Unit 6 notes

Economic Growth Defined

• Sustained increase in Real GDP over time
• Sustained increase in Real GDP per capita over time

Why Grow?

• Growth 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

Physical Capital

• Tools, machinery, factories, infrastructure
• Physical Capital is the product of Investment
• Investment is sensitive to interest rates and expected rates of return
• If takes capital to make capital
• Capital must be maintained

Technology & 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

Human Capital

• 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

Hindrances to Growth

• Economic and Political Instability
• high inflationary expectation
• 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

Absolute vs. Comparative advantage

Absolute Advantage 

• Individual
• exists when a person can produce more of a certain good/service than someone else in the same 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

• Individual/National: exists when an individual or nation can produce a good/service at a lower opportunity cost than can another individual or nation
• Input Problems
• where the country who can produce a set amount of something by using the least amount of resources, land, or time has the absolute advantage
• chosen item / forgone item
• Output Problems
• who can produce the product the best
• what is given up / what is produced

Foreign Exchange Market

Buying and selling of currency

• In order to purchase souvenirs in France, first necessary for Americans to sell (supply) their dollars and buy (demand) Euros
• Exchange rate (e) is determined in the foreign currency markets and is the price of a currency
• Change the demand on one currency graph, change the supply on the other currency graph
• Move the lines on the two currency graphs in the same direction and you will have the correct answer
• If D increases on one graph, S increases on the other

Changes in Exchange Rates

• Exchange rates (e) are a function of the supply and demand for currency
• increase in supply of currency will make it cheaper to buy one unit of that currency
• decrease in supply of currency will make it more expensive to buy one unit of that currency
• increase in demand for a currency will make it more expensive to buy one unit of that currency
• decrease in demand for a currency will make it cheaper to buy one unit of that currency

1. Appreciation of a currency occurs when the exchange rate of that currency increases
2. Depreciation of a currency occurs when the exchange rate of that currency decreases

Purchasing Power Parity

• When the currency rates are set by international markets, changes will be based on the actual purchasing power of the currencies
• Ex.: If the US dollar to the European euro rate is 1.5 to 1, then each $1.50 will buy 1 euro. However, if an item in the US costs $1.50 and then costs more or less than 1 euro, the parity is lost. Markets will adjust quickly in floating rate or pressure for change will occur in fixed rates
• What is the need for exchanging currencies?
• Sell exports, buy immports
• Invest in other countries stocks and bonds
• build factory or store in other markets
• speculate on currency values
• hold currencies in bank acct. for future exports, imports and business loans
• to control excessive imbalances

Unit 7 notes

Balance of Payments
Measure of money inflows and outflows between the U.S. And rest of the works (ROW)
inflow = credit
outflows = debits
3 Acct balance is divided into
Current Acct
Capital Acct
Official Reserves
Double Entry Bookkeeping: every transaction in the balance of payments is recorded twice in accordance w/standard accounting practice.
Balance of Trade
Export of goods/service - imports of goods/services
Export create credit to balance of payments
Imports create debit to balance of payments
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)
Foreign aid > a debit to the current acct
Ex. Mexican migrant workers send money to family in mexico.
Capital/Financial accounts
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 Rica
Purchase of foreign financial assets represent a debit to capital account.
The current account & capital account should zero each to her out.
If current account has a negative balance (deficit) then the capital account has 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 vs. Passive
the US is passive in its use of official reserves because our exchange rate stays the same
the people's republic of china is active in its use of official reserves.
Actively buys and sells dollar in order to maintain a steady exchange with the US

Unit 5 notes

Short Run AS

• Time is too short for wages to adjust to the price level 
• Workers may not be aware of changes in their real wages due to inflation and have adjusted their labor decisions and wage demands accordingly. 
• Nominal Wages: Amt. of money received per hour, day, or year
• Adjusted for inflation
• Sticky Wage: Nominal wage level set according to an initial price level and it does not vary.
• Will be stuck in the short run for a while

Price level	Wage level	Employment level	Implications
Keynesian: Fixed	Fixed	Flexible	Output depends on changes in employment
Intermediate: flexible	Fixed	Flexible	Output depends on change in price level and employment
Classical: flexible	Fixed	Fixed	Output depends on a change in price level

Long Run AS

• It has flexible wages and price levels
• off set each other
• Time is long enough for wages to adjust to price level
• if we have growth, capital stock gain and change in technology.

Phillips Curve

• Represents the relationship between inflation and unemployment. 
• Trade off between inflation and unemployment only occurs in the short run.

Long Run

• The long run curve occurs at the natural rate of unemployment
• represented by a vertical line
• there is no trade off in the long run, meaning the economy produces at full employment level
• Long run Philips Curve shift only if LRAS shifts
• At the natural rate of unemployment: structural, seasonal and frictional unemployment exist
• fewer worker benefits create lower natural rates
• Shift PPC outwards, LRPC will shift, otherwise it is vertical and stable

Short run

• Inverse relationship between inflation & unemployment.
• High inflation means lower employment
• Relevance to okun's law
• Since wages are sticky
• inflation changes
• moves the points on SRPC
• If inflation persist and expected rate of inflation rises, then the entire SRPC moves upward due to stagflation.  
• If inflation drop due to new technology or economic 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 year. 
• Single digit misery is good.
• LRPC: exist natural rate of unemployment, structural changes in the economy affect unemployment and shift LRPC

• Stagflation: when inflation/unemployment increase simultaneously

1. During 1946-1964 (baby boom)
2. Women's movement
3. Civil rights movement
4. Vietnam War ends
5. Oil embargo 1973 & 1979

• Disinflation: reduction in inflation rate from year to year. 
• occurs when AD declines.
• Deflation: general drop in the price level.

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 more on marginal tax rate.
• marginal tax rate = amount paid on last dollar earned or additional dollar 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 that promote GDP growth by arguing high marginal tax rate along with the current system of transfer payments, such as welfare and unemployment provide disincentives to work, invest and undertake entrepreneurial ventures.

• Referred to as Reaganomics
• Lower marginal tax rate to get U.S. out of a recession >  deficit. 
• Trade off between tax rates & govt. revenue is used to support supply side argument.  
• As tax rates increase from zero, tax revenue increase from zero to some maximum level and then declines.

3 criticism of the Laffer Curve:

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.