Comparative & Absolute Advantage (05/11/17)

Specialization

• Individuals and countries can be better off if the will produce in what they have a comparative advantage and then trade with others for whatever else they want/need

Absolute and Comparative Advantage

Absolute Advantage 

• The producer that can produce the most output OR requires the least amount of inputs (resources) 

• Ex: Papa John has an absolute advantage in pizzas because he can produce 100 and Ronald can only make 20. 

Comparative Advantage 

• The producer with the lowest opportunity cost. 

• Ex: Ronald has a comparative advantage in burgers because he has a lowest PER UNIT opportunity cost. 

Countries should trade if they have a relatively lower opportunity cost.

They should specialize in the good that is "cheaper" for them to produce

Distinguishing input from output problems

Example of an output problem

• An Output problem presents the data as products produced given a set of resources. (ex. Number of pens produced)
• An Input problem presents the data as amount of resources needed to produce a fixed amount of output. (ex. Number of labor hours to produce 1 bushel)
• When identifying absolute advantage, input problems change the scenario from who can produce the most to who can produce a given product with the least amount of resources

Unit 7 - Foreign Exchange (FOREX) (05/10/17)

Foreign Exchange (FOREX)

• The buying and selling of currency

- Ex. In order to purchase souvenirs in France, it is first necessary for Americans to sell their Dollars and buy Euros.

• Any transaction that occurs in the Balance of Payments necessitates foreign exchange
• The exchange rate (e) is determined in the foreign currency markets. 

Changes in Exchange Rates 

• Exchange rates (e) are a function of the supply and demand for currency. – An increase in the supply of a currency will decrease the exchange rate of a currency

Exchange Rates determinants

• Consumer Tastes

• Relative Income 

• Relative Price Level

• Speculation 

Exports and Imports

• Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing imports 

• Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports 

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Unit 7- Balance of Payments (05/08/17)

Balance of Payments

• Measure of money inflows and outflows between the United States and the Rest of the World (ROW)

- Inflows are referred to as CREDITS
- Outflows are referred to as DEBITS

• The Balance of Payments is divided into 3 accounts:

- Current Account
- Capital/Financial Account
- Official Reserves Account

Current Account

Balance of Trade or Net Exports

• Exports of Goods/Services – Import of Goods/Services
• Exports create a credit to the balance of payments
• Imports create a debit to the balance of payments

Net Foreign Income

• Income earned by U.S. owned foreign assets  – Income paid to foreign held U.S. assets.

- Ex. Interest payments on U.S. owned Brazilian bonds – Interest payments on German owned U.S. Treasury bonds or a pension payment to an American retiree living in the Bahamas.
Net Transfers (tend to be unilateral)

• Foreign Aid → a debit to the current account

- Ex. Mexican migrant workers send money to family in Mexico (remittances)

Capital/Financial Account

• The balance of capital ownership
• Includes the purchase of both real and financial assets
• Direct investment in the United States is a credit to the capital account

- Ex. The Toyota Factory in San Antonio

• Direct investment by U.S. firms/individuals in a foreign country are debits to the capital account

- Ex. The Intel Factory in San Jose, Costa Rica

• Purchase of foreign financial assets represents a debit to the capital account.

- Ex. Warren Buffet buys stock in Petrochina.

• Purchase of domestic financial assets by foreigners represents a credit to the capital account. 
• The United Arab Emirates sovereign wealth fund purchases a large stake in NASDAQ.

Relationship between Current and Capital Account

• The Current Account and the Capital Account should zero each other out.
• That is… If the Current Account has a negative balance (deficit), then the Capital Account should then have a positive balance (surplus).

Official Reserves

• The 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 of payments.
• When there is a balance of payments deficit the Fed depletes its reserves of foreign currency and credits the balance of payments
• The Official Reserves zero out the balance of payments.

Unit 5 - Reaganomics, Laffer Curve (04/24/17)

Supply-side economics or Reagonomics

• Stimulate production or supply to spear output
• They cut taxes and government regulation, to increase incentive for business and individuals
• Business invest and expand creating jobs

• People work, save, and spend money

Laffer Curve

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

• The lower the taxes the more the government is able to collect in taxes

Criticism of the Laffer Curve

1.  Empirical evidence suggest suggest 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 and demand impacts may exceed supply impacts
3.  Where the economy is actually located on the Laffer Curve is difficult to determine

Unit 5 - Laffer Curve (04/20/17)

Laffer Curve

Inflation- it is a rise in the general level of prices.


