Unit 7

The Balance of Payments

The BOP is the measure of $ based on inflows or outflows between the US and the world. (What goes in US goes out.)
Inflows are accounted as CREDIT. (adds to acct.)
Outflows are accounted as DEBIT. (subtracts from acct.)

3 Parts:
Current Account
Capital Account:
Official Reserves Account
Double Entry Book Keeping:
This occurs every time a transaction is recorded; it records it twice.
The transactions effect each other; The BOP should always equal zero.

Current Account
Consists of the balance of trade (net exports)
Formula: *Exports-Imports*
Exports create credut to balance of payments.
Imports create a debit to BOP.

Net Foreign Income
This is income earned by US owned foreign assets-income paid to foreign held by US assets.
Net Transfers formula: Foreign aid- a debt to the current acct.

Capital Account
This is the balance of capital ownership.
This includes the purchase of real and financial assets. Direct investmentnt in the US is credit to capital acct.
Direct investment by US firms/individuals in foreign country are debits to the capital account.

The Relationship Between Current/Capital Acct.
(double entry book keeping)
Current Acct. and Capital Acct. should zero each other out, ALWAYS.

Foreign Exchange Market
This is the buying and selling of  currency.
The exchange rate is the price of a currency. Don't try to calculate the exact exchange rate!

Tips:
Always change the Dline on one currency graph, and the S line on the other. If the D on one graph shifts to the right, then the S line will do so on the other graph. The S and D always move in the same direction on both graphs.

Absolute Advantage: Faster, more efficient
Output problems look at production
Input problems deal with time.
Comparative Advantage is the lower opportunity cost.
Purchasing Power Parity:

• Markets will adjust quickly in floating rates or pressure for change will occur in fixed 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 values
5. To hold currencies in bank accounts for future exports, imports, and business loans.
6. To control excessive imbalances. 

Unit 6

This unit is all about Economic Growth!
Economic Growth is a sustained increase in Real GDP/per capita over time.
We want our economy to grow because it leads to economic prosperity. It strengthens our over all well being, and it reduces scarcity.


Conditions For Growth
Rule of Law
Economic Freedom
Trade
Low inflationary Expectations
Willingness to sacrifice consumption in order to grow


Physical Capital:
Consists of tools, machinery, factories
PC is the product of investment. Investment is very sensitive to interest rates and unexpected rates of return.
It takes capital to make capital.
Technology and Productivity
Research and development yield increases in technology.
Productivity is the output per worker. More productivity equals more economic growth.


Human Capital
Human are the most important resource for a nation. Education, economic freedom, the right to acquire private property, stable food and water, and access to technology all contribute.


Obstacles to Economic Growth:

High inflation
Economic instability'
Absence if rule of law
Negative Incentivess
Lack of Savings
Failure to maintain existing capital
Crowding Out of Investment
Increased income inequality
Restricitons on Free Int'l Trade


Example of Economic Growth:

Unit 5

Unit 5
The Phillips Curve
The Phillips curves shows the relationship between unemployment and inflation. This only occurs i the short run.

The LRPC occurs at the natural rate of unemployment, which is represented by a vertical line. There is no trade off between unemployment and inflation in the long run.
The long run only shifts if the LRAS curve shifts. The major LRPC assumption is that more worker benefits create higher natural rates and fewer worker benefits create lower natural rates.
LRAS=LRPC

3 Types of Unemployment That Give You the Natural Rate:
Seasonal
Frictional
Structural
The natural rate of unemployment is 4-5%. Full Employment is the same as the natural rate of unemployment.

SRPC:
...has relevance to Okuns Law, and has an inverse relationship occurring between the unemployment rate and the inflation rate.
High inflation=low unemployment
High unemployment= Low inflation

What is "Reagonomics?"

Reagonomics, aka Supply Side, is the study of economists believing that the AS curve will determine levels of inflation, unemployment, and economic growth to increase the economy. You take actions to shift the AS curve to the right, always benefitting the company first. 

If they reduce marginal tax rates, you encourage more people to work longer in which they would forego their leisure time for extra income. Lower taxes are an incentive for businesses to invest in our economy, and create lower interest rates fir increases in business investment.

The Laffer Curve

This is a trade off between tax rates an government revenue, used t support supply side arguments. 

As tax rates increase from 0, tax revenues increase from 0 to some maximum level and then decline.

Criticism:'

Research suggests that impact of tax rates on incentives to work, save, and invest are all. Tax cuts also create demand, which can fuel inflation, which will cause demand to exceed supply.