Unit 7; Day 4

• Fixed/ Flexible Exchange Rates
• Flexible/Floating- based on supply and demand of currency 
• Very sensitive to business cycle
• Provide options for investments
• Fixed Rate- based on country’s willingness to distribute currency and to control the amounts
• If market appreciates, eports go down, AD/GDP decrease
• If market depreciates, exports go up AD/GDP increase
• Absolute Advantage (Video explaining the difference between absolute and comparative advantage)
• Individual- exists when a person can produce more of a certain good/service than someone else in the same amount of time (or can produce a good using the least amount of resources)
• National- Exists when a country can produce more of a good/service than another country can in the same period
• Comparative Advantage
• A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner
• Ex. output Tons per acre, mph, wpm,
• Input: Hours to do job, acres to feed, number of gallons to paint
• Specialization and trade
• Gains from trade are based on comparative advantage, not absolute 

Unit 7; Day 3

• Foreign Exchange Market
• 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
• Transaction that occurs in the balance of payments necessitate foreign exchange. 
• Changes in Exchange Rates
• An increase in the supply of currency will decrease the exchange rate of a currency
• A decrease in supply of a currency will increase exchange rate
• Increase in demand for a currency increases exchange rate
• Decrease in demand for currency will decrease exchange rate
• Appreciation and Depreciation
• Appreciation of a currency occurs when exchange rate increases
• Deprecation currency occurs when exchange rate decreases
• Ex. Germans go to america, Supply of euros increase, demand for dollars increase. Euro depreciates, Dollar appreciates
• Exchange Rate Determinants 
• Consumer tastes
• Ex. Preference for jap. Goods creates increase in S of dollars, depreciation of dollar
• Relative Income
• Relative Price Level
• Speculation
• Exports and Imports
• The exchange rate is a determinant of both exports and imports
• Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be 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

 

As the demand for a foreign currency increases, the supply of US currency increases to match the conversion. This results in a depreciation of the dollar(aka lower price levels) and an appreciation of foreign currency(increased prices for foreign currency) 

Unit 7; Day 2

Relationship Between Current and Capital Account (Quick video summarizing the relationship)

• Current account and Capital Account should zero out
• If current account has negative balance(deficit), then capital account should then have a positive balance(Surplus) 
• Official Reserves
• The foreign currency holdings of the US 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 balance of payments
• The Official reserves zeros out the balance of payments
• Active v. Passive Official Reserves
• The US is passive in its use of official Reserves. It does not seek to manipulate the dollar exchange

Unit 7; Day 1

• Balance of Payments 
• Measure of money inflows and outflows between US and Rest of World(ROW)
• Inflows= CREDITS
• Outflows= DEBITS
• Balance of payments divided into 3 accounts
• Capital Account/Financial Account
• Official Reserves Account
• Current Account
• Current Account (Current Accounts Video)
• Balance of trade or Net Exports
• Exports of goods/services
• Import of good/services
• Exports create a credit to balance of payments
• Imports create a debit to the balance of payments
• Net Foreign Income
• Income earned by US owned foreign assets- Income paid to foreign held US assets
• Ex. Interest payments on US owned brazilian bonds- interest payments on german owned US bonds
• Net Transfers (Tend to be unilateral) 
• Foreign Aid> A debit to current account
• Ex. Mexican migrant workers send money to family in mexico
• Capital/ Financial Account (Capital Accounts Video)
• Balance of Capital Ownership
• Includes purchase of both real and financial assets
• Direct Investment in US is credit to capital account
• Ex. Toyota Factory in San Antonio
• Direct Investment By US firms/ Individuals in a Foreign country are debits to capital account
• Intel Factory in San Jose, Costa Rica
• Purchase of foreign financial Assets represent Debit to Capital Account
• Ex. Warren Buffett buys stock in Petrochina
• Purchase of Domestic Financial Assets by foreigners represent Credit to capital Account
• UAE Fund purchases a large stake in NASDAQ

Unit 6; Day 2

• Hindrances to Growth
• Economic and Political Instability
• High inflationary expectations
• Absence of the rule of law
• Diminished Private Property Rights
• Negative Incentives
• The welfare state
• Lack of Savings
• Excess current consumption
• Failure to maintain existing capital
• Crowding Out of Investment
• Government deficits & debt increasing long term interest rates!
• Increased income inequality → Populist policies
• Restrictions on Free International Trade
• Technology and Productivity
• Research and development, innovation and invention yield increases in available technology.
• More technology in the hands of workers increases productivity.
• Productivity is output per worker.
• More Productivity = Economic Growth.

Unit 6; Day 1

• Economic Growth
• sustained increase in real GDP over time
• Sustained increase in Real GDP per Capita over time

• Why grow?
• Growing leads to greater prosperity for society
• Lessens the burden of scarcity.
• Increases the general level of well-being
• Conditions for Growth
• Rule of Law
• Sound Legal and Economic Institutions
• Economic Freedom
• Respect for Private Property
• Political & Economic Stability
• Low Inflationary Expectations
• Willingness to sacrifice current consumption in order to grow
• Saving
• Trade
• Types of Capital
• Physical:
• Tools, machinery, factories, infrastructure
• Physical Capital is the product of Investment.
• Investment is sensitive to interest rates and expected rates of return.
• It takes capital to make capital.
• Capital must be maintained.
• Human
• People are a country’s most important resource. Therefore human capital must be developed.
• Education
• Economic Freedom
• The right to acquire private property
• Incentives
• Clean Water
• Stable Food Supply
• Access to technology

Unit 5; Day 3

• Supply Side economics( Reaganomics) (Reaganomics quick summary Video)
• Change in AD but not in AS
• Determines- rate of inflation, unemployment rates and economic growth
• Supply Side economists support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments provide disincentive to work, invest, innovate and… entrepreneurial ventures. 
• Lower Marginal tax rates induce more work which cause AS to increase and also make work more attractive

• Incentive to save and invest:
• Higher Marginal tax rates reduce rewards for savings and investment
• Consumption might increase but investment depends upon savings
• Lower marginal tax rates encourage savings and investment 

• Laffer curve- theoretical relationship between tax rates and govt revenue 
• As tax rates increase from zero, govt revenue increase from zero to some maximum level and then decline
• Research suggests that impact of tax rates on incentives to work, save and invest is small 
• Tax cuts also increase demand which fuels inflation and causes demand to exceed supply 
• Where the economy is actually located on the curve is difficult to determine