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.