Unit 5

Disinflation: Reduction in the inflation rate from year to year which can be seen in the LRPS. this also occurs when AD declines.

Deflation: General decline in PL

Hyperinflation: when the economy experiences unusual high rise of inflation.

Adverse supply shock- SRPC intersect LRPC 

Supply side economics also known as (Reaganomics) Triple balance effect. (lower taxes and decrease regulation) (lower taxes and provide positive work incentives and thus shift the AD curv to the right)

Changes in AS, not AD. Determines the level of inflation unemployment rates and economic growth. 

The laffer curve: theoretical relationship between tax rates and government revenue. As rate increases from 0 tax revenue increases from 0 to some maximum level, then declines. 

3 criticism:
1. evidence suggests that the impact of tax rates on incentives to work, save and invest are small.
2. Tax cut also increase demand, which can fuel inflation
3. where the economy is actually located on the curve is difficult to determine.

Phillips Curve
Inverse relationship between unemployment and inflation
Long Run Phillips Curve
Misery Index- the combination of inflation and unemployment in any given year.

Single digit misery is good.

Unit 7; Balance of Payments, Foreign Exchange, Comparative and Absolute Advantage

Topic 1- Balance of Payment 

Balance Payment

• measure of money inflows and outflows between the United States and the rest of the world. 
• Inflows: Credits
• Outflows: Debits
• The Balance of Payments is divided into three accounts:

1. Current Account
2. Capital/Financial Account
3. Official Reserves

• Every transaction in the Balance of Payment is recorded twice. 
• current account has to equal to capital account

Current Account

• net exports 
• known as balance of trades
• exports - imports
• net foreign factor payment
• income earned by US earned foreign assets
• net transfers
• tend to be unilateral (one-way)
• what do we give to other countries/what do they give to us
• es. foreign aid 

Capital/Financial Account

• the 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
• ex. Toyota factory in San Antonio
• direct investment by US firms/individuals in a foreign country are debits to the capital account.
• ex. dell computer factory in Costa Rica
• the purchase of foreign financial assets represents a debit to the capital account
• ex. bill gates buying stocks in petro china
• purchase of domestic financial assets by foreigners represents a credit to the capital account.
• ex. cuba purchases a large stake in mcdonalds
• capital and current account, when added together, must zero each other out. 

Official Reserves

• the foreign currency holdings of the United States Federal Reserve System. 
• the official reserves zero out the balance of payments 

Formulas for Balance of Payments

• Balance of Trade= goods export + goods imports
• Balance on Goods and Services= goods exports + services exports - goods imports + services imports
• Balance of Current Amount= net exports + net foreign factor payment + net transfer
• Capital amount= foreign ourchases of assets + US purchases of foreign assets

↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔↔

Topic 2- Foreign Exchange

Foreign Exchange Market- The buying and selling of currency

appreciation: the increase of value of a countries currency with respect to a foreign countries currency 

• a dollar is set to be stronger
• less unit of dollars that are needed to buy a single unit of the other currency
• trade deflict 

depreciation: the loss of value of a countries currency with respect to a foreign currency

• the dollar is consider weak
• more units of dollar is needed to buy a single unit of the other currency

⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽⬽

Topic 3- Comparative and Absolute Advantage

Absolute Advantage- the producer can produce the most output or requires the least amount of input (resources)

• Ex. Papa Johns produces 12 pizzas while McDonald produces 3  

Comparative Advantage- the producer with the lowest opportunity cost

• Lowest number when you do the calculations. 
• Lowest opportunity cost

Input vs. Output 

Input- certain amount of input to get a given product (time)

Output- certain amount of product out of a given input (production)