Unit 7

Absolute and Comparative Value

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 resourses.
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
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.

Foreign Exchange Market

- The foreign exchange market or forex market as it is often called is the market in which currencies are traded.
The supplier of dollars is also the demander of yen. Therefore, both the supply of dollars and the demand for yen represent that aspect of the transactions. Conversely, the supplier of yen is also the demander of dollars so those two curves reflect that aspect of the transactions.

Balance of Payments

Balance of Payments: The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time.
 - Divide into 3 components capital, current, official reserves account.
Current Account:
Trade – buying and selling of goods and services
Exports – a credit entry
Imports – a debit entry
Trade balance – the sum of Exports and Imports
Factor income – repayments and dividends from loans and investments
Factor earnings – a credit entry
Factor payments – a debit entry
Factor income balance – the sum of earnings and payments.
The capital account records the net change in ownership of foreign assets. It includes the reserve accounts (the foreign exchange market operations of a nation's central bank).

Money Unit

USES OF MONEY
1. Mediums of Exchange: can trade or barter with the money
2. Unit of Account: establishes economic worth
3. Store Of Value: money holds its value over a period of time

TYPES OF MONEY
1. Commodity: gets value from the material in which it is made (gold and silver coins)
2. Representative Money: paper money that is backed by something tangible
3. Fiat money: Money because the government says so

CHARACTERISTICS OF MONEY
1 Durability: Money lasts through many transactions b/c it is durable (ex: Wash money accidentally, still useable)
2. Portability: Can transport money in many forms (Wallet, purse, bosoms - whatever floats your boat)
3. Uniformity: Even, all money looks alike.
4. Divisiblity: Can make change in various ways (2 5s to make a 10, or 10 ones)
5. Scarcity: Not having that money at that time (Clerk must get change from a different register)
5. Accepibility: Will be accepted all over the states

M1 MONEY: (more liquid = easier to convert to cash, 75%)
-Cash & coins.
- Checkable/Demand Deposits: (checking accounts)
- Traveler's check: Must sign twice, with two signatures and checked with driver's license (Obviously: used for traveling)
M2 MONEY: (25% of money in circulation)
- Savings Account
- Money market accounts
- C.Ds (certificate of deposits)
- Deposits held by banks outside of the U.S
- + M1 money

How banks & Thrifts(Savings & Loans institution) create money:
- Assets (own) = Liabilities (Owed) + Net Worth (balance sheet)
- Bank deposits are subject to a reserve requirement
Reserve ratio = Commercial bank's required reserves/Commercial bank's checkable-deposit liabilities

 important issue:
1. Excess reserves = Actual reserves - Required reserves
(Assume 20% reserve requirement)
((110, 000 (checkable deposits) - 20,000 = $90, 000))

*Banks create money by:
1. Lending excess reserves & destroy it by loan payment
2. Purchasing bonds from the public also creates money

Money Market!

Uses of Money Include..

• Medium of Exchange
• Unit of account
• state of value

Function of Money

• Representative money- paper money that is backed by tangible product
• Commodity money- gold and silver coins
• Fiat Money- money because the govt said so

M1 money is currency in circulation

M2 is savings accounts, money market account, checkable deposits

Demand for money slopes down because the when the price is high the quantity demanded is low.

When the price is low then the quantity demanded is high.

When interest is low, people will want to borrow more.

Supply of money is not based upon the interest rate, it stays vertical because the fed decides the SM and it is fixed. 

Incentives for People to want more money is making them want more money to get a better incentive like, lower taxes. 

4 Feds Tools of Monetary Policy

Expansionary and Contractionary Policy

Expansionary(easy money) is 

•  Lower Reserve Requirement then money that has been required reserves becomes excess reserve makes more money available
• Discount Rate  is lowered to make banks borrow more.
• Fed Fund Rate is lowered to have banks borrow from each other.
• Buy Bonds to make more money 

Contractionary(tight money) is 

•  Raise Required Reserve to take banks excess reserve and make them RR. 
• Discount Rate is raised to make borrow less.
• Fed Fund Rate is raised to have banks not borrow from each other.
• Sell bonds to contract the money supply.