Deflation- it is a general decline in the economy price level.

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

Hyperinflation- it is a rapid rise in the price level, basically an extremely high rate of inflation.

For better understanding watch:

Unit 5 - Phillips Curve (04/19/17)

Phillips Curve

It is in inverse relationship between unemployment and inflation. Basically a trade-off , as one increases the other decreases.

• In increae in AD will cause price level and real output to increase, which increases inflation and reduces unemployment.

•  Each point point on the Phillips Curve corresponds to a different level of output.

• Since wages are sticky, inflation changes move the point in SRPC, if inflation persists and expected rate of inflation rises, than the entire SRPC moves upward. In the event that this scenario happens you have stagflation.

• Stagflation, unemployment, and inflation rise simultaneously, wich results in an increase in output cost. In in event that this scenario occurs the Phillips Curve is going to shift outward.

Supply shock- sudden large increse in resource cost.

If inflation expectations drop due tonew technology or efficiency then the SRPC will move downward.

• In the long run LRPC occurs in the natural rate of umenployment

• It is represented by a vertical line.

• There is no trade-offf between unemployment and inflation in the long run, because the economy produces at the full employment output level.

• It will only shift if the LRAS

• Increase in U_n will shift LRAS→

• Decrease in U_n will shift LRAS ←

The major LRPC assumption is that more workers benifits create higher natural rates, and fewer workrs benifits create lower natural rates.

Misery Index - it is a combination of unemployment and inflation in any given year. 

• Single digit misery is good

Unit 4 Video / FRQ (04/13/17)

Loanable Funds Market (04/04/17)

Loanable Funds Market

Is in interest rate of 50% good or bad. Bad for borrowers but good for lenders.

The loanable funds market is the private sector supply and demand of loans.

This market brings together those who want to lend money(savers) and those who want to borrow(firms with investment spending projects)

• This market shows the effect on REAL INTEREST RATE
• Demand- Inverse relationship between real interest rate and quantity loans demanded
• Supply- Direct relationship between real interest rate and quantity loans supplied

This is NOT the same as the money market (supply is not vertical)

For more understanding:

Tools of Monetary Policy & 3 Shifters of MS (04/03/17

The FED adjusting the money supply by changing any one of the following:

1. Reserve Requirement
2. Open Market Operation 
3. Discount Rate

Reserve Requirement

In the Reserve Requirement the FED sells the amount that banks must hold. 

The reserve requirement (reserve ratio) is the percent of deposits that banks must hold in reserve (the  percent they can NOT loan out)

If there is a recession what should the FED do to reserve requirement?

Decrease the Reserve Ratio

1. Banks hold less money and have more excess reserves
2. Banks create more money by loaning out excess
3. Money supply increases, interest rates fall, AD goes up. RR↓ MS↑ i↓ I↑ AD↑

If there is inflation what should the FED do to the reserve requirement?

Increase the Reserve Ratio

1. Banks holds more money and have less excess reserves
2. Banks create less money
3. Money supply decreases, interest rates up, AD down. RR↑MS↓ i↑I ↓AD↓

Open Market Operation 

• Open money operation is when the FED buys or sells government bonds (securities)
• This is the most important and widely used monetary policy
• If the FED BUYS bonds it takes bonds out of the economy and replaces them with money. MS↑
• If the FED SELLS bonds it takes money and gives the securities to the investor. MS↓
• It also depends on whether or not the Purchase (or sale) is from a bank or from the nonbank pubilic

Discount Rate

The Discount Rate is the interest rate that the FED charges commercial banks for short term loans.

Federal Funds Rate 

The Federal Funds Rate is the interest rate that banks charge one another for overnight loans.

When they say the FED has "raised rates" they will charge us more to take out a loan.

The Prime Rate 

It is the interest rate that banks charge their most credited worthy customers.

Money Creation Process (03/29/17)

Money Creation Process

Required Reserves = 100 (.10 x $ 1000)

Single Bank: Amount of money they can loan out (ER).

$1000 - 100 = $900

Banking system: Can create money by a MULTIPLE of its initial excess reserves.

1/RRR = 1/.10 = 10    $900 x 10 = $9000

ER x mm 

Total Change in money supply as a result of the deposit:

Initial Deposit   +   Banking system created money  = Total Change in MS

     $1,000          +                         $9,000                   =       $10,000

Money creation (03/27/17)

Money Creation Formula

• A single bank can create $ by the amount of its excess reserves

• The banking system as a whole can create $ by a multiple of the excess reserves

• MM x ER = Expansion of money 

• Money Multiplier = 1/RR 

New vs Existing $

• If initial deposit in a bank from FED or bank purchase of a bond or other money out of the circulation ( buried treasure), the deposit is immediately increases the money supply.

