Unit 7: Comparative and Absolute Advantage

Unit 7: Comparative and Absolute Advantage

- Absolute: The producer that can produce the most output or requires the least amount of input.

• Ex: Papa John produces 20 pizzas and McDonalds produces 14 pizzas.

- Comparative: The producer that has the lowest opportunity cost.

Unit 7: Foreign Exchange Market

Unit 7: Foreign Exchange Market

- The buying and selling of currency

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

Appreciation	Depreciation
-       Increase of value of a country’s currency with respect to a foreign currency -       Less units of dollars are needed to buy a single unit of another country’s currency.	-       The loss of value of a country’s currency, the dollar is considered to be weaker -       More units of a dollar are needed to buy a single unit of a currency

Unit 7: Balance of Payments

Unit 7: Balance of Payments

- It is the measure of money inflows and outflows between the United States and the rest of the world.

- Inflows are known as credits.

- Outflows are known as debits.

- Balance of payments is divided to 3 accounts:

1. Current Account
2. Capital/Financial Account
3. Official Reserves

-Every transaction in the balance of payments is recorded twice.

Current Account	Capital/Financial Account	Official Reserves
-       Net exports/ balance of trades (exports-imports) -       Net foreign factor payment (Income earned by US owned foreign assets) -       Net transfers (foreign aid)	-       Balance of capital ownership (includes purchase of real and financial assets) -       Direct investment in the US is a credit to the capital account (Ex: Toyota factory in San Antonio) -       Direct investment by US firms/ individuals in a foreign country are debts to capital account. (Ex: Dell Computer factory in Costa Rica.) -       Purchase of foreign financial assets represents a deficit to capital account. (Ex: Bill Gates buying stock in Petro China.) -       Purchase domestic financial assets by foreigners represents a credit to the capital account. (Ex: Cuba purchases in McDonald’s)	-       Foreign currency holding of US states federal reserve system -       The official reserve zero out the balance of payment.

Formulas:

Balance of Trades = Good imports + Good Exports

Balance of Goods and Services = (Good Exports + Service Exports) - (Good Imports + Service Imports)

Current Account = Net Exports + Net Foreign Factor + Net transfers

Capital /Financial Account = Foreign Assets + Our Country Assets

Unit 5

May 5, 2018

Unit 5

Phillips Curve

Natural rate of unemployment: short run and long run intersect

Disinflation: it is a reduction in the inflation rate from year to year

This can be seen in the long run Phillips curve. It also occurs when aggregate demand falls.

Deflation: A general decline in the price level

Hyperinflation: where an economy experiences an unusual high inflation rate.

Supply-side economics (Reagenomics)

-       Change in AS, not AD in determining the level of inflation, unemployment rates and economic growths.

-       Argue that lower tax rates provide positive work incentives in this shift in thus shift the aggregate supply serve to the right

-       Supply- side economist support programs and policy that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments (unemployment compensation, welfare programs, etc.) provide disincentives to work, invest, and to undertake entrepuernual ventures.

Lafer curve

-       It depicts a theoretical relationship between tax rates and tax revenues.

-       As tax rates increase from zero, tax revenues increase from zero to some maximum level and then decline.

-       Criticism:

o   Impericle evidence suggest that the impact of tax rates on incentives to work save and invest are small.

o   Tax cuts also increase demand which can fuel inflation

o   Where the economy is actually located on the lafer curve is difficult to determine.

Unit 4: Expansionary vs. Contractionary Monetary Policy

Expansionary vs. Contractionary Monetary Policy

Expansionary Monetary Policy – “Easy” Money (Recession) -       Buy Bonds (Big Bucks) -       RR ↓ -       DR ↓ -       FFR ↓ -       i ↓ -       Ig ↑ -       AD ↑ -       MS ↑ -       $ depreciate

Contractionary Monetary Policy – “Tight” Money (Inflationary) -       Sell Bonds -       RR ↑ -       DR ↑ -       FFR ↑ -       i ↑ -       Ig ↓ -       AD ↓ -       MS ↓ -       $ appreciate

Unit 4: Money Creation Process

Unit 4: Money Creation Process

1.)  $1000 in cash deposited into a checking account

2.)  $1000 Fed purchase of Bonds from the public (deposited into a checking account)

                                         ↓                                                                                ↓

No immediate change in MS

Immediate increase in MS of $1000

                                                                                 ↓

Assets Reserves - $1000

Liabilities DD - $1000

Required Reserves = $100 (.10 x $1000 deposit)

Single Bank: Amount of money single bank can create (loan out) = ER

 Actual Reserves - Required Reserves = Excess Reserves

$1000 - $100 = $900

Banking System: can create by a multiple of its initial EXCESS RESERVES

Monetary Policy = 1/RR

1/.1=10

System New $ = Deposit Multiplier x Initial Excess Reserves

10 x $900 = $9000

Total change in money supply as result of deposit

initial deposit + banking system created money = Total change in MS

Unit 4: Money

April 9, 2018

Unit 4: Money

Uses of money

1.    Medium of exchange - barter/trade

2.    Unit of account - economic value

a.    Am I getting my money’s worth?