Loanable Funds

Supply of loanable funds is dependent on savings, the amount people have placed in their banks.The more money people save, the more money banks have to loan out to people.

If Demand for loanable funds is increased then interest rate is also increased. 

Money creation process

banks make money by loans 

• Monetary Multiplier. ( 1/ required reserve)
• Multiple deposit expansion- money being deposited over and over again.

AD/AS

Day 13

•    Aggregate demand.

           -shows the amount of real GDP that private, public, and foreign sector collectively desire to purchase              at each possible price level.
           -inverse relationship between price level and level of real GDP.



3 reasons why downward slope of AD.

• Real - Balance Effect

                  - when price level high households and businesses cannot afford to purchase as much output.
                  - when price level low households and businesses can afford to purchase more output.

• Interest - Rate Effect

                       - higher price level increases the interest rate most people tend to not invest.
                       - lower price level decrease the interest rate which tends to encourage investment.

• Foreign - Purchases Effect

                       - higher price level increases the demand for relatively cheaper imports.
                       - lower price level increases the foreign demand for relatively cheaper U.S. exports.

Shifts in (AD) graphs.

• 2 parts to a shift in AD:

         - A change in C, IG, G, XN.

            - Multiplier effect that produces a greater change than the original change in the 4 components.

• Increase in AD = AD shift to right.
• Decrease in AD = AD shift to left.

Consumption

• Having Spending is affected by
• Consumer wealth
• more wealth equals more spending (AD right)
• less wealth equals less spending (AD left)
• Consumer expectation
• positive expectations (AD right)
• negative expectations (AD left)
• Household indebtedness
• less debt is more spending (AD right)
• more debt is less spending (AD left)
• Taxes
• less taxes is more spending (AD right)
• more taxes is less spending (AD left)

Gross Private Investment

• Investment Spending is sensitive by
• Real Interest Rate
• Low Interest is more investment (AD right)
• More interest is less investment (AD left)
• Expected returns
• higher expected returns is more invest (AD right)
• lower expected returns is less invest (AD left) 
• Expected returns influenced by
• expectation in future profitability
• technology
• degree of excess capacity (existing stock of capital)
• Business taxes

Govt Spending

• More govt spending (AD right)
• less govt spending (AD left)

Net Exports sensitive to:

• Exchange rate
• Strong $ is more imports fewer exports (AD right)
• Weak $ is less imports more exports (AD left)
• Relative Income
• Strong Foreign economics is more exports (AD right)
• Weak Foreign economics is less exports (AD left)

Day 14

Aggregate Supply

Long run vs Short Run

Long Run

• Period of time when input prices are completely flexible and adjust to changes in the price level
• The level of real GDP supplied by independent of the price level

Short Run

• Period of time where input prices are sticky and do not adjust to changes in the price level
• Level of Real GDP supplied is directly related to price level.

Long run LRAS- marks the level of full employment in the economy (analogous to PPC)

Changes in SRAS

• increase in SRAS (right)
• decrease in SRAS (left)

Key to understanding shifts in SRAS is per unit cost of production.

Per unit cost of production= Total Input cost/Total output cost

Determinants of AD

• Input prices
• Productivity
• Legal institution Environment 

• Input Prices
• wages 95% of all business costs
• Raw materials commodity prices
• Cost of Capital
• Foreign Resource Price
• Strong $ lower foreign resource price
• Weak $ higher foreign resource price
• Increase in resource price SRAS( right)
• Decrease in resource price SRAS(left)

Productivity

• Prod=total output/total input
• more productivity = lower unit production cost SRAS(right)
• less productivity = higher unit production cost SRAS(left)

Legal Institution Environment

• Taxes and Subsides
• Taxes increase on business increase per unit cost SRAS(right)
• Subsides to business reduce per unit cost SRAS(left)
• Govt regulation
• Govt regulation creates a cost of compliance SRAS(right)
• Deregulation creates reduction of compliance cost SRAS(left)

AS/AD

Equilibrium of AS and AD determines current output(GDP Real) and price level

Full Employment equilibrium exists where AD intersects SRAS and LRAS of the same point.