• The deposit then leads to further expansion of the money supply through the money creation process.

• Total change in MS if initial deposit is new $ = Deposit + $ created by banking system.

• If a deposit in a bank is existing $ (already counted in M1; ex: currency of checks), depositing the amount does NOT change the MS because it is already counted.

• Existing currency deposited into a checking account changes only the composition of the money supply from coins/paper $ to checking accounts deposits

• Total change in the MS if deposit is existing $ = banking system created money only.

Practice:

http://schools.birdvilleschools.net/cms/lib2/TX01000797/Centricity/Domain/4466/Classroom%20practice%20on%20Banking%20and%20Money%20Creation.pdf

Money Market (03/23/17)

Money Market

(Supply and Demand for money)

 Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.

Money Demand Shifter 

1. Changes in price level
2. Changed in income
3. Changes in taxation that affects investment 

Increasing the Money Supply 

Increase money supply > decrease interest rate > increase investment > increase AD

How do banks create/make money

Demand deposits are created through the Fractional reserve system.

• It is the process in which banks hold a small portion of their deposits in reserve, and they loan out the excess
• Banks keep cash on hand (required reserves) to meet depositors needs
• Banks must keep reserve deposits in their volts or at their district FED
• Total reserve (total funds held by a bank) =

Required reserves + excess reserves

• Banks can only lend out their excess reserves 

Bonds & Stocks(03/22/17)

Bonds & Stocks

Bonds are loans, or IOUs, that represent debt that the government or corporation must repay to an investor.

The bond holder has NO OWNERSHIP of the company.

• If a corporation issues and then sells a bond,

- it is a liability or an asset for the corporation? Liability!

- it is a liability or an asset for the buyer? Asset!

• If that corporation issues a 10K loan with a 10 yr term and a 5% interest 

- What is the nominal interest rate at the time of issue? 5%

- If the Nominal interest rate falls 3%, what happens to the value of the bond? Increase

- If the Nominal interest rate rises 8%, what happens to the value of the bond? Increase

Stockowners can earn a profit in two ways:

1. Dividends, which are portions of a corporations profits, are paid out to stockholders.

The higher the corporate profit, the higher the dividend.

2.  A capital gain is earned when a stockholder sells stock for more than he or she paid for it.

A stockholder that sells stock at a lower price than the purchase price suffers a capital loss.

Financial Institutions (03/21/17)

Purposes of Financial Institutions:

a. Store $

b. Save $

- savings account
- checking account
- CD
- money market

c. Loan $

Interest- price paid for the use of borrowed money

Principal- amount that you borrow

Types of Financial intermediaries:

Credit Union

1. Comercial Bank
2. Savings + Loans Institutions
3. Credit Union
4. Mutual Fund Companies
5. Finance Companies

The Financial System

Assets: Anything of monetary value owned by a peerson or business.

• Financial Asset- a paper claim that entitles the buyer to future income from the seller
• Physical Asset-  a claim on a tangible object (ex: house, car)

If you go to your bank and take out a loan ... the bank has created a Financial Asset 

You have created a Liability

Liability - a requirement to pay money in the future ( usually with interest)

• There are 5 major financial assets: Loans, Stocks, Bonds, Loan-backed securities and bank deposits.

The Time Value of Money - A dollar is worth more today than it is tomorrow, you are losing monry every secon you are not investing it.

Present Value Vs. Future Value

FV = Future value   PV = Present value   i = Nominal Interest rate   t = time

Future Value: If you invest( or lend ) money to someone according to the following equation:

 FV= PV(1 + i)^t

Present Value: Is the amount of money I need to invest now, in order to get some amount ( FV is Known) in the Future.

 PV = FV/( 1 + i  )^N

Time Value of Money

v = FV  p = PV  k = number of times interest is credited per year   n = year r = real interesst rate

• The Simple Interest Formula

v = (1 + i )ⁿ * p

• The Compound Interest Formula

v = (1 + r/k )^nk    * p

Money (03/20/17)

The Barter System: goods and services are traded directly. There is no money exchanged.

Money: is anything that is generally accepted in payment for goods and services. Money is not the same thing as wealth or income.

