ABSOLUTE ADVANTAGE 

INDIVIDUAL

  -Exists when a person can produce more of a certain good/service than someone else in the osme amount of time

NATIONAL 

   -Exists when a country can produce more of a 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 the product at a domestic opportunity cost than can a trading partner

OUTPUT Ex's                                  INPUT Ex's 

miles per gallon                                # of hours ro do a job

words per min                                  # of gallons of paint to paint a house 

apples per tree                                 # of hours to pick apples 

SPECIALIZATION AND TRADE 
    -Gains from trade are based on comparative adv. not absolute adv.
 

FOREIGN EXCHANGE 

buying and selling of currency

•  Any transaction that occurs in the balance of payments 
• The exchange rates is determine in the foreign currency markets

CHANGES IN EXCHANGE RATES 

      -Exchange rates are a function of the supply and demand for currency 

           - an increase in the supply of currency with decrease the exchange rate of a currency (vice versa)

           -A increase in demand of a currency increases the exchange rate of a currency(vice versa)

APPRECIATION AND DEPRECIATION 

      -Appreciation of a currency occurs when the exchange rate of that currency increase (supply more)

      -Depreciation of a currency occurs when the exchange rate of that currency decease (demand more)

EXCHANGE RATE DETERMINANTS 

     -Consumer tastes 

     -Relative income 

     -Relative price level 

     -Speculation 

EXPORTS AND IMPORTS 

     -Exchange rate is determinant of both exports and imports

     -Appreciation of the dollar causes American goods to 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 expansive thus increasing exports and reducing imports 

FLOWING RATES

     -Depends upon supply and demand of that currency verses other currency is very sensitive to the business cycle and provides options for investment  

FIXED RATES 

     -based upon a country's wiliness to distribute currency and the ability to control the amount 

UNIT 7

BALANCE OF PAYMENTS measure of money inflows and outflows between the U.S and the rest of the world

    Inflow (Credits)

    Outflows(Debits)

3 Accounts 

 1.CURRENT ACCOUNT 

     Balance of trade or net exports

        -Exports/Imports of goods and 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 

    Net transfer

        - Foreign aid= a debit to the current account 

2.CAPITAL/FINANCIAL ACCOUNT

      -The balance of capital ownership

      - Includes the purchase of both real and financial assets 

      - Direct investment in the U.S is a credit to the CA

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

RELATIONSHIP BETWEEN CURRENT AND CAPITAL 

      - They should ZERO each other out

      - If the current account has a negative balance(deficit) them the capital account should then have a positive balance(surplus)

3.OFFICIAL RESERVES

     - Foreign currency holding of the U.S federal reserve system 

     -When the balance of payments surplus the fed accumulates foreign currency and debits the balance of payments 

     - When the balance of payments deficit of the fed depletes its reserves of foreign currency and credits the balance of payments  

    - Official reserves zero out the balance of payments 

ACTIVE V. PASSIVE OFFICIAL RESERVES 
     -U.S is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate 
     -China is active

EQUATIONS 
    - Balance of trade 
          Goods exports + Goods imports
    -Balance on goods and services 
          Goods exports + Service exports + Good imports + Service imports 
    -Currents Account 
          Balance on goods and services + Net investment + Net transfers 
    -Capital Account 
          Foreign purchases + Domestic Purchases 

UNIT 5 & 6

 SHORT RUN AGGREGATE SUPPLY- period in which wages remain fixed as PL increases or decrease 

      EFFECTS:

            PL allows changes allow for companies to exceed normal outputs and hire more works b/c profits are increasing while wages remain constant  (SR)

            Wages will adjust to the PL and previous output levels will adjust accordingly (LR)

EQUILIBRIUM IN THE EXTENDED MODEL 

    extended model means the inclusion of both SR and LR curves 

DEMAND PULL inflation in the AS model DP prices increase based on increase in AD

  - SR demand pull will drive up prices and increase production 

  - LR increase in AD will eventually return to previous levels 

COST PUSH arises from factors that will increase per unit costs suck as increase in the price of a key resource 

DILEMMA FOR THE GOVT

   -In effort to flight cost push the govt can react in two different ways 

   - Action such as spending by the govt could begin an inflationary spiral

   - No action however could lead to recession by keeping production and employment levels 

LONG RUN PHILLIPS CURVE measures inflation and unemployment

    -natural rate of unemployment is held constant 

    -B/c LRPC exists at the natural rate of unemployment structural changes in the economy that affect unemployment will also cause the LRPC to shift 

RELATING PHILLIPS CURVE TO AS/AD

  - changes in AS/AS model can also be seen in the Phillips curve 

SRPC 

  -inverse relationship bwt unemployment and inflation 

LRPC

  -occurs at the nature rate of unemployment 

  -always represented by a vertical line 

  -no trade of bwt unemployment and inflation 

  -only shift if LRPS shifts 

  -If the NRU shifts so does the LRPC 

-Major assumption is that more worker benefits create higher nature rates and few worker benefits create lower nature rates 

MISERY INDEX comb. of inflation and unemployment in any given year single digit is good 2% 

SUPPLY SHOCKS rapid and efficient increase in resources cost due to oil embryo 

DISINFLATION reduction in inflation from year to year found in LRPC

DEFLATION general decline in prices 

INFLATION general rise in prices