Patricia's AP Macroeconomics Blog

COMPARATIVE ADVANTAGE

Specialization - individuals and countries can be made better off if they will produce and what they have a comparative advantage and then trade with others for whatever else they need
Absolute advantage – the producer that can produce the most outputs or requires the least amount of inputs
Comparative advantage – producer with the lowest opportunity cost
Countries should trade if they have a relatively lower opportunity cost. They should specialize in the good that is cheaper for them to produce
Output problem presents in the data as products produced given a set of resources
Input problem presents the data as amount of resources needed to produce a fixed amount of output
When identifying absolute advantage, input problems can change the scenario from who can produce most to who can produce a given product with the least resources

Country A will have an absolute advantage on cars and trucks because they take up less time.
To find comparative advantage do this:
For cars, country A 30÷6 = 5. The opportunity cost for country be would be 35÷21 = 1.6, so country B has comparative advantage on cars.
For trucks, country A will be 6÷30 = .2 and for country B it will be 21÷35 = .6, so country A has the comparative advantage on trucks.

The buying and selling of Currency
Any transaction that occurs in the balance of payments necessitates foreign exchange
The exchange rate is determined in the foreign currency markets
Simply put, the exchange rate is the price of a Currency

Exchange rates are a function of the supply and demand for Currency
An increase in the supply of Currency will decrease the exchange rate of a Currency
A decrease in supply of a Currency will increase the exchange rate of a Currency
An increase in the demand for Currency would increase the exchange rate of a currency
A decrease in the demand for a currency will decrease the exchange rate of a Currency

Appreciation of a Currency occurs when the exchange rate of a Currency increases
Depreciation is when the exchange rate of that Currency decreases

When the American money appreciates it causes our goods to be more expensive and foreign goods to be cheaper. Exports decrease and imports increase.
Exchange rate determined by exports and imports
Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be more expensive. Exports increase and imports decrease

Balance of payments – the measure of money inflows and outflows between the US and rest of the world
Inflows – credits
Outflows – debits
Balance of payment is divided into three

Balance of trade or net exports
Exports of goods and services – 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 US owned foreign assets. Income paid to foreign held US assets. (Example: interest payments on US on Brazilian bonds – interest payments or German on the US treasury bond)
Net transfers – foreign aid is a debit to the current account. (Example: Mexican migrant workers send money to Mexico)

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
Direct investment by US firms or individuals in a foreign country are debits to the capital account
Purchase of foreign financial assets represents a debit to the capital account
Purchase of domestic financial assets by foreigners represents a credit to the capital account

Current account and capital account should zero each other out
If the current account has a negative balance, the capital account should be positive
Official reserves

Foreign currency holdings of the US Fed
When there is a balance of payments sir plus, the Fed accumulates foreign currency and debits the balance of payments
When there is a balance of payments deficit, the Fed depletes it's reserves of foreign Currency and credits the balance of payments
The official reserves zero out the balance of payments

Inverse relationship between installation and unemployment. There is a trade off.
Each point on the Phillips curve corresponds to a different level of output.
Long run Phillips curve: occurs at the natural rate of unemployment. It is represented by a vertical line. There is no trade off between unemployment and inflation because the economy produces at the full employment level. will only shift if LRAS shifts

natural rate of unemployment = seasonal, sectional, and structural unemployment.
Increase in Un will s
hift LRPC right.
Decrease in Un will shift the LRPC left.

SHORT RUN PHILLIPS CURVE.

Since wages are sticky, inflation changes moves the points on the SRPC.
If inflation persists, and the expected rate of inflation rises, then the entire SRPC moves upward.
Stagflation – unemployment and inflation simultaneously rise.
Supply socks – Rapid and significant increases in resource cost.
If inflation expectations dropped due to new technology or efficiency, then the SRPC will move downward.
Misery index - combination of inflation and unemployment in any given year.
Single digit Misery is good

The price of bonds decrease when interest rates increase
Supply side economics – manipulate AS by enacting policies. Designed to stimulate incentives to work, save, and invest. Example: tax cuts increase disposable income.
Laffer curve – theoretical relationship between tax rates and government revenues.
Criticisms of the Laffer curve:

Empirical evidence suggests that the impact of tax rates on incentives to work, safe, and invest are small.
Tax cuts also increase demand which can fuel inflation.
When the economy is actually located on the curve is difficult to determine.