Unit 7: Balance of Payments, Foreign Exchange, Comparitive and Absolute Advantage

 

Balance of Payment 

• Measure of money inflows and outflows between the united states and the rest of the world.
• Inflows are reffered to as Credits
• Outflows are reffered to as debits
• The Balance of payment is divided into 3 accounts  

3 Accounts

• Current Account
• Balance of trade or net exports
• Exports (credit/asset) - Imports (Debit/Liability) 

• Net foreign income or Net investments
• Income earned by U.S. owned foreign assets 
• Income payed to foreign held U.S. asset

• Net Transfer: 
• Foreign Aid
• Humanitarian effort
• Sending money home to family  

• Capital/ Financial Accounts 
• Balance of capital ownership
• Purchases of both real and financial assets

• Direct investment in the U.S. is a credit to the capital account
• Toyota factory in San Antonio

• Direct investment by the U.S. firms/individuals in a foreign country are debits to the capital acct.
• Dell computer in Costa Rica

• Purchase of foreign financial asset represents a debit to the capital accounts
• Bill Gates buy stock in Petro China

• Purchase of domestic financial asset by foreigner represents a credit to the capital acctount
• Venezuela purchase a large stake in Walmart.

• Official Reserves
• The foreign currency holdings of the United States balance of payments        

Foreign Exchange Formulas 

• Balance of trade:
• goods export - goods imports
• Balance on goods and services:
• Goods exports + service exports - good imports + service imports
• Current Account:
• Net export + Net investment + Net transfers
• Capital Account:
• Foreign purchase of Assets + U.S. purchases of Assets

The Market

• Foreign Exchange Market:
• The buying and selling of currency
• Appreciation:
• Strong dollar. 
• The dollar buys more of another currency and results in less expensive imports and more expensive exports.
• Leads to a trade deficit and imports will increase because they are cheaper.
• Depreciation:
• Weak dollar
• The dollar buys less of another currency and results in more expensive imports and less expensive exports.
• Cheap exports. Weak dollar

   Comparative and Absolute Advantage  

• Comparative
• Who can produce with the lowest opportunity cost. 

Absolute Advantage  

• Who can produce more with the same resources or who can produce the same output with less resources. 
•  E.X. Papa Johns can produce more pizza than McDonald’s  

 

Unit 5: Phillips Curve, Laffer Curve, Disinflation, Deflation and Supply Side

The Phillips Curve

• The Phillips curve that purports to plot the relationship between unemployment and inflation on the theory that as inflation falls unemployment rises and vice versa
•  The trade off between inflation anf unemployment.
• Only occurs in the short run.

The Laffer Curve

• Depicts a theoretical relationship between tax rates and government revenue.
• As tax rates increase from 0, Tax (Government Revenues) increase from 0 to some maximum level and then decline

3 Criticisms

1. Empirical Evidence suggests that the impact of tax rates on incentives to work and save are small.
2. Tax cuts also increase demnad which can fuel inflation
3. Where the economy is located on the curve is difficult to determine 

Disinflation

• A reduction in the inflation rate from year to year and it can be seen in the long run Phillips curve.

Deflation

•  A general decline in the price level 

Hyperinflation

• When an economy experiences an unsual high rate of inflation

Supply Side (Reganomics)

• Change in AS and not AD determines the level of inflation, unemployment rates, and economic growth.
• Supporters of SSE believe is best to lower taxes and decrease regulation
• Lower tax rates provide positive work incentives and thus shift the aggregate supply curve to the right. 

 

Unit 4: Money Market + Loan-able Funds

                                               


Money Market

• It is the Market where the Fed and the users of money interact, thus determining the nominal interest rate. 

Money Demand 

• Comes from households, Firms, the Government, and the Foreign Sector.

Money Supply

• Determined only by the Federal Reserve

Types of Money Demand

• Transaction Demand
• Demand for Cash

Asset Demand

• Demand for money as a store value
• Depended upon the Interest Rate

Total Money Demand

• It is downward sloping because of high-interest rates people are less inclined to hold money and more inclined to hold stocks and bonds.
• Money supply is vertical because it is independent of Interest Rates. 

Expansionary Monetary Policy 

• Money Supply moves to the right
• Reserve Ratio Decreases
• Discount Rate Decreases
• Buy Bonds
• More Money
• Money Supply Increases

Contractionary Monetary Policy

• Money Supply shifts left 
• Reserve Ratio Increases 
• Discount Rate Increases
• Sell Bonds 
• Less Money 
• Money Supply decreases 

Loanable Funds 

• A market where buyers and savers meet to exchange bonds at the real interest rate 
• Both the demand and supply of loanable funds comes from households, firms, the Government and the Foreign Sector. 

Unit 4: The Uses of Money

Uses of Money

• Medium Exchange (Barter or Trade)
• Unit of Account (Is this the right value?)
• Store of Value (Is it worth it?)

Types of Money

• Commodity Money
• Item, Material, Gold Silver
• Representative Money
• IOU'S (Doesn't have a value) 
• Fiat Money 

Characteristics of Money

• Durability
• Money in the same composition 
• Portability
• Where the Money is being carried
• Divisibility 
• Breaking Money Down 
• Uniformity 
• Scarcity
• Acceptability 

Money Supply

M1 Money

• Cash 
• Coins
• Currency
• Traveler's Check
• The demand for Checkable Deposits
• Largest Component of M1 Money

M2 Money

• M1 Money + Savings Accounts

M3 Money 

• M2 Money + Money Markets accounts + CD'S (Certificate of Deposits) 

Liquidity 

• Easy to convert to cash 
• (M2+M3 are very liquid)