Unit 7 - Comparative and Absolute Advantage

Absolute advantage -  one country would have an absolute advantage over the other if it can produce same amount of goods with fewer resources.

• This is then the ability of country to produce more goods than its competitors using same or less resources.

Comparative advantage  - the production of a product  can produce the product at a lower domestic opportunity cost than can a trading partner.

• It is also the basis for all trade.
• If the two nations specialize according to comparative. advantage, then to get the other product, they must trade.

Terms of Trade - the rate of exchange of two products is be determined through negotiation

• Terms of trade - the outcome .
• Gains from trade are based on comparative advantage, not absolute advantage

Specialization and Trade

• Specialization based on comparative advantage improves global resource allocation.
• Specialization and trade - increase productivity and the standard of living within a nation.
• Because of specialization and trade, there will be a larger global output of goods and services.

Input and Output Approach

• Output problem - based on the most of an item producer can make if it specializes using a set amount of resources.
• Take B/A for comparative advantage and pick the highest amount for absolute advantage.
• Input problem approach -  based on the least resources producer needs to make a set amount of an item .
• Take A/B for comparative and pick lowest amount for absolute.

Unit 7 - Foreign Exchange Market

Foreign Exchange Market

• A market in which various national currencies are exchanged for one another. (this is the definition)
• The buying and selling of currency
• Ex: If you travel and want to buy souvenirs from Japan, you have to sell your Dollars to buy Yen.

Exchange rate - the equilibrium prices of currency in these markets, determined in foreign currency exchange.

• Ex: If you sell $1.00, then you can buy ¥102.185.

2 Points

1.  A competitive market - real-world foreign exchange markets characterized by large numbers of buyers and sellers dealing in standardized products such as American’s dollars, European’s Euro, British’s Pound and Japanese Yen.
2.  Linkages to all domestic and foreign prices - the market price or exchange rate of a nation’s currency is an unusual price; it links all domestic prices with all foreign prices. Enable consumers to translate prices of foreign goods into units of their own currency.

 Dollar-Yen Market

• U.S exports goods to Japan demand payment in dollar not Yen and vice-versa to Japan and they will exchange their currency in the foreign exchange market.
• Some U.S. importers need to pay the Japanese in exporters in Yen, so these people will demand for Yen.
• Because of the demand between two currency, we have “price” is in Dollars and the “product” is in Yen.
• If we show it on a graph of Supply and Demand the intersection of Demand Curve and Supply Curve establishes the equilibrium Dollar price of Yen.

Changing Rates : Depreciation and Appreciation

• Appreciation occurs when the exchange rate of a certain currency decreases.
• Depreciation occurs when the exchange rate of a certain currency increases.
• Ex: If the Japan products sell out more, then Yen will increases while the Dollars will decreases.

Unit 7 - Balance of Payments

Balance of Payments - the sum of all the transaction that takes place between its residents and the residents of all foreign nations.

Current Account - the US trade in currently produced goods and services.

• Export - credit (+)
• Import - debt (-)

A country's balance of trade on goods and services is the difference between the export and import of goods.

• Trade surplus = export > import.
• Trade deficit = export < import.

Official Reserves - the central banks of nations hold quantities of foreign currencies.

Balance of Payment Deficit and Surpluses - imbalance between current and capital accounts that causes a drawing down or building up of foreign currencies. 

Graph 16 - Other Market

Graph 15 - 15 Dollar Market Graph (International Supply & Demand)

Unit 6 - Economic Growth & Productivity (From Ms. McCartney's Powerpoint)

Economic Growth

• Sustained increase in Real GDP over time.
• Sustained increase in Real GDP per Capita over time. 

Grow - leads to greater prosperity for society. It lessens the burden of scarcity and increases the level of well-being.

• Conditions
• Rule of law.
• Sound Legal & Economic Institutions.
• Economic freedom.
• Respect for private property.
• Political & Economic stability -Low inflation expectancy.
• Willingness to sacrifice current consumption.
• Saving.
• Trade.

Physical Capital - product of investment (sensitive to interest rates and expected rates of return).

• Tools, machinery, and factories.
• Takes capital to make capital.
• Capital must be maintained.

Technology & Productivity

• More technology = Increases productivity.
• Productivity - output per unit of input.
• Labor productivity - output per worker.
• More Productivity = Economic Growth.
• Research + development and innovation + invention = Increases in technology.

Human Capital - people are the most important resources, so they must be developed.

• Education.
• Economic Freedom.
• The right to acquire private property.
• Incentives.
• Clean water and stable food supply.
• Access to technology.

How to show Economic Growth Graphically

1. LRAS shifts to the right.
2. PPC shifts outward. 

Obstacles to Growth

• Economic and Political Instability – such as high inflation expectancy.
• No of the rule of law.
• Diminished private property rights.
• Negative incentives.
• Lack of savings.
• Excess current consumption.
• Failure to maintain existing capital.
• Crowding out of investment – government deficits & debts increasing long term interest rates.
• Restrictions on free international trade.

Unit 5 - April 3

Supply Side Economics / Reaganomics - tends to believe that the AS curve will determine level of inflation, unemployment, and economic growth.

• To increase economy - AS shifts right.
• Companies benefit - AS.
• Consumers benefit - AD.
• Focus on the marginal tax rate - amount of tax paid on additional dollar of income.
• By reducing the marginal tax rate, it will encourage more people to work longer.
• High marginal tax rate reduces saving because saving money taxed at a higher rate on profit/interest.

Laffer Curve 

• Tax Rates and Government Revenue have an inverse or a trade off relationship.
• High tax rate = Low government revenue.
• There is a U-shaped, because it always tries to maximizes government revenue.
• As tax rate increase from 0, tax revenue increases from 0 to some maximum number then they decline.

3 Criticisms of the Laffer Curve

1. Where the economy is 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 state that tax rate impact people's incentive to work, invest, and save.