Recessionary GAP exists when equilibrium occurs (allow full employment output)

Inflationary GAP exists when equilibrium occurs beyond full employment output.

Day 15

• Horizontal or Keynesian: includes only levels of real output that are less than full employment output, implies that the economy is a recession, therefore you have a decrease in real output
• Vertical or Classical: the economy reaches it's full capacity real output
• Intermediate Range: expansion of real output and price level

Day 16

Disposable Income (DI):
-Income after taxes or net income
-Two choices, households can either consume or save
DI=(gross income)-(taxes)

Consumption:
-Household spending
-The ability to consume is constrained by:

The amount of disposable income
The propensity to save
Autonomous consumption
Dissaving
APC=C/DI=% DI that is spent

Saving:
-Household not spending
-The ability to save is constrained by:

The amount of disposable income
The propensity to consume
APS=S/DI=% DI that is not spent

APC & APS
-APC: average propensity to consume
-APS: average propensity to spend

APC+APS=1
1-APC=APS
1-APS=APC
APC>1: Dissaving
(-APS):Dissaving

MPC & MPS
-Marginal Propensity to Consume
-Percent of every extra dollar earned that is spent
MPC=(Change in Consumption)/(Change in Disposable Income)

-Marginal Propensity to Save
-Percent of every extra dollar earned that is saved
MPC=(Change in Savings)/(Change in Disposable Income)
MPC+MPS=1
1-MPC=MPS
1-MPS=MPC

Why does this happen?
Expenditures & income flow continuously which sets off a spending increase in the economy

Calculating the Spending Multiplier

• The Spending multiplier can be calculated from the MPC or MPS
• Multiplier = 1/1- MPC or 1/MPS
• Multipliers are (+) when there is an increase in spending and (-) when there is a decrease

Calculating the Tax multiplier

• money is now leaving the circular flow
• Tax Multiplier (its negative)
•  = -MPC/1-MPC or -MPC/MPS
• If there is a tax CUT, then the multiplier is + because there is now more money in the circular flow

Day 18
Investment - money spent or expenditure on:

• New plans (factories)
• Capital equipment (machinery)
• Technology (hardware/software)
• New homes
• Inventories (goods sold by producers)

Expected Rate of Return
How does business make investment decision?
Cost/benefit analysis.

How does business determine the benefits?
Expected rate of return.

How does business count the cost?
Interest cost.

•  How does business determine the amount of investment they undertake?
• Compare expected rate of return to interest cost.
• Expected cost > interest cost, then invest.
• Expected cost < interest cost, then don't invest.

Real (r %) vs. Nominal (n %)
Differences?
Nominal - observable rate of interest.
Real - subtracts out inflation(π %) and is only known ex post facto.

• Real interest rate (r %)

r % = i % - π %

What determine the cost of investment decision?

• The real interest rate (r %).

Investment Demand Curve (ID)

• Downward sloping.
• When interest rate is high, fewer investments are profitable.
• When interest rate is low, more investments are profitable.