Wealth: is the total collection assets that store value.

Income: is a flow of earnings per unit of time.

Money can be usd as:

1) Medium of Exchange: it is used to determine value.

2) Unit of Account: comparing cost or price.

3) Store of value: how wel does the money hold.
-Where do you put it and when do you expect it to grow

Types of Money

Characteristics of money

1) Durability: money is durable
2) Portability: you can carry it anywhere
3) Uniformity: all the same
4) Divisibility: break it in many ways
5) Limited supply
6) Acceptability

Liquidity: ease with which an asset can be accessed and converted into cash (liquidized).

Types of Money Supply

M1 (High liquidity) - Coins, Currency, and Checksble deposits ( personal and corporate checking accounts which are the largest components of M1). AKA demand deposits.
In general, this is the money supply.

M2 (Mediun Liquidity) - M1 plus savings deposit ( money market accounts), time deposits ( CD = certificate of deposit), and Mutual Funds below $100K.

M3 ( Low Liquidity)- M2 plus time deposits above $100k.

Fiscal Policy (03/06/17)

Fiscal Policy  

How does the government stabilize the economy?

The government has 2 different tool boxes it can use:

1. Fiscal Policy

Actions by congress to stabilize the economy.

2.Monetary Policy

Actions by the Federal reserve bank to stabilize the economy.

Fiscal Policy

Changed in expenditures or/and revenues of the federal government

- 2 tools of fiscal policy:

• Taxes- government can increase or decrease taxes.
• Spending- government can increase or decrease spending
• Fiscal Policy is enacted to promote our nation's economic goals: full employment, price stability, economic growth

Deficit, Surpluses, and Debt

• Balanced budget

-Revenues = Expenditures

• Budget Deficit

- Revenues > Expenditures

• Government Debt

- Sum of all deficits - Sum of all surpluses

• Government must borrow money when it runs a budget deficit
• Government borrows from:

-Individuals

-Corporations

- Financial institutions

- Foreign entities of foreign governments

Fiscal Policy

• Discretionary Fiscal Policy(action)

• Expansionary Fiscal Policy - think deficit

• Contractionary Fiscal Policy - think surplus

•  Non- Discretionary Fiscal Policy ( no action)

3 Types of Taxes

1. Progressive Taxes- takes a larger percent of income from high income group (takes more from rich people).

Ex.: Current Federal Income Tax system.

2. Proportional Taxes (flat rate) - takes the same percent of income from all income groups.

Ex.: 20% flat income tax on all income groups.

3. Regressive Tax- takes a larger percentage from low income group (takes more from poor people)

Ex.: Sales Tax; any consumption tax.

Contractionary Fiscal Policy ( The Brakes)

Laws that reduce inflation, decrease GDP (Close a inflationary Gap)

• Decrease Government spending
• Tax Increases
• Combination of the two

If in a Inflation, then G↓.: AD←.: GDPR↓ & PL↓.: u%↑ & π↓ or T↑.: DI↓.: C↓.: AD←.: GDPR↓ & PL↓.: u%↑ & π↓

  Expansionary Fiscal Policy (The Gas)
Laws that reduce unemployment and increase GDP (Close Recessionary Gap)

• Increase Government spending

• Decrease Taxes on consumption

• Combination of the two

If Recession, then G↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π↑ or T↓.: DI↑.: C↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π↑

• Anything that increases the government budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers.

1.    Transfer Payments

Automatic or Built - In Stabilizers

A. Welfare checks

B. Food Stamps

C. Unemployment checks

D. Corporate dividends

E. Social Security 

F. Veteran's benefits

Schools of Economics (02/28/17)

Classical vs Keynesian   

More information:

http://smallbusiness.chron.com/differences-between-classical-keynesian-economics-3897.html

3 Ranges of AS (02/27/17)

3 Ranges of AS 

Reasons why price tend to be inflexible or "sticky" in a downward direction:

1. Fear of Wars

2. Wage Contracts

3. Minimum Wage

4. Menu Cost

5. Moral, effort and productivity

Range 1 (Horizontal range/ Keynesian model)

• Output is low relative to the economies full employment output
• Unemployment increases & GDP decreases.

Range 2 (Intermediate model)

Output expands as savings increases.

Range 3 (Vertical or Classical range)

• In the Long- Run the A.S. curve is vertical, because the only effects of an increase in AD, when we are at full employment  or an increase at the price level.
• Firms can't respond to increase in demand by increasing output