Unit VII: Foreign Markets/ Advantages:

Foreign Exchange: The buying and selling of currency. The exchange rate (e) is determined in the foreign currency markets. Simply put the exchange rate is the price of a currency. 

Four tips: *Always change the D line on ones currency graph, the S line on the other currency's graph. *Move the two lines of both graphs in the same direction and you will have the correct answer. *If D on one graph increases, S on the other will also increase.*If D moves to the left, S will move to the left on the other graph. 
Changes in Exchange Rate: Exchange rates (e) are a function of the supply and demand for currency. An increase in the supply of a currency will make it cheaper to buy one unit of that currency. A decrease in supply of a currency will make it more expensive to buy one unit of that currency. An increase in the demand for a currency will make it more expensive to buy one unit of that currency. A decrease in demand for a currency will make it cheaper to buy one unit of that currency. 

Appreciation: appreciation of that currency occurs when the exchange rate of that currency increases. (E increases) the dollar is stronger 
Depreciation: occurs when the exchange rate of that currency decreases (e decreases) the dollar is weaker. 
Exchange rate determinants: Consumer Tastes: the increase in the supply of dollars leads to the depreciation of the dollar. Relative Incomes: imports tend to be normal goods. This increases he demand for the dollar, causing the dollar to appreciate and the currency to depreciate. Relative Price LevelSpeculation 

Purchasing power policy: When the currency rates are set by international markets changes will be based on the actual purchasing power of the currency. 
If the U.S. Dollar to European euro rage is 1.5 to 1 , then each 1.5 will buy one euro, however if an item in the U.S. Cost 1.50 and then cost more or less than one euro, the parody is lost. Markets will adjust quickly in floating rates or pressure for change will occur in fixed rates. 

Why do we exchange currencies
1. to invest in other countries stocks & bonds
2. To sell exports buy imports
3. To build factories or stores in other markets
4. To hold currencies in bank accounts for future exports imports or business loans
5. To speculate on currency values
6. Control excessive imbalances 

Absolute Advantage
-Individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time.
-National: exists when a country can produce more of a good/service than another country can in the same time period.
Comparative Advantage
-Individual/National: exists when an individual or a nation can produce a good/service at a lower opportunity cost than can another individual or nation can.
Input Problems:
-the country or individual that uses the least amount of resources land or time has the absolute advantage.
Output Problems:
-the country or individual that can produce the most has, the country or individual that has lowest opportunity cost has comparative advantage for that product.
AA:
-faster, more efficient
CP:
-lower opportunity cost

Unit VII: BOP

Unit VII: AP Macroeconomics: The Balance Of Payments: 

Balance of Payments: measure of money inflows (credits) and outflows (debits) between the U.S. And the rest of the world. 

Balance of Accounts is divided into 3 parts: 

1. Current Account

-balance of trade + our net invest + our net transfers 

-every transaction in the balance of payments is recorded twice in accordance with standard accounting practice.

- what goes out should come back equal to zero

2. Capital/Financial Account

-the balance of capital ownership

-includes purchase of both real and financial assets

-direct investment in the united states is a credit to the capital account

-direct investment by US firms/individuals in a foreign country are debits to the capital account

-purchase of foreign financial assets represents a debit to the capital account.

-purchase of domestic financial assets by the foreigners represents a credit to the capital account

Relationship between current and capital 

account:

-they should zero each other out

-if current account is negative then capital account should have a positive balance

- foreign purchases of US assets + US purchases of assets abroad

3. Official Reserves Account  

-foreign currency holdings of the united states federal reserve system

-when there is a balance of payments surplus the fed accumulates foreign currency and debits the balance or payments

-when there is a balance of payments deficit the fed depletes its reserves of foreign currency and credits the balance payments

-official reserves zero out the balance of payments

current account + capital account

Double Entry Book Keeping: 

Every transaction in the balance of payments is recorded twice in accordance with stranded accounting practice.

Theoretically, The balance payment should always equal zero. 

Balance of trade:

-exports - imports = balance of trade

Balance of trade:

-goods and services exports - goods and services imports

-trade deficit or trade surplus

-imports > exports =deficit

-exports < imports =surplus

-goods exports + goods imports

Net foreign income:

-income earned by US owned foreign assets - income paid to foreign held US assets

Net Transfers:

Ex: people work here and send money to their country

Active v. Passive Official Reserves:

-the united states is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate.

