Comparative Advantage

Comparative Advantage

• Specialization - Individuals and countries can be made better off if they will produce in what they have a comparative advantage and then trade with others for whatever else they want/need.

•   Absolute Advantage: The producer that can produce the most output OR requires the least amount of inputs (resources).

•    Comparative Advantage - The producer with the lowest opportunity cost.

•      Countries should trade if they have a relatively low opportunity cost.

•      Input VS Output

•     An output problem presents the data as products produced given a set of resources. (ex. Number of pens produced)

•     An input problem presents the data as amount of resources needed to produce a fixed amount of output. (Number of labor hours to produce 1 bushel)

• When identifying absolute advantage, input problems change the scenario from who can produce the most to two can produce a given product with the least amount of resources.

Foreign Exchange (5/8)

Foreign Exchange (5/8)

• buying and selling of currency
• any transaction that occurs in the BoP
• exchange rate (e) is determined in the foreign currency mrkts
• e is the price of a currency
• e is a function of the supply & demand of currency
• S↑ = e↓ ; S↓ = e↑
• D↑ = e↑ ; D↓ = e↓
• appreciation of currency - e↑
• depreciation of currency - e↓

• Consumer Taste
• Relative Income
• Relative PL
• Speculation

Balance of Payment Equation (5/8)

1. Balance of Trade

1. GoodsExports - GoodsImports

2. Balance of Goods & Services

1. G&SExports & G&SImports

3. Balance of Current Acct

1. Balance of G&S & Net Investment & Net Transfers

4. Balance of Capital Acct

1. see notes

5. Official Reserves

1. theoretically 0

2. Current Acct (+, -) & Capital Acct (-,+)

Balance of Payments (5/4)

Balance of Payments (5/4)

• measure of $ inflows & outflows btwn U.S. and RestofWorld (ROW)

• inflow - CREDIT

• outflow - DEBIT

3 Accts

• Current Acct
• Capital/Financial Acct
• Official Reserves Acct

Current Acct

• Balance of Trade or Net Export
• Exports - Imports
• Exports create credit in BoP
• Imports create debit
• Net Foreign Income
• Income earned by U.S. owned foreign assets - income paid to foreign held US assets
• Net Transfers (Tends to be Unilateral)
• Foreign Aid is debit
• migrant workers sending earned money to family in Mexico

Capital Acct

• Balance of capital ownership
• include the purchase of real & financial assets
• direct investment in the US is a credit
• Toyota Factory in San Antonio
• direct investment by US firms/individuals in a foreign country, a debit
• Intel Factory in Costa Rica
• purchase of foreign financial assets, a debit
• Warren Buffet buys stocks in PetroChina
• purchase of domestic financial assets by foreigners, a credit
• UAE purchases stock from NASDAQ

Official Reserves Acct

• foreign currency holdings of US Fed
• balance of payments surplus, FED accumulates foreign currency & debits to BoP
• BoP deficit, FED depletes its reserves of foreign currency & credits the BoP

Economic Growth

Economic Growth Defined as:

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

Reasons for Growth

• Growth leads to greater prosperity for society
• Lessens burden of scarcity
• Increase general level of well being

Conditions for Growth

• Sound legal and economic institutions
• Eco. freedom
• Respect private property
• Political and economic stability (low inflationary expectations)
• Willingness to sacrifice current consumption in order to grow
• Savings
• Trade

Physical Growth

• Tools; machinery, factories, infrastructure
• Physical capital is product of investment
• Investment = affected by interest rates and expected rates of return
• Takes capital to make capital
• Maintained Capital

Technology and Productivity

• Research and development, innovation and invention yield increase in available technology
• More technology on hands = increase productivity
• Productivity is output per worker
• More productivity = more economic growth

Human Capital

• People most important resource, therefore human capital must be developed
• Education
• Economic freedom
• Right to acquire private property
• Incentives
• Clean water & stable food supply
• Access to new technologies

Supply Side Economics or Reaganomics! (4/24)

Supply Side Economics or Reaganomics (4/24)

• deals with manipulation the AS by enacting policies to stimulate incentives to Work,Save,Invest
• tax cuts = DI↑
• though there could be disincentives

Laffer Curve

• displays the 'theoretical' relationship btwn tax rates and gov't (tax) revenue
• Criticisms of Laffer Curve
• Empirical evidence suggest that impact of tax rates on incentives to work,save,invest are small
• Tax cuts also increase Demand which can fuel inflation
• Where the economy is actually located on the curve is difficult to determine 

3399 × 2003 - laffercenter.com

Phillips Curve Cont & Inflation Rates(4/19-20)

Phillips Curve Cont... (4/19)

• if inflation persist and expected rate of inflation ↑, then the entire SRPC moves upward, which brings STAGFLATION

• stagflation - simultaneous rise in inflation and unemployment

• supply shock- rapid and significant ↑ in resource cost which cause SRAS to shift

• i.e. depreciation of $, oil embargo; if inflation expectation and due to new tech then SRPC will move downward

• NRU - Frictional, Seasonal, Structural, Cyclical

• Misery Index - combination of inflation and unemployment in any given yr

• Single-Digit Misery is good

Inflation

• inflation - PL↑ (natural rate - 2% to 3%)
• deflation - PL↓
• disinflation  - rate of inflation ↓
• hyperinflation - rate of inflation ↑