account

3. Official Reserves Account

Current Account

Balance of Trade or Net Exports

-Exports of Goods/Services - Imports of Goods/Services

-Exports create a credit

-Imports create a debit

Net Foreign Income

-Income earned by the U.S owned foreign assets - Income paid to foreign held U.S. assets

-Example: Interest payments on the U.S. owned Brazilian bonds - Interest payments on German owned U.S. Treasury bonds

Net Transfers (tend to be unilateral)

-Other states sending money to other states

-Foreign aid is a debit to the current account

-Example: Mexican immigrant workers send money to family in Mexico

Capital/ Financial Account- Balance of capital ownership

-Includes purchase of both real and financial assets

-Direct investment in the U.S. is a credit to the capital account

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

-Purchase of foreign financial assets represent a debit to the capital account

-Purchase of domestic financial assets by foreign represents a credit to the capital account

Relationship Between Current and Capital Accounts

-Current and Capital accounts should ZERO each other out

-If current account has a negative balance (deficit), then the capital account should have a positive balance

Official Reserves

-The foreign currency holdings  of the U.S. 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 a balance of payments deficit, the Fed depletes its reserves of foreign currency and credits the balance of payments

-SHOULD ZERO OUT 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

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Five: Reaganomics/ Supply Side Economics

Reagonomics/ Supply Side Economics

Notes from 4/13/16

Reagonomics- Change in AS (not AD) which determines the level of inflation, employment rates, and economic growth

Supply side economists support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments (such as unemployment compensation or welfare programs) provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures 

BASICALLY- "What can you do in your work time?"

-Lower marginal tax rates induce more work and AS increases and also makes leisure more expensive and more more attractive

-Higher opportunity cost not to work

-Postpone retirement and increase hours may have lower unemployment rates

Incentives to Save and Invest

1. High marginal tax rates reduce the rewards for savings and investments

2. Consumption might increase, but investments depend on savings

3. A lower marginal tax rate encourages savings and investment

Laffer Curve

-Depicts a theoretical relationship between tax rates and government revenues

-As tax rates increase from 0, government revenues increase from 0 to some maximum level, then decline 

3 Criticisms of the Laffer Curve

1. Research suggests that the impact on incentives to work, save, invest, are small

2. Tax cuts increase demand, which can fuel inflation and demand may exceed supply

3. Where the economy in actually located on the curve is hard to determine

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

 

Unit Five: Phillips Curve

Phillips Curve

Notes from 4/8/16

Long Run Phillips Curve

LRPC

-Because the LRPC exists at the NRU, structural changes in the economy that effect NRU will also cause the LRPC to shift

     -Increases in the NRU wil shift LRPC --->

     -Decreases in the NRU will shift the LRPC <---

SRPC

-There is a tradeoff between inflation and unemployment

-One increases, then the other decreases and vice versa

-Determinants are same as AS: Productivity, Input Costs, Legal Institutions

LRPC

-There is NO tradeoff between inflation and unemployment

-Always vertical at the natural rate of unemployment (NRU)

-Will only shift if LRAS shifts

*NRU= Frictional + Structural + Seasonal Unemployment

MAJOR LRPC ASSUMPTION

That more worker benefits create higher NR's and fewer worker benefits create lower NR's 

Supply Shocks

-Rapid and significant increases in resource costs which cause the SRAS curve to shift

-Outcome: SRAS will shift downward, SRPC will shift outward

Misery Index

-The combination of inflation and unemployment in any given year

-Single digit misery is GOOD

-Used to determine what is up with the economy

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Five: Extending the Analysis of Aggregate Supply

Extending the Analysis of Aggregate Supply

Notes from 4/7/16

Short Run Aggregate Supply- Period in which wages remain fixed as price level increases or decreases

Effects over Short Run

-In Short Run (SR), price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant

-In Long Run (LR), wages will adjust to the price level and previous output levels will adjust accordingly

Equilibrium in the Extended Model

Extended Model- The inclusion of both the short run and long run aggregate supply curves

-The LRAS curve is represented with a vertical line at full employment

Demand Pull Inflation- Prices increase based on increase in AD

-In SR, demand pull will drive up prices and increase production

-In LR, increases in AD will eventually return to previous levels

Cost Push- Arises from factors that will increase per unit costs such as increase in the price of a key source

Dilemma for the Government

-In an effort to fight cost push inflation, the government can react in two different ways

-Action such as spending by the government could begin an inflationary spiral

-No action could lead to recession by keeping production and employment levels declining

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

 

Unit Four: Countercyclical Polices

Fiscal Policy v. Monetary Policy

Notes from 3/29/16

1. In the early 21st century, here in the USA:

An efficient, "full employment" economy  will probably have:

-An annual unemployment rate of 4-5%.