Determinants

• Cost of production
• Business tax
• Technological changes
• Stock of capital
• Expectation

Day 19

Changes in the expenditure or tax revenues of the federal government

•   2 tools of fiscal policy
•   taxes: gov't can increase or decrease
• spending: gov't can increase or decrease

Fiscal Policy is enacted to promote our nation's economic goals: full employment, price stability, economic growth

Defecits, Surpluses, & Debt

• Balanced Budget: revenue = expenditures
• Budget Deficit: revenue < expenditures
• Budget surplus: revenue > expenditures
• Gov't Debt: sum if all deficit - sum of all surpluses

Gov't must borrow money when in a budget deficit from:

  1. Individuals

  2. Corporations

  3. Financial institutions

  4. Foreign Entities

DISCRETIONARY FISCAL POLICY: (action)

Expansionary: think deficit

Contractionary: think surplus

NONDISCRETIONARY: (Nonaction)

Discretionary: Increase or decrease in gov't spending and/or taxes in order to return the economy to full employment

 Automatic: unemployment compensation & marginal tax rates are examples that help miligate the effects of recession & inflation

Contractionary: decrease AD (control inflation)

Expansionary: increase AD

Expansionary:

•  Recession is countered with this policy
• (Increase gov't spending, decrease taxes)

Contractionary: inflation is countered (decrease gov't spending, increase taxes)

Note That unemployment increased this means contractionary

UNIT 2

Day 7:
Circular Flow Model- represents the flow of money,goods, and services in our economy.

•      Factor Market(Resource Market)- Land, Labor, Capital, and Entrepreneurship. We sell our resources to the businesses
• Factor Market(Goods Market)- Goods and services are bought and sold.

Household- person or group share income

Firm- Organization that produces goods and services for sell.

Day 8:

GDP- Gross Domestic Product- Total value of all final goods and services produced within a countries border within a given year.

GNP- Gross National Product- Total value of all final goods and services produced by Americans in a given year.

Included and Excluded in GDP

Included-

1. Final Goods and Services
2. Income Earned
3. Interests payment on corporate bonds
4. Current production of final goods and services
5. Unsold Output( business Inventories)

Not Included

1. Intermediate goods
2. Transferred payments( public or private )
3. Purchases of stocks and bonds
4. Used or second-hand goods
5. Non-market Transactions
1. Babysitting
2. illegal drugs
3. doing own housewor

Day 9:

How to Calculate GDP

Expenditure Approach

GDP=C + Ig + G + Xn

C- Personal Consumption

Ig- Gross Private domestic Investment

G- Government Spending

Xn- Net Exports ( Exports- Imports )

Income Approach

GDP=W + R + I + P + Statistical Adjustments

W- Wages( salary, compensation of employees)

R- Rents Income

I- Interest Income

P- Proprietors Income

Budget Deficit Income- Total Amount of govt borrows within a year

(Transfer Payments + Government purchases of goods and services ) - (Government tax and Fee Collection)

DPI- National Income - Household Taxes + Government Transfer

Depreciation- Consumption of fixed capital

Day 10:

Nominal vs Real GDP

Nominal GDP- value of output produced in current prices. P*Q=Nominal GDP

Real GDP- Value of output produced in constant or base year prices. P*Q= Real GDP

Nominal can increase year to year if either output or prices increase

Real GDP can only increase if output increases.

• economic growth(Real GDP)
• Inflation(Nominal GDP)

GDP Deflator= Nominal/Real *100

In base year GDP deflator stays 100

For year after base year GDP deflator is greater than 100

For year before the base year GDP deflator less than 100

Day 11:

Consumer Price Index(CPI)- measures the cost of the market basket of goods or a typical urban american family

Real GDP is adjusted for inflation

Inflation- General rise of the price level

Deflation- Fall of price level

Rate of Inflation 

P0- New Year

P1- Base Year

Day 12:

Types of Inflation

1. Cost-push inflation- higher production cost which increase prices, supply shock

2. Demand-pull inflation- Too many $, chasing too few goods. shortage driving prices. overheated economy with excessive spending and same amount of goods.

3. Political Panics- Caused by depression or recession.

How Inflation Helps/ Hurts

Hurt

1. Lenders(Loan Money @fixed rate)
2. People with fixed income(Elderly)
3. Savers( People saving money)
4. People with fixed wage(people at McDonalds)

Help

1. Debtors(Those who owe money)
2. Business where price of product increases faster than price of resources.

Day 12:

Unemployment- percentage of people who do not have jobs but they are in the labor force.

