absolute:

• individual: exist when a person can produce more of a certain good/service than someone else in same amount of time. 
• national: exist when a country can produce more of a good/services than another country can in same time. 

comparative:

• individual/national: exist when individual or nation can produce a good/service at a lower opportunity cost than another individual or country.

input problems: the country or individual can produce a set amount of something by using the least amount of resources/land/time has the absolute advantage.

chosen item

forgone item

output problem: looking @ production

what is given up

what is produced

purchasing power parity - when currency rates are set by international market change will be based on the actual purchasing power of the currencies.

EX. US $ to euro rate is 1.5:1 then each $1.5 will buy 1 euro. howerever if an item in US cost $1.50 and then cost more or less then 1 euro then the parity is lost. markets will adjust in floating rates or pressure for change will occur in foxed rates.

why do we exchange currencies?

1. to sell exports and buy imports
2. to invest in another countries' stocks and bonds
3. to build factories or stores in other markets
4. to speculate on currency value
5. hold currencies in bank accounts for future exports, imports, and business loans.
6. to control excess inbalance.

1. capital/debit
2. capital/credit
3. official reserves/credit
4. current/debit 
5. current/credit
6. official reserves/debit

appreciation of currency occurs when exchange rate of that currency increase.
EX. 100 yen = $1 --> 200 yen = $1  the dollar is stronger

depreciation of currency occurs hen exchange rate of that currency decreases.

exchange rate determinants


consumer taste:

• ex. preference for jap. goods creates an inc. in demand of yen & inc. supply of $ in currency exchange market. 
• inc. in demand of yen lead to appreciation of yen
• inc. in supply of $ leads to the depreciation of $

relative income:

• imports tend to be normal goods. 
• ex. mex. econ. is becoming stronger & US econ is in recession, then mex will buy more.
• $ appreicates. 

relative price level:

• ex. price level in canada higher than in US, then american goods are cheaper. 
• canadians purchase more goods cause $ to appreciate. 

speculation:

• ex. if US expect that swiss interest rate go up, US demand for swiss francs in order to earn higher rate of return in switzerland. 
• swiss francs appreciate 
• supply of $ inc. cause depreciate.

Measure of money inflows and outflows between the U.S. And rest of the works (ROW)
- inflow referred to credit
- outflows are referred to debits

1. Current Account
2. Capital/Financial account
3. Official Reserve account

Double Entry Bookkeeping: 
Every transaction in the balance of payments is recorded twice in accordance w/standard accounting practice. 

Balance of Trade or net export
Export of goods/service - imports of goods/services

Export create credit. 
Imports create debit.

Net foreign income:
Income earned by US owned foreign assets - income paid to foreign held US assets. 
EX. interest payments to US owned Brazilian bonds - interest payment on German owned US treasury bonds.

Net transfer (tend to be unilateral)
A debit to current account to foreign aid. 
Ex. Mexican migrant workers send money to family in mexico.

Capital/Financial accounts
- The balance of capital ownership includes the purchase of both real and financial assets
- direct investment in US is a credit to capital account
Ex. Toyota factory in San Antonio 
- direct invest by US firms/individual in a foreign country are debit to the capital account. 
Ex. Intel factory in San Jose, Costa Rice 
- purchase of foreign financial assets rep. a debit to capital account. 
- purchase a large stake in NASDAQ

- The current account & capital account should zero each to her out. 
- if current account has a negative balance (deficit) then the capital account should the. Have a positive balance (surplus)

Official Reserve:
- foreign currency holding of the United States Federal Reserve System
- when there is a balance of payments surplus the FED accumulates foreign currency and debits the balance of payments. 

Active v. Passive official reserves
- the US is passive in its use of official reserves. It doesn't seek to manipulate the dollar exchange rate.

Balance of Trade: Goods & Service exports - goods & service important

Trade Deficit: Import > export

Trade Surplus: Exports > import

Goods exports + good imports 
(Informal way)

Balance on Good & Service:  Good imports + service imports

Current Account:  Balance on trade + net investment + net transfer

Capital account: Foreign purchase of US assets + US purchase of assets abroad 

Official Reserve:  Current account balance + capital account balance.

Supply Side Economics: Belief that as AS curve determine level of inflation, unemployment, & econ growth.  
To increase economy,  the AS curve will have to shift to the right which will have to benefit the economy first.

Supply Side Economics focus on marginal tax rate. 
 

Marginal Tax Rate: amount paid on last $ earned or on additional $ earned.

Lower taxes are incentives for businesses to invest in our economy. 
Lowered taxes are incentives to increase savings & therefore create lower interest rates which will increase business investment.

Supply Side Economists support policies thay promote GDP growth. They argue high marginal tax rate along with the current system of transfer payments.
Ex. Welfare provides disincentive to work, invest, innovate, & undertake entrepreneurial ventures.

Referred to Raeganomics
Lowered the marginal tax rate to get U.S. out of a recession. = deficit. 

Laffer Curve: trade off between tax rates & gov. revenue.
Used to support supply side argument.  
As tax rates increase from 0. Tax revenue increase 0 to some max level & then decline.

3 criticism:
1. Research suggests that impact of tax rates on incentives to work, invest, & to save are small.

2. Tax cut also increase demands which can fuel inflation & cause demand to exceed supply.

3. Where economy actually located on the curve is get to be determined.

It represents the relationship between inflation & unemployment.
There is a trade off thay only occurs in short run.

Long run occurs @ natural rate of unemployment. Rep by vertical line. 
No trade off between unemployment & inflation in long run which means economy produces @ full employment level. 
Long run curve will shift on if LRAS curve shift.

Frictional, seasonal, structural = long run

Major LRPC assumption is that more workers benefits create higher natural rates & fewer worker benefits create lower natural rates.

SRPC:
There is an inverse relationship between inflation & unemployment.
High inflation = lower employment

Has relevance to okun's law
Since wages are sticky,  inflation changes more the points on SRPC
If inflation persist & insisted rate of inflation rise then the entire SRPC moves upward die to stagflation.  
If inflation expectations drop due to new tech or econ growth then SRPC moves downward

Aggregate supply shock cause both rate of inflation & unemployment to inc. 
Supply shock - rapid and significant inc. in resource cost.

Misery index - combination of inflation & unemployment in any given ysar. Single digit misery is good.

LRPC:
because LRPC exist @ natural rate of unemployment, structural changes in the economy thay affect unemployment also cause LRPC to shift.

Stagflation: when inflation & unemployment increase simultaneously

• During 1946-1964 (baby boom)
• Women's movement
• Civil rights movement
• Vietnam War ends
• Oil embargo 1973 & 1979

Disinflation: reduction in inflation rate from year to year. This occurs when AD declines.

Deflation: general drop in the price level.

Supply shock: cost push

market where savers and borrowers exchange funds (QLF) @ real rate of interest.

• demand for loanable funds, or borrowing comes form households, firms, gov, and foreign sectors. demand for loanable funds is in fact the supply of bonds.
• supply of loanable funds or saving comes from households, firms, gov, and foreign sector. supply of loanable funds is also demand for bonds. 

• remember that demand for loanable funds = borrowing 
• more borrowing = more demand for loans
• less borrowing = less demand for loans

EX. gov deficit spending = more borrowing
less investment demand = less borrowing

change in supply:

• remember supply of loanable funds = savings (demand for bonds)
• more saving = more supply of loanable funds
• less saving = less supply of loanable funds
• when gov. does fiscal policy, it will affect the loanable funds markets
• changes in real interest rate will affect gross private investment.