3.    Store of value – what is the money’s value over time?

Types of money

1.    Commodity money – a product

a.    EX: golden silver

2.    Representative Money – Money that has no value

a.    EX: IOU’s

3.    Fiat Money – it is money because the government says so.

Characteristics of Money

1.    Durability – Able to last / withstand

2.    Portability – carry money from place to place

3.    Divisibility – money can be divided into smaller units

4.    Uniformity – same or identical

a.    EX: old money is the same as the new money

5.     Scarcity

6.    Acceptability

Money Supply – Monetary Policy controlled by the Fed. Government

-       M1 Money: Cash, currency, coins, checkable or demand deposits(checking account)

o   75% of businesses

o   Traveler’s check

-       M2 Money: M1 Money + savings account

-       M3 Money: M2 Money + Money Market Accounts + CD’s

Liquidity – Easily to convert to cash

Prime Rate: Interest rate that banks charge their most credit worthy customers.
Balance Sheet:

• summarizes the financial position of a bank at a certain time

ASSETS: - RR (Required Reserves): % of DD in vault - ER (excess Reserves): remaining of DD for loans - Property - Securities or Bonds (investments) - Loans

LIABILITIES: -DD (Demand Deposits); Checkable Deposits - Net Worth (Owners Equity) bank owners wealth

Assets = Liabilities + Net Worth

DD (demand deposits) = RR (required reserves) + ER (excess reserves)

MM (money multiplier) = ER (excess reserves) x [1/RR (required reserves)]

Fractional Reserve Banking System: Where a fraction of the total money supply is held in reverse as currency.

Basics: How Do Banks Get Money?

- From the public as deposits. The public wants safety and sometimes a return in the form of interest rates.
- Since the deposits are the property of the public, banks must record them as "liabilities" for the bank and are labeled as "demand deposits". they are also known as "checkable accounts" but that tern is being used less with the demise of "checkbooks".
- Banks, once in operation, can invest funds in the form of Federal Bonds, purchased from the Fed. The bonds earn the bank interest rate. The bond amounts are "assets" for banks.

What Do Banks Do With The Money?

- lend it the public in order to profit from the interest charges on the loans. This money creates a "money multiplier" or "monetary multiplier".

Do Banks Lend All of the Money? No

- Not all of the Demand Deposits, Since some of the public comes to the bank each day and wants to withdraw some of the Demand Deposits, banks must keep some cash "in the vault". This "reserve" is used to satisfy withdrawal requests.
- Banks that belong to the Federal Reserve System must keep a "Required Reserve" percentage set by the Fed. the Required Reserve is approximately 10? of Demand Deposits, and since almost all banks in the US are part of the Fed System, this has become the national standard.
- The remaining amount becomes the "excess reserves". The excess are then used by the banks as loans to the public.
- Banks can lend all of the Bond Assets they hold and so not have to put any percentage into the Required Reserves.

What Happens to the Loans?

- When a person borrows from a bank it will be assumed that the money is spent somewhere. The next assumption is that the funds end up in a bank account as someone else's checkable Deposits in a second bank. The second bank then pulls out the Required Reserves, The remaining Excess Reserves become a new loam which another person can use the money ends up in a third bank. The process "multiplies".
- Note however, that with each new loan, some is removes and held a Required Reserves. The loam amount will shrink with each new loan. How many times can the process occur?
- No one knows at which point any given amount of deposits shrink to a point where borrowing will end, but estimates are made using the "money multiplier". the formula is based on the amount being drained out by the Reserve Requirement. The greater the Reserve Requirement, the quicker the loan amount will shrink and end the line of loans.
- The general formula is given as 1/rr, with "rr" standing for the Required Reserve percentage, known here as the reserve ratio. If the rr is 10%, then every original loan of 1 dollar will create 10 dollars of loans in the banking system (1/.1). A 5% rr gives a multiplier of 20(1/.05) and a reserve of 20% lowers the multiplier to only 5(1/.20).

AP and Bank T-Accounts

- Banks keep all of the accounting for this lending in a T-Account of Assets and Liabilities.
- The Assets and Liabilities are always equal to show bank solvency,
- The T-Account is a chart, with Assets on the Left and Liabilities of the Right.