-An annual inflation rate of 2-3%.

2. If the economy goes into recession:

-The real GDP decrease for at least 6 months.

-The unemployment rate will go to 6% or more.

-The inflation rate will probably go to 2% or less.

3. If Congress enacts Keynesian Fiscal Policies to attempt to slow/stop the recession, then:

- The policy will try to improve C or G (parts of AD)

-Congress will cut federal taxes.

-Congress will increase job and spending programs.

-The federal budget will probably create a deficit.

-Due to changes in Money Demand, interest rates will increase.

(Crowding Out may occur)

4. If the Federal Reserve employs Monetary Policy options to slow/stop the recession, then:

-The policy will target improvement in Ig (part of AD).

-The Fed will target a lower federal funds rate.

-The Fed can decrease the discount rate.

-The Fed can buy bonds.

-The Fed can lower the reserve requirement.

-The Fed policies will decrease the interest rates through changes in the Money Supply.

-These options should increase Ig.

5. If the economy suffers from too much demand-pull inflation or cost-push inflation, then:

-The unemployment rate will go to 4% or less.

-The inflation rate will probably go to 4% or more.

6. If Congress enacts Keynesian Fiscal Policies to attempt slow/stop the inflation problems, then:

-The policy will try to decrease C or G (parts of AD)

-Congress will increase federal taxes.

-Congress will decrease job and spending programs.

-The federal budget will probably create a surplus.

-Due to changes in Money Demand, interest rates will decrease.

7. If the Federal Reserve employs Monetary Policy options to slow/stop the inflation problems, then:

-The policy will target decreases in Ig (part of AD).

-The Fed will target a higher federal funds rate.

-The Fed increase discount rate.

-The Fed can sell bonds.

-The Fed can raise the reserve requirement, but probably won't because it is too complex for the banks. 

-The Fed policies will increase the interest rates through changes in the Money Supply.

-These options should decrease Ig. 

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Four: Monetary Policies

Three Tools of Monetary Policy 

Notes 3/21/16

1. Reserve Requirement

-Only a small percentage of your bank deposit is in the safe. Rest of money has been loaned out.

   *Called Fractional Reserve Banking

-Fed sets amount banks must hold

-RR= Percent of deposits that banks must hold in reserve and NOT loan out

-When the Fed increases the Money Supply, it increases the amount of money held in bank deposits

2. Discount Rate

-Interest Rate the Fed charges commercial banks

-To INCREASE the Money Supply, DECREASE the Discount Rate (Easy Money Policy)

-To DECREASE the Money Supply, INCREASE the Discount Rate (Tight Money Policy)

3. Open Market Operations (OMO)

-Fed is buying/selling bonds (securities)

  *Most widely and often used*

-To INCREASE the Money Supply, BUY bonds

-To DECREASE the Money Supply, SELL bonds

RECESSION?--> Expansionary Policy

-OMO: BUY bonds

-Reserve Requirement: Decrease

-Discount Rate: Decrease

* Money Supply INCREASES, AD INCREASES, GDP INCREASES, iR DECREASES, Loans INCREASES 

INFLATION?--> Contractionary Policy

-OMO: SELL bonds

-Reserve Requirement: Increase

-Discount Rate: Increase

* Money Supply DECREASES, AD DECREASES, GDP DECREASES, iR INCREASES, Loans DECREASES

+Federal Funds Rate: FDIC member banks make overnight loans to other banks

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

-When a customer deposits cash or withdraw cash from their demand deposit account, it doesn't change the Money Supply. It changes:

   *The Composition of Money

   *Excess Reserves

   *Required Reserves

-Single Bank- Can only loan money from excess reserves

-Banking System- (ER)(Multiplier)= Total Money Supply

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Four: Banks and the Creation of Money

Bank Balance Sheets

Notes 3/10/16

How do banks "create" money?

-By lending out deposits that are used multiple times

Where do the loans come from?

-Depositors who take cash and place it in the bank

How are the amounts of potential loans calculated?