Labor Force- unemployed + employed

Not in the labor force-

• Kids(16 and younger)
• Mentally "insane"
• Stay at home moms and dads
• Retired people
• military personal
• people locked up in prison
• full time students
• Discourage( No one wants to hire these people)

Employed vs Unemployed

Employed- people 16 and older with a job

Unemployed- people 16 or older who have actively looked for a job for 2 weeks

Labor force= Employed + Unemployed

Types of Unemployment

Seasonal - Mall Santa

Frictional- between jobs

Structural- associated with lack of skill or declining industry. Update in technology

Cyclical- Associated with business cycle.

• it is bad for society
• usually during a recession

Full Employment- Occurs when there is no cyclical unemployment in the economy.

NRU- Natural Rate of Unemployment- 4% to 5%

Okuns Law- For 1% of unemployment above the NRU, causes a 2% of decline in RGDP( Real GDP )

Unit 1 Notes

Day 1:
Macroeconomics- study of the major components of the economy: Inflation, GDP, unemployment, supply and demand.
Microeconomics- study of how households and firms make decisions and how they interact in markets. Supply and demand, market structures.
Positive versus normative economics
Positive- Attempting to describe the world as it is. Very descriptive. Example. "minimum-wage causes unemployment".
Normative- describes the world and how it should be. Prescriptive in nature. Example "The government should raise minimum wage."

Wants versus needs
Wants- desires of citizens: broader then needs.
Needs- basic requirements for survival.

Scarcity versus Shortage
Scarcity- most basic fundamental economic problem that all societies face. Facing unlimited wants and limited resources.
Shortage- situation in which quantity demanded is greater than quantity supplied.

Day 2:

Goods- tangible commodities can be bought, sold, traded and produced.
    1) consumer goods- goods intended for final use by the consumers.
    2) capital goods- items used in the creation of other goods such as factory machinery and trucks.
Services- work that is performed for someone else.

Factors of Production (FoP)
1) Land
2) Labor
3) Capital
    Human- knowledge and skills a worker gains through education and experience.
    Physical- human made objects used to create other goods and services. Example tools, machines, building.
4) Entreprenuership.

Opportunity Cost- most desirable alternative giving up by making a decision. I.e trade-off.

Production Possiblities Graph (ppg)
Curve(ppc)
Frontier(ppf)

(PPG)- show alternative ways to use resources.

Productive efficiency- producing at the lowest cost and allocative resources efficiently and have full employments.
  - in order to be efficient. Any point on a curve.
Allocative efficiency- combination most desires by society, I.e where to produce on the curve.

Day3:
Law of Increasing Opportunity Cost
  -When resources are shifted from making one good or service to another, the cost of producing the second item increase.
*This occurs because not all resources are equally shifted for the production of all good and services.

4 Key Assumptions of PPG
1)Only 2 goods can be produced.
2) Full employment of resources
3)Fixed Resources
4) Fixed technology

Day 4:
Elastic: a product is elastic when demand when demand change greatly given a small change in price.(greater than 1)
1. many substitutes
2. luxury goods
Ex. cars, coke, steak
inelastic: a product is said to be inelastic if the demand for it will not change or it changes very little regardless of price. ( less than 1)
1. few substitutes
2. necessary
Ex. heart medicine gas, salt, milk
unitary elastic= 1
*PED= step 1 change in quantity   new-old/old
change in price  new-old/old
then change in quantity/change in price

Day 6
Price floor- minimum price for good or service. i.e minimum wage
Price ceiling- maximum price that can be legally charged for a good or service. i.e rent control

Expansion- real output in the economy is increasing and unemployment rate decreasing
Peak- Real output is at highest point
Contractionary/Recession- real output decreasing and unemployment rate rising
Trough- lowest point of real GDP