-the people's republic of china is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate with the united states

Goods and Services:

-goods imports + service imports

Unit VI: Economic Growth

Unit VI: Economic Growth & Productivity:

Economic Growth Defined:

·         Sustained increase in Real GDP over time.

·         Sustained increase in Real GDP per Capita over time.

·         Growth leads to greater prosperity for society.

·         Lessens the burden of scarcity.

·         Increases the general level of well-being.

Conditions of Economic Growth:

• Rule of Law
• Sound Legal and Economic Institutions
• Economic Freedom
• Respect for Private Property
• Political & Economic Stability
• Low Inflationary Expectations
• Willingness to sacrifice current consumption in order to grow
• Saving
• Trade

Human Capital:

·         People are a country’s most important resource. Therefore human capital must be developed.

·         Education

·         Economic Freedom

·         The right to acquire private property

·         Incentives

·         Clean Water

·         Stable Food Supply

·         Access to technology

Unit V: Phillips Curve

Unit V: Phillips Curve: Represents the relationship between unemployment and inflation 


Long Run Phillips curve: Occurs at the natural rate of unemployment. (4-5%) represented by a vertical line 
No trade off between unemployment and inflation in the long run - the economy produces at the full employment level. Will only shift if the LRAS curve shifts 
The major LRPC assumption is that more worker benefits create higher natural rate and fewer worker benefits create lower natural rates. 

The long run Phillips curve (LRPC): because the long run Phillips curve exists at the natural rate of unemployment (un) structural changes in the economy that affect (un). 
Supply side economics: it is the belief That the as curve will determine levels of inflation, unemployment, and economic growth. 
To increase the economy you would shift the as curve to the right. 
Supply side economists focus on the marginal tax rate-(Amount paid on the last dollar earned or on each additional dollar earned)
Beliefs: Lower taxes are an incentive for a business to invest in the economy and that lower taxes are an incentive for workers to work hard thereby becoming more productive. Lower taxes are incentives for people to increase savings and therefore create lower interest rates which causes an increase in business investment. 
They 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 entrepanuer ventures 
Known as Reaganomics. 

Ladder curve : a Tradeoffs between tax rates and government revenue. Used to support the supply side argument. As tax rates increase from zero tax revenues increase from zero to some number and then decline. 

Three criticisms of the ladder curve: 
1. Research suggests that the impact of tax rates on incentives to work save and invest are small. 
2. Tax Cuts also increase demand which can fuel inflation thus creating a situation where demand exceeds supply. 
3. Where the economy is actually located on the curve is difficult to determine. 








Short Run Phillips Curve: there is a trade off between inflation and unemployment. SRPC has relevance to Okun's law. Since wages are sticky, inflation changes move the points on the SRPC. If inflation persists and the expected rate of inflation rises, then the entire SRPC moves upward which causes a situation called stagflation. If inflation expectations drop due to new technology or economic growth then SRPC moves downward. 

Aggregate Supply Shock: causes both the rate of inflation and the rate of unemployment to increase. It is a rapid and significantly increase in resource cost. 



The misery Index: is a combination of inflation and unemployment in a any given year, single digit misery is good. 

Unit IV: Monetary policy Video

Unit IV: Loanable Funds Market

Unit IV: Loanable Funds Market: 

The market where savers and borrowers exchange funds(Qlf) at the real rate of interest (r%) 

The demand for loanable funds or borrowing comes from households, firms, government and the foreign sector. The demand for loanable funds is in fact the supply of bonds. 

The supply of loanable funds, or savings comes from households,firms, government, and the foreign sector. 

Changes in the Demand for Loanable Funds: 

Remember that demand for loanable funds=borrowing(supplying bonds)

More borrowing=more demand for loanable funds. (Increase,right)

Less borrowing=less demand for loanable funds (decrease,left)

Changes in the Supply Fr Loanable Funds: 

Remember that supply of loanable funds = saving(demand for bonds) 

More savings= more supply of loanable funds (right) 

Less savings=less supply of loanable funds (left) 

Final Thoughts on Loanable Funds: when government does fiscal policy , it will affect the loanable funds market. 

Unit IV:

The money market demand for Money has an inverse relationship between nominal interest rates and the quantity of money demanded.  

Discount rate: Interest rate that the fed charges commercial banks for borrowing money. 

Reserve Requirement: Fraction of money that the bank must keep to reserve. 

Federal fund rate: interest rate that commercial banks charge one another for an overnight loan. 

Prime Rate: interest rate that banks charge their most credit worthy customers