SUPPLY SIDE ECONOMICS NOTES (4/7/15)

• The believe that the AS curve will determine levels of inflation, unemployment, and economic growth
• To increases economy, the AS curve will have to shift to the right, which will benefit the company first
• Supply side economists tend to focus on marginal tax rates
• marginal tax rates - amount paid on the last $ earned or on each additional $ earned
• Lower taxes are incentives for businesses to invest in our economy and are also incentives for workers to work more and harder, thereby becoming more productive
• Lower taxes are 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 w/ our current system of transfer payments, such as unemployment compensation or welfare programs, provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures 
• Referred to as Reaganomics
• lowered marginal tax rates to get US out of recession -> deficit

Laffer Curve 

• trade off between tax rates and government revenue
• used to support supply side argument
• as tax revenue increases from 0, tax revenues increase from 0 to some maximum level and then declines 
• 3 criticisms of Laffer curve
• (1) research suggest that the impact of tax rates on incentives to work, to invest, and to save are small
• (2) tax cuts also increase demand which can fuel inflation and it causes demand to exceed supply
• (3) where the economy is actually located on the curve is yet to be determined

UNIT SIX: ECONOMIC GROWTH AND PRODUCTIVITY NOTES (4/5/15)

Economic Growth Defined

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

Why Grow?

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

Conditions for Growth

• Rule of Law
• Sound Legal and Economic Institutions
• Economic Freedom
• Respect for Private Property
• Political & Economic Stability
• Low Inflationary Expectations
• Willingness to sacrifice current consumption in order to grow
• Saving
• Trade

Physical Capital

• Tools, machinery, factories, infrastructure
• Physical Capital is the product of Investment
• Investment is sensitive to interest rates and expected rates of return
• If takes capital to make capital
• Capital must be maintained

Technology & Productivity

• Research and development, innovation and invention yield increases in available technology
• More technology in the hands of workers increases productivity
• Productivity is output per worker
• More Productivity = Economic Growth

Human Capital

• People are a country’s most important resource. Therefore human capital must be developed
• Education
• Economic Freedom
• The right to acquire private property
• Incentives
• Clean Water
• Stable Food Supply
• Access to technology

Hindrances to Growth

• Economic and Political Instability
• high inflationary expectation
• Absence of the rule of law
• Diminished Private Property Rights
• Negative Incentives
• the welfare state
• Lack of Savings
• Excess current consumption
• Failure to maintain existing capital
• Crowding Out of Investment
• government deficits & debt increasing long term interest rates
• Increased income inequality -> Populist policies
• Restrictions on Free International Trade

ABSOLUTE ADVANTAGE VS COMPARATIVE ADVANTAGE NOTES (4/29/15)

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
• where the country who 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
• who can produce the problem the best
• what is given up / what is produced

PURCHASING POWER PARITY NOTES

• When the currency rates are set by international markets, changes will be based on the actual purchasing power of the currencies
• Ex.: If the US dollar to the European euro rate is 1.5 to 1, then each $1.50 will buy 1 euro. However, if an item in the US costs $1.50 and then costs more or less than 1 euro, the parity is lost. Markets will adjust quickly in floating rate or pressure for change will occur in fixed rates

Why Do We Exchange Currencies?

1. To sell export and buy imports
2. To invest in another country's stocks and bonds
3. To build stores or factories in other markets
4. To speculate on currency values
5. To hold currencies in bank accounts for future exports, imports, and business loans
6. To control excessive imbalances

FOREIGN EXCHANGE MARKETS NOTES (4/21/15)

• Buying and selling of currency
• Ex.: in order to purchase souvenirs in France, first necessary for Americans to sell (supply) their dollars and buy (demand) Euros
• Exchange rate (e) is determined in the foreign currency markets
• Ex.: currency exchange rate is approximately 77 yen to 1 US $
• Simply put, exchange rate is the price of a currency
• Do not try to calculate exact exchange rate

