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.