-By using the bank balance sheet or T-account that consists of assets and liabilities for the bank

Bank Liabilities (Right Side of T-Account Sheet)

-Demand Deposits (DD) or Checkable Deposits (CD): Cash deposits from the public, They belong to the depositors, makes them liabilites

-Owners Equity: The value of stocks held by the public ownership of bank shares

Key Concepts:

-If DD comes from someone's cash holdings, then the DD's already part of the money supply, the cash is simply being placed in a bank account

- If DD comes in from the purchase of bonds (by the FED), then this creates new cash and therefore creates new money supply

Bank Assets (Left Side of T-Account Sheet)

-Required Reserves (RR)- Percentages of DD that must be held in the vault so that some depositors have access to the money, usually between 5-20%, In real time it will never be higher than 10%

-Excess Reserves (ER)- The source of new loans, DD= ER + RR

-Property 

-Securities/Bonds- Bonds purchased by the banks or new bonds sold to the bank by the Federal Reserve, These bonds can be purchased from the bank and turned into cash that immediately becomes available as ER

-Loans

*The FED requires banks to always have some money readily available to meet consumer's demand for cash

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Four: Money (Part Four)

Money

Notes from 3/9-10/16

Financial Sector

Financial Assets- Stocks or bonds that provide expected future benefits

   +Benefits the owner only if the issuer of the asset meets certain obligations

Financial Liabilities- Is incurred by the issuer of a financial asset to stand behind the issued asset.

   +Liabilites: OWED Assets: OWN

Interest Rate- The price paid for the use of a financial asset 

Stocks- Financial assets that convey ownership in a corporation

Bonds- The promise to pay a certain amount of money plus interest in the future

What Banks Do?

-A bank is a financial intermediary

   +Uses liquid assets to finance the investments of borrowers

   +Process known as Fractional Reserve Banking 

     -System where depository institutions (banks) hold liquid assets less than the amount of deposits

     -Takes forms of:

       *Currency of bank vaults

       *Bank reserves: Deposits held at the Federal Reserve

Basic Accounting Review

-T-Account (Balance Sheet)

  +Statement of assets of liabilities

  +Assets = Liabilities

- Assets (Amount Owned)

  +Items to which a bank holds legal claim

    *Examples: Capitol Stock, Owner's Equity

-Liabilities  (Amounts Owed)

  +The legal claims against a bank

Functions of the Federal Reserve Bank (FED)

1. Issue paper money

2. Sets reserve requirement and holds reserves of the bank

3. Lends money to banks and charges them interest

4. A check-clearing service for banks

5. Acts as a personal bank for the government

6. Supervises member banks

7. Control the money supply

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Four: Money (Part Three)

Money

Notes from 3/9/16

Money Demand and Supply

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

-What happens to quantity of money when interest rates decrease?

   +Quantity Demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities

-What happens to Quantity Demanded when interest rates decrease?

   +Quantity Demanded decreases because there is no incentive to convert cash into interest earning assets

Increasing Money Supply

-If the FED increases money supply, a temporary surplus of money will occur at i. The surplus will cause interest rate to fall to i'. 

Supply of Money Increases ---> Interest Rates Decrease ---> Investment Increases --->        Aggregate Demand Increases

Decreasing Money Supply

-If the Fed decreases money supply, a temporary shortage of money occurs.

Supply of Money Decreases ---> Interest Rates Increase ---> Investment Decreases --->         Aggregate Demand Decreases

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

 

Unit Four: Money (Part Two)

Money

Notes from 3/9/16

QUESTION: Is a dollar today worth more than a dollar tomorrow?

ANSWER: YES

WHY: Inflation and Opportunity Cost

VARIABLES:

v= future value of money

p= present value of money

r= real interest rate (nominal interest rate - inflation, expressed as a decimal)

n= years

k= # of times interest is credited per year

Simple Interest Formula

v= (1 + r) ^n x p

Compound Interest Formula

v= (1 + r/k)^nk x p

Example: Inflation is expected to be at 3% and nominal interest rate on simple interest savings is 1%. Calculate the future value of $ after one year.

r%= i% - ∏%

r%= 1 - 3 

r%= -2% or -0.02

v= (1 + r)^n x p

v= (1 + -0.02)^1 x 1

v= (.98)^1 x 1

v= $0.98

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Four: Money

Money

Notes from 3/4/16

Uses of Money

-Medium of Exchange: To trade or barter

-Unit of Account: Establishes economic worth in the exchange process

-Store of Value: Money holds its value over a period of time, whereas products do not

Types of Money

-Commodity $: Gets its value from the type of material from which it is made

    -Example: Gold and Silver Coins

-Representative $: Paper money backed by something tangible that gives it value

-Fiat $: It is money because the government said so

    -Used in the United States

Characteristics of Money

a. Portable- Can fold, move, etc.

b. Durable-Can leave money in your pocket, wash clothes, and the money will be fine

c. Scarce- Only having cash is rare

d. Divisible- How many ways can you break a dollar?.....A LOT

e. Acceptable- No where cash is not allowed

f. Uniform- Dollar is same no matter where you go

Money Supply

a. M1 $

   -Consists of currency

   -Currency:

