UNIT 7

UNIT 7

4/3/16

• Foreign Exchange (FOREX)

-The buying and selling of currency

-any transaction that occurs in the balance of payments

• Change in Exchange Rates
• Exchange rates (e) are function of the supply and demand of currency

-an inc in supply of currency will decrease the exchange rate of a currency

-a decrease in supply of a currency will inc the exchange rate of a currency

-an inc in demand will inc exchange rate

-a dec in demand for cur will dec the exch rate of curr

• Appreciation- of a curr occurs when the exchange rate of that currency increase (e^)
• Depreciation- of a curr occurs when the exchange rate of that currency decreases (ev)
• Exchange rate determinants:

-consumer tastes

-Relative income

-relative price level

-Speculation

• Exports and Imports

-the exchange rate is a determinant of both exports and imports

-appreciation

4/5/16

Floating vs flexible

• It is based on the supply and demand if that currency vs. other currency
• It is very sensitive to business cycles and it provides options for investments.
• Fixed rates- it is based on a country’s willingness to distribute other currencies and control it’s amounts

4/26/16

·      Balance of payments- a measure of money that inflows and outflows between the US 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 parts:

-Current account

-Capital/ Financial account

-Official Reserves account

·      Double entry bookkeeping

·      Current Account:

Balance of trade of net exports

- EX- IMP

-exports create a credit to the balance of payments

-import create a debit

Net Foreign income

-Income earned by US owned foreign assets- income paid to foreign held US assets

Net transfers (tend to be unilateral)

-Foreign Aidà a debit to the current account

-Ex. Mexicans working

·      Capital/ Financial Account:

-the balance of capital ownership

-includes the purchase of both real and financial assets

-direct investment in the US is a credit to the capital account

Ex. Toyota factory in San Antonio

-Direct investment by US firms/ individuals in a foreign country are debits to the capital account

Ex. 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

Ex. The UAE sovereign wealth fund purchases a large stake in the NASDAQ

·      Relationship between current and capital account

-The current account and the capital account should zero each other out.

-That is… is the Cur Acc has a negative balance (deficit), then the 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 if payments surplus the Fed accumulates foreign currency and debits the balance if payments

- When there is a balance if payments deficit the Fed depletes foreign currency and credits the balance if payments

-the official reserve zero 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 rate.

5/10/16

Absolute 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 good/service than another country can in the same time period.

Comparative advantage:

• A person or a nation has a comparative advantage in the production of a product when it can produce a the product at a lower domestic opportunity cost than can a trading partner.
• Output: mph, cars produced per hour
• Input:hours to do a job, # of acres to feed a horse, # of gallons of paint to paint a house

Specialization and Trade

• Gains from trade are based on comparative advantage, not absolute advantage

UNIT 5&6

UNIT 5&6

Apr. 7, 2016

·      Short run Aggregate Supply-In macroeconomics this is the period in which wages (and other input prices) remain fixed as price level increases or decreases.

·      LRAS- period of time in which wages have become fully responsive to changes in price level.

·      Effects over Short-run:

-In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant.

-in the long run, wages will adjust to the price level and previous output levels will adjust accordingly

·      Equilibrium in the Extended Model-The long AS Curve in represented with a vertical line @ full employment level of real GDP.

·      Demand Pull inflation in the AS model

-demand pull- prices increase based on increase in aggregate demand

-in the short run, demand pull will drive up prices, and increase production

-in the long run, increases in aggregate demand will eventually return to previous levels.

·      Cost push & the extended model:

-cost push arises from factors that will increase per unit costs such as increase in the price of key resource.

·      Dilemma for the Government

-in an effort to fight cost-push, the government can react in two different ways.

-action such as spending but the govt could begin an inflationary spiral.

-no action however could lead to recession by keeping production and employment levels declining.

4/8/16

·      Long run Phillip’s curve: natural rate of unemployment is held constant. Because the Long-run Phillips curve exist at the natural rate of unemployment (Un) structural changes in the economy that affect (Un) will also cause the LRPC to shift. Increase in Un will shift to right, Decrease will shift to left.

-long run Phillip’s curve: is no tradeoff between inflation and unemployment.

·      Represented by a vertical line

·      Occurs at natural rate of unemployment.

·      LRPC will only shift if LRAS shifts.

·      NRU (4%-5%) = frictional + Structural + Seasonal unemployment

·      Major LRPC composition is that more worker benefits create higher rates and fewer worker benefits create lower rates.

-supply shocks is caused by rapid an significant recourse cost which causes the LRAS curve to shift.

·      The misery index: a combination of unemployment and inflation in a given year.

·      Single digit misery is good.

4/11/16

·      Inflation- general rise in price level

·      Deflation-general decline in the price level

·      Disinflation-decrease in the rate of inflation over time

·      Stagflation- unemployment and inflation increasing at the same time.