Monday, May 18, 2015

Supply Side Economics

In this video, the instructor goes into extreme detail about supply side economics and ties it into Reaganomics. Although he goes into excess detail, I used just the first few minutes to gain a better understanding of the concept.

Absolute vs. Comparative Advantage

This video goes into more depth about absolute vs. comparative advantage and talks about nations and individuals when comparing opportunity costs.

Unit 7 Notes

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: this is where the country or individual 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:
  • What is given up/what is being produced

Balance of Payments
  • Measure of money inflows and outflows between the United States and the Rest of the World (ROW)
    • Inflows referred to as credits
    • Outflows referred to as debits
  • Divided into Three Accounts:
    • Current Account
    • Capital/Financial Account
    • Official Reserves Account
Double Entry Bookkeeping
  • Every transaction in the balance of payments is recorded twice in accordance with standard accounting practice
    • John Deere exports $50 Million worth of farm equipment to Ireland
      • Credit of $50 million to the current account
      • (-$50 million worth of farm equipment or physical assets)
      • Debit of $50 million to the capital/financial account (+$50 million worth of Euros or financial assets)
Current Account
  • Balance of Trade or Net Exports
    • Exports of goods/services - Import of goods/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 U.S. owned foreign assets - Income paid to foreign held U.S. assets
      • Interest payments on U.S. owned Brazilian bonds - Interest payments on German owned U.S. Treasury bonds
  • Net Transfers (tend to be unilateral)
    • Foreign Aid is a debit to the current account
      • Mexican migrant workers send money to family in Mexico
  • Capital/Financial Account
    • The balance of capital ownership
    • Includes the purchase of both real and financial assets
    • Direct investment in the Unites States is a credit to the capital account
      • The Toyota Factory in San Antonio
    • Direct Investment by U.S. firms/individuals in a foreign country are debits to the capital account
      • Intel Factory in San Jose, Costa Rica
    • Purchase of foreign financial assets represents a debit to the capital account
      • Warren Buffet buys stock in Petrochina
    • Purchase of domestic financial assets by foreigners represents a credit to the capital account
      • The United Arab Emirates sovereign wealth fund purchases a large store in the NASDAQ
  • Relationship between Current and Capital Account
    • The Current Account and the Capital Account should zero each other out
    • If the Current Account has a negative balance (deficit), then the Capital Account should then have a positive balance (surplus)
  • Official Reserves
    • The foreign currency holdings 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
    • When there is a balance of payments deficit the Fed depletes its reserves of foreign currency and credits the balance of payments
    • Active v. Passive Official Reserves
      • The US is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate.
      • The People’s Republic of China is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate with the US.
Balance of Trade

  • Goods & Services Exports - Goods & Services Imports
    • Have Either Trade Deficit or Trade Surplus
      • Deficit = Imports > Exports
      • Surplus = Exports > Imports
  • Current Account
    • Balance on Trade + Net Investment + Net Transfers
  • Capital Account
    • Foreign Purchases of U.S. Assets + U.S. Purchases of Assets Abroad
  • Official Reserves
    • Current Account Balance + Capital Account Balance

Unit 5 & 6 Notes

Short Run Aggregate Supply
  • 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
    • Amount of money received per hour per day or per year
  • Sticky Wages
    • Nominal wage level is set according to an initial price level and it does not vary

Price Level
Wage Level
Employment Level
Implications
1.Keynesian/
Horizontal
Fixed
Fixed
Flexible
Output depends upon changes in employment
2.Intermediate
Flexible
Fixed
Flexible
Output depends upon changes in price level and employment
3.Classical/
Vertical
Flexible
Fixed
Fixed
Output dependent upon changes in price level