Tips

• Always change the D(emand) on one currency graph, the S(upply) line on the other currency graph
• Move the lines on the two currency graphs in the same direction (R/L) and you will have the correct answer
• If D on one graph increases, S on the other graph 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
• increase in supply of currency will make it cheaper to buy one unit of that currency
• decrease in supply of currency will make it more expensive to buy one unit of that currency
• increase in demand for a currency will make it more expensive to buy one unit of that currency
• decrease in demand for a currency will make it cheaper to buy one unit of that currency

Appreciation

• Occurs when the exchange rate of that currency increases
• Hypothetical: 100 Yen used to buy $1, now 200 Yen buys $1
• dollar is "stronger" because one buys more Yen than it used to

Depreciation

• Occurs when the exchange rate of that currency decreases
• 100 Yen used to buy $1, now 50 Yen buys $1
• dollar is weaker because it takes fewer Yen to buy $1

UNIT 7: BALANCE OF PAYMENTS NOTES (4/9/15)

• Measure of money inflows and outflows b/w the U.S and the rest of the world (ROW)
• inflows -> credits
• outflows -> debts
• Divided into three accounts
• (1) current account
• (2) capital/financial account
• (3) official reserves account

Double-Entry Bookkeeping

• Every transaction in the B.O.P is recorded twice on accordance w/ standard practice
• Ex.: US manufacturer, 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)
• debt of $50 million to the capital/financial account (+$50 million worth of Euros or financial assets)

Current Accounts

• Balance of Trade/ Net Exports
• exports of goods/services - imports of goods/services
• exports create a credit to B.O.P
• imports create a debt to B.O.P
• Net Foreign Income
• income earned by US owned foreign assets - income paid to foreign held US assets
• Ex.: Interest payments on US owned Brazilian bonds - interest payments on German owned US Treasury bonds
• Net Transfers (tend to unilateral)
• foreign aid -> debt to the current account
• Ex.: Mexican immigrant workers send money to family in Mexico

Capital/Financial Accounts

• Balance of capital ownership
• Includes purchases of real (property) and financial (stocks) assets
• Direct investment in the US is a credit to capital account
• Ex.: Toyota factory in San Francisco
• Direct investment by US firms/individuals in a foreign country are debts to the capital account
• Ex.: Intel factory in San Jose, Costa Rica
• Purchase of foreign financial assets represents a debt to the capital account 
• Ex.:Warren Buffet buys stocks in Petrochina
• Purchase of domestic financial assets by foreigners represents a credit to the capital account
• Ex.: United Arab Emirates Sovereign Wealth Fund purchases a large stake in NASDAQ

Relationship B/w Current & Capital Account

• Current account and capital account should zero each other out 
• If the current account has a negative balance (deficit), than the capital account should have a positive balance (surplus)

Official Reserves

• Foreign currency holdings of the US Federal Reserve System 
• When there is a B.O.P surplus the Fed accumulates foreign currency and debts the B.O.P
• When there is a B.O.P deficit the Fed depletes its reserves of foreign currency and credits the B.O.P

Active vs. Passive Official Reserves

• US is passive in its use of official reserves; does not seek to manipulate the dollar exchange rate
• China is active in its use of official reserves; actively buys and sells dollars in order to maintain a steady exchange rate with the US

NOTES (3/24/15) - Countercyclical Fiscal Policies

Fighting A Recession

• Policy Name = expansionary
• Taxes = cut
• Gov. Spending = increase
• Budget Result = deficit

• Aggregate Model:
• C should = increase
• G should = increase
• AD should = increase

• Money Market: 
• DM will = increase 
• i should = increase
• Ig on Aggregate Model will = decrease

• Loanable Funds Market: 
• Budget issue will cause-
• S-LF = decrease
• D-LF = increase

Fighting Inflation

• Policy Name = contractionary
• Taxes = increase
• Gov. Spending = decrease
• Budget Result = surplus

• Aggregate Model:
• C should = decrease
• G should = decrease
• AD should = decrease

• Money Market: 
• DM will = decrease 
• i should = decrease
• Ig on Aggregate Model will = increase

• Loanable Funds Market: 
• Budget issue will cause-
• S-LF = increase
• D-LF = decrease