Input/Output Problems

Input/Output Problems

• Output Problem presents data as products produced given a set of resources
• Input Problem presents data as amount of resources needed to produce a fixed amount of output.

In absolute advantage, input changes from who can produce the most to who can produce a given product with the less resources.

Comparative Advantage

May 10, 2017

Comparative Advantage

Speculation

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

Absolute Advantage

• Producer that can produce the most output or requires the least amount of inputs/resources

Comparative Advantage

• Producer with lowest opportunity cost
• *countries should trade with relatively low opportunity cost*
  

Mechanics Of Foreign Exchange (FOREX)

Mechanics Of Foreign Exchange (FOREX)

• Buying/Selling of Currency
• Any transaction that occurs in the balance of payments necessitates foreign exchange
• The foreign exchange rate (e) is determined in the foreign currency markets
• -exchange rate is the price of a currency-

Changes in Exchange Rates

• Exchange rates (e) are function of supply/demand for currency
• An increase in supply of currency will decrease exchange rate of currency.
• Decrease in supply will increase exchange rate
• Increase in demand will increase exchange rate
• Decrease in demand will decrease exchange rate

Appreciation and Depreciation

• Appreciation of a currency occurs when the exchange rate of that currency increases
• Depreciation occurs when exchange rate of that currency decrease

Exchange Rate Determinants

1. Consumer Taste
2. Relative Income
3. Speculation

Exports/Imports

• Exchange rate is determinant of both exports and imports
• Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing imports
• Depreciation- relatively cheaper and foreign goods more expensive, increases exports, decreases imports

Balance Of Payments

May 4, 2017

Balance of Payments

• Measure of money inflows and outflows between the U.S and the rest of the world (ROW)
• Inflows= Credits
• Outflows= Debits
• Balance of Payments divided into 3 accounts
1. Current Account
2. Capital/Financial Account
3. Official Reserves

1. Current Account
• Balance of Trade/Net Exports
1. Exports of goods/services-imports goods/services
2. Exports creates a credit to balance of payments
3. Imports create debit
• Net Foreign Income
1. Income earned by US foreign assets - income paid to foreign held US assets
• Net transfers (tend to be unilateral)
1. Foreign aid= a debit to current account.
2. Capital/ Financial Account
• Balance of capital ownership
• Includes purchase of both real and financial assets
• Direct investment in U.S is credit to capital account
• Direct investment by U.S firms/ individuals in foreign country are debits to capital account
• Purchase of foreign financial assets (debit to capital account)
• Purchase of domestic financial assets by foreigners represents credit.

*current account and capital account zero each other out.*

1. Official Reserves
1. Foreign currency holdings of U.S Fed. Reserve Sys.
2. When there is a balance of payments surplus, the Fed accumulates foreign currency and debits the balance of payments.
3. When there is balance deficit, the Fed depletes reserves of foreign currency and credits balance.

*Official Reserves zero out balance of payments

Monetary Policy Video

Loanable Funds Market

April 3, 2017

Loanable Funds Market

• Private sector supply and demand of loans
• Bring together lenders and borrowers
• Shows effect on real interest rate
• Demand: inverse relationship between real interest rate and quantity loans demanded
• Supply: Direct relationship between real interest rate and quantity loans supplied
• NOT the same as money market (supply is not vertical)

Federal funds rate: interest rate that banks charge one another for overnight loans

Prime rate: interest rate banks charge their most creditworthy customers

Tools of Monetary Policy

Tools Of Monetary Policy

FED adjusts money supply by changing 1 of the following….

1. Setting reserve requirements
2. Lending money to banks and thrifts
1. Discount rate
3. Open Market Operations
1. Buying and selling bonds

1. Reserve Requirement
1. Fed sets amount that bank must hold (fractional reserve banking).
2. RR ration is % of deposits banks must hold in reserve (can NOT loan out)
2. Open Market Operations
1. If the Fed buys bonds- it takes bonds out of the economy and replaces them with money. MS increases.
2. Most important and widely used monetary policy
3. To increase MS, Fed should buy govt securities
4. To decrease money supply, fed should sell govt securities
3. Discount Rate
1. Interest rate that the Fed charges commercial banks for short term loans.