    +Cash and Coins

    +Checkable Deposits/Demand Deposits (Checking Accounts)

    +Travelers Checks

   -75% of money currently in circulation

   -Most liquid- Easy to convert to cash

b. M2 $

   -Consists of M1 $ along with savings accounts, money market accounts, and deposits held by private institutions

   -Not as liquid

   -Money Market: Earn interest while in checking account

c. M3 $

   -Consists of M2 $ plus certificates of deposits (CDs) held by private institutions

   -If money here is withdrawn early, there is a penalty 

    +Example: Taking money out of your 401k plan

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Four Video Summaries: Video Six

Blog Video Summaries

3/26/16

6th Video Summary

The last video combined a few of the concepts we learned earlier and showed the relationship between the Loanable Funds Market, the Money Market, and Aggregate Demand-Aggregate Supply.

If the government runs a deficit, then everything is affected.

• Demand for Money shifts RIGHT, Interest Rate goes UP, Supply of Money stays the same
• Demand for Loanable Funds shifts RIGHT or Supply of Loanable Funds shifts LEFT
• Aggregate Demand shifts RIGHT, Price Level goes UP, and GDP goes UP

If you'll notice, everything increased when the government ran a deficit. This is called the Fisher Effect.

Fisher Effect- The change in the interest rate must equal the change in price level. They must have a 1:1 direct ratio.

It is important to be able to explain the relationship between all of the graphs. 

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Four Video Summaries: Video Five

Blog Video Summaries

3/16/16

5th Video Summary

This video talked about Money Creation and Multiple Deposit Expansion (all those sample problems we've done in class with RR and ER and all that jazz. One point that was made: Banks make money by making loans!!!

Money Multiplier: 1/ RR (Reserve Requirement)

EXAMPLE: Bobs puts $500 into the bank. The reserve requirement is 20%. What is the amount of money that is created in the banking system?

RR= 20% so 1/.2=2. ----------------> Money Multiplier= 5

5(Loan Amount) --------------> 5 x 500= 2,500 

Answer: $2,500

(This answer is implied that there are no ER- Excess Reserves. If there were, our $2,500 would be decreased.)

-JaelyNoTainted

Like Jaelym (SPACE) Not (SPACE) Tainted

Get it?

Unit Four Video Summaries: Video Four

Blog Video Summaries

3/26/16

4th Video Summary

This video talked about the Loanable Funds Market.

Loanable Funds- Amount of money available in the banks for people to borrow.

Demand for Loanable Funds is downward sloping because when the interest rate is low, people demand more money to spend. A high interest rate discourgaes people from borrowing money.

Supply of Loanable Funds comes from the amount of money people have in banks. It is dependent on SAVINGS. The more people save, the more money banks can loan out.

If the government is running a deficit, then they are demanding more money to spend. Demand for Loanable Funds shifts RIGHT and interest rate goes UP or Supply of Loanable Funds shifts LEFT and interest rate goes UP. 

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Four Video Summaries: Video Three

Blog Video Summaries

3/26/16

3rd Video Summary

The third video talked about the three monetary tools of the Fed. There are two directions the Fed can take: Expansionary (Easy Money) or Contractionary (Tight Money). The three tools the Fed can use are the Reserve Requirement, the Discount Rate, and Open Market Operations (OMO). 

Reserve Requirement- Percent of total deposits banks must keep in vault cash or on reserve with a Fed branch. This money CANNOT be loaned out.

Discount Rate- The rate at which banks can borrow money from the Fed.

Open Market Operations (OMO)- Buying or selling bonds or securities: Used most often

Federal Funds Rate- The rate at which banks can borrow from other banks

Under an Expansionary Policy, the Fed is trying to increase the Money Supply. In order to do so, they can: DECREASE the Reserve Requirement, DECREASE the Discount Rate, or BUY BONDS.

Under a Contractionary Policy, the Fed is trying to decrease the Money Supply. In order to do so, they can: INCREASE the Reserve Requirement, INCREASE the Discount Rate, or SELL BONDS/SECURITIES.

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?

Unit Four Video Summaries: Video Two

Blog Video Summaries

3/25/16

2nd Video Summary:

The second video was the introduction to money market graphs. 

Dm stands for Demand of Money. It is downward sloping because when interest rates are low, people tend to want to borrow more. Sm stands for Money Supply. This is a vertical line because it doesn't vary based on interest rates because it is fixed and set by the Fed, unless they do something to change it. They may shift it to the right, or increase the Money Supply to stabilize interest rates. A increase in Demand of Money causes it to shift  to the right and and an increase in interest rates. A decrease in the Demand of Money causes it to shift to the left and a decrease in interest rates.

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

Get it?