Long Run Aggregate Supply
  • Time long enough for wages to adjust to the price level
Long Run Phillips Curve
  • Relationship between unemployment
  • Long Run Phillips Curve occurs at the natural rate of unemployment
  • Represented by a vertical line
  • No trade off between unemployment and inflation in the long run
  • Means that the economy produces at the full employment level
  • Long Run Phillips Curve will only shift if the LRAS curve shifts
  • More worker benefits create higher natural rates
  • Fewer worker benefits create lower natural rates
Short Run Phillips Curve
  • Tradeoff between unemployment and inflation (inverse relationship)
  • High inflation equal to low employment
  • Relevance to Okun’s Law
  • Since wages are sticky, inflation changes move the points on the SRPC
  • If inflation persists, and the expected rate of inflation rises then the entire SRPC moves upward due to stagflation
  • If inflation expectations drop, due to new technology or economic growth then the SRPC moves downward
  • Aggregate supply shocks cause both the rate of inflation and the rate of unemployment to increase
  • Supply shocks- Rapid and significant increase in resource cause
  • Misery Index- Combination of inflation and unemployment in any given year; single digit misery is good
Long-Run Phillips Curve
  • LRPC exists at the natural rate of unemployment so structural changes that affect the natural rate of unemployment will also cause the LRPC to shift
  • Increases in the natural rate of unemployment will shift the LRPC to the right
  • Decreases in the natural rate of unemployment will shift the LRPC to the left
Stagflation
  • When Inflation and Unemployment increase simultaneously
  • 1946-1964 Baby Boom
  • Women’s Movement
  • Civil RIghts Movement
  • Vietnam War ends
  • Oil Embargo of 1973 & 1979
Disinflation
  • Reduction in the inflation rate from year to year
  • Occurs when aggregate demand declines
Deflation
  • General drop in the price level
Supply Side Economics
  • The belief that the AS curve will determine levels of inflation, unemployment, and economic growth
  • To increase the economy, the AS curve will have to shift to the right which will benefit the company first
  • Supply side economist focus on marginal tax rates
    • Marginal Tax Rates: Amount paid on the last dollar earned or on each additional dollar earned
  • Lower taxes or incentives for businesses to invest in our economy
  • Lower taxes or incentives for workers to work more and harder thereby becoming more productive
  • Lower taxes or incentives for people to increase savings and therefore create lower interest rates which will increase business investment
  • Supply Side Economists Support policies that promote GDP Growth by arguing that high marginal tax rates along with our current system of transfer payments (Unemployment compensation/welfare programs) provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures
Reaganomics
  • Lowered the marginal tax rate to get the U.S. out of a recession. This actually led to a deficit.
Laffer Curve
  • Trade off between tax rates and government used to support supply side argument
  • As tax rates increase from zero, tax revenues increase from zero to some maximum level and then decline
  • Three criticisms of the laffer curve:
    • Research suggests that the impact of tax rates on incentives to work, invest, and to save are small
    • Tax rates also increase demand which can fuel inflation and it causes demand to exceed supply
    • Where the economy is actually located on the curve is yet to be determined
Focus 4/15/15
  1. Debit/Capital
  2. Credit/Current
  3. Debit/Capital
  4. Debit/Current
  5. Credit/Current
  6. Debit/Official Reserves
Foreign Exchange
  • The buying and selling of currency
  • The exchange rate (e) is determined in the foreign currency markets
  • The exchange rate is the price of a currency. Do not try to calculate the exact exchange rate
Tips
  • Always change the D line on one currency graph, the S line on the other currency’s graph
  • Move the lines of the two currency graphs in the same direction (right or left) and you will have the correct answer
  • If D on one graph increases, S on the other will also increase
  • If D moves to the left, S will move to the left on the other graph
Changes in Exchange Rates
  • Exchange Rates (e) are a function of the supply and demand for currency
  • An increase in demand for a currency will make it more expensive to buy one unit of that currency
  • A decrease in demand for a currency will make it cheaper to buy one unit of that currency
Appreciation
  • Appreciation of a currency occurs when the exchange rate of that currency increases
Depreciation
  • Depreciation of a currency occurs when the exchange rate of that currency decreases
Exchange Rate Determinants

  • Consumer Tastes
    • People want Japanese goods, more dollars go there, increasing Yen
  • Relative Income
    • Mexico has stronger economy than US, more US products being bought, more demand for dollars, USD appreciates, pesos depreciate
  • Relative Price Level
    • Higher price level, less demand
  • Speculation
    • Swiss interest rates will rise, greater demand for their money, appreciates value