04/23/2014 Supply and Demand of Money

• Supply of the dollar
• Comes from U.S. citizens, banks, and industries wanting to purchase foreign goods, investments, assets, and make transfer payments to foreigners.
• Demand of the dollar
• Comes from foreigners, banks, and industries wanting to purchase our goods, investments, assets, and to make transfer payments to us.
• In short, if dollar appreciates, then demand of the dollar increases, supply decreases value of dollar increases.
• If dollar depreciate, then demand decreases, supply increases value of dollar decreases.
• Fixed Exchange Rate
• based on a countries willingness to distribute currency and control the amounts. (Set by the government)
• Flexible or floating Exchange Rate
• Supply and demand of that currency v. other currencies.
• No government interventions, based on market forces. 

04/21/2014 Balance of Payments

• A nation's balance of payments is the sum of all the transactions that take place between its residents and the residents of all foreign nation.
• Exports/ Imports of goods, services, tourist expenditures, interest and dividends.
• A balance of statement is made every year which is a statement that shows all the payments a nation receives from foreign countries and all the payments it makes to them.
• The US trade is currently produced goods and services is called the current account.
• Exports are indicated with a + sign because they are credit, imports have a - sign because they are debt.
• A country's balance of trade on goods in the difference between the exports and imports of goods.
• Trade surplus: exports of goods and services > imports
• Trade deficit: imports> exports
• The central bank of nations hold quantities of foreign currencies called official reserves.
• Balance of Payments Deficits and Surpluses: Imbalances between current and capital accounts that cause a drawing down or building up of foreign currencies. 

4/14/14 Terms of Trade

• Terms of trade determine the rate at which one country is willing to trade one item another item on the world market
• Trade terms may be expressed in either monetary or bartering vocabulary
• As a monetary expression, terms of trade are stated as a world price, the subject of upcoming discussions.
• When viewed from a bartering standpoint, trade terms refer to the amount of certain items two countries are willing to exchange with one another.
• Trade terms are influenced by economic and non-economic factors and must be negotiated through a political process.
• There is no unique set of optimal trade terms between two countries.
• A range of acceptable trade solutions exists from which the countries must select through a trade agreements.
• Knowing how a country benefits from specializing can help us determine how it may benefit from trade- shifts in PPC outward.

04/14/14 Specialization and Trade

• Specialization occurs when productive agents use their available resources to focus on producing one or a few products at which they are best suited.
• Some producers are better to produce certain items depending on their resources.
• International Trade occurs when buyers and sellers in two nations exchange with one another.
• Closed economy- A nation neither imports or exports products.
• Open economy- A nation imports and exports product. They specialize in for those they don't, a nation with an open economy can obtain more of both. 
• Cost ratios provide a method of comparing opportunity costs of producing certain items between producers.
• Lower cost ratio= lower opportunity cost. 
• Measures how much of one good must be surrendered for every unit of another good. 
• Can be compared between different nations for the same item or between different items within the same nation.
• Can be calculated using output or input data, both approaches lead to the same results if done correctly.
• Producers should specialize in making a product only when their cost ratio of doing so is less that that of their trading partners.
• Output problem approach is based on the most of an item each producer could make if it specializes using a set amount of resources. 
• Maximum output of item B/Maximum output of Item A
• How much of item B must be lost for every unit of item A gained by this producer. 
• Input problem approach is based on  the least resources each producer needs to make a set amount of an item (generally one unit)- these problems are stated in terms of resources per output unit.
• Resources needed for item A/ Resources needed for item B
• How much of item A will be gained for every unit of item B lost by this producer.
• Rules of specialization 
• In general, producers should specialize in making a product only when their cost ratio of doing so is less than that of their trading partners.
• The no advantage rule states that nations should not specialize or trade i neither trading partners possesses a cost advantage in producing either product.
• The absolute advantage states that two countries should specialize and trade when each partner has an output advantage over the other.
• The rule isn't always a reliable guide because having an output advantage doesn't guarantee a cost advantage. 
• The comparative advantage rule by David Ricardo states that two countries should specialize and trade, even if one produces more output of both products, as long as each partner has a cost advantage over the other. 
• Trade Possibilities Curve shows the amount of two items a country can obtain by specializing in one and trading for the other.
• The PPC assumes a closed economy where trade-offs must be made in how a nation uses its own resources.
• The TPC assumes an open economy where a nation is free to specialize its own production and trade with other nation.
• The nation with the lower opportunity cost has a comparative advantage in that particular item. 

4/08/14 Unit 6

• Focus on real GDP per Capita
• Last 50 years real GDP grew by about 3.5% per year,
• Last 50 years real GDP per capita grew by about 2.3% per year.
• Sources of Long- Run Growth
• Productivity- output per unit of input,
• Labor productivity- output per worker,
• What leads to higher productivity?
• Stock of physical capital- buildings, machines, robots, etc.
• Human Capital- knowledge, skills, education, etc.
• Technology- technical means for producing goods and services.
• Improved resource allocation- Trade allows us to shift labor services from low= productive jobs to high productive jobs.
• Economics of Scale- Reductions in per- unit costs that result from increases in the size of markets and firms.
• Production Possibilities Curve and LRAS
• Economic growth= shift in production possibilities curve outward.
• Economic growth= shift in the LRAS to the right.
• Why growth rates differ among other countres
• Rates of Savings
• Foreign Investment
• Education
• Infrastructure- Roads, power lines, ports, and information networks, etc.
• Research and development
• Political stability 
• Protection of property rights.
• Economic freedom versus excessive government intervention.
• The Phillips Curve- Short and Long Run 
• Tradeoff between inflation and unemployment.
• Stagflation leads to shifts in the SRPC.
• Aggregate supply shocks: Oil, embargo, major agriculture short falls, depreciating U.S. dollar, wage hikes, inflationary economy.
• Long- Run Phillips Curve (LRPC)
• Vertical line at the natural rate of unemployment.
• Supple- side economics and the Laffer Curve
• Stress that changes in Aggregate Supply are an active force in determining the levels of inflation, employment, and economic growth.

04/03.14 Reagonomics/ Laffer Curve

• Supply- side economics. AKA Reagonomics
• Tends to believe that the A Curve will determine levels of inflation, unemployment and economic growth. 
• To increase economy, shift AS curve to the right.
• Focus on marginal tax rate amount of tax paid on an additional dollar of income. 
• By reducing marginal tax rates, it will encourage more people to work together.
• High marginal ax rates may end up reducing savings since when you save money, you are then taxed at a higher rate on your profit or interest.
• Laffer Curve
• Inverse relationship
• The higher the tax rate, the less government tax revenue is.
• Progressive tax: Increasing tax
• Curve is 'u' shaped because trying to maximize government revenue.
• As tax rates increase from 0, tax revenues increase from 0 to some maximum total.
• 3 Criticism of the Laffer Curve
1. Where the economy is actually located on the curve is difficult to determine.
2. Tax cuts also increase demand, which can fuel inflation and demand may exceed supply.
3. Research states that tax rates impact people incentive, to work, invest, and save.

04/02/14 Supply shock, disinflation, stagflation

• Supply shock- Rapid and significant increase in resource prices which cause the SRAS to shift, which result in producing a shift in the SRPC curve.
• I.e. Oil embargo, increase in input prices, wage hikes.
• Can be either positive or negative
• Depending on what the supply shock is, it can lead to stagflation.
• Stagflation- Simultaneous increase in inflation and unemployment.
• Disinflation- Reductions in the inflation rate from year to year which can be seen in the Long Run Phillips Curve.
• We can tell if LRPC shifts, if unemployment goes down.