5/10/17: Comparative & Absolute Advantage

• Specialization
• Individuals & countries can be made better off if they will produce in what they have comparative advantage & then trade with others for whatever else they want or need.
• Absolute & Comparative Advantage
• Absolute Advantage-
• The producer that can produce the most output or requires the least amount of input (resources.)
• Comparative Advantage-
• The producer with the lowest opportunity cost
• Countries should trade if they have relatively lower opportunity costs.
• They should specialize in the good that is "cheaper" for them to produce.

• Distinguish Input from Output Problems
• Output Problem- Presents the data as products produced given a set of resources. 
• Ex) Number of pens produced
• Input Problem- Presents the data as amount of resources needed to produce a fixed amount of output.
• Ex) Number of labor hours to produce 1 bushel.
• When identifying absolute advantage, input problems change the scenario from who can produce the most to who can produce a given product with the least amount of resources.

5/8/17: Mechanics of Foreign Exchange

• Foreign Exchange-
• The buying & selling of currency.
• Any transaction that occurs in the Balance of Payments necessitates foreign exchange.
• The exchange rate (e) is determined by the foreign currency markets.
• Ex) Current exchange rate is approx. 8 yuan to 1 dollar.
• Simply put, the exchange rate is the price of a currency. 
• Changes in Exchange Rate-
• Exchange rates (e) are a function of the supply & demand for currency.
• An increase in the supply of a currency will decrease the exchange rate of a currency.
• Decrease in demand of currency will decrease exchange rate of a currency.
• Increase in demand of currency will increase exchange rate of a currency.
• Decrease in supply of a currency will increase the exchange rate of a currency.

• Appreciation & Depreciation-
• Appreciation: When the exchange rate increases.
• Depreciation: When the exchange rate decreases.
• Ex) Changing euros to dollars will increase demand for dollars, causing dollars to appreciate & euros to depreciate.

• Exchange Rate Determinants-
• Consumer Taste
• Relative Income
• Relative Price Level
• Speculation

5/4/17: Balance of Payments

• Balance of Payments-
• Measure of money inflows and outflows between the United State and the Rest of The World (ROW.)
• Inflows are referred to as DEBITS
• Outflows are referred to as DEBITS

• The Balance of Payments is divided into 3 accounts
• Current Account
• Capital/Financial Account
• Official Reserves Account
• 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 the U.S owned foreign assets- income paid to foreign held U.S assets.
• Ex)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- A debit to the current account.
• Ex) Mexican migrant workers send money to family in Mexico.
• Capital/Financial Account-
• Balance of capital ownership
• Includes the purchase of both real & financial assets
• Direct investment in the United States is a credit to the Capital Account.
• Ex) Toyota factory in San Antonio
• Direct investment by U.S firms/individuals in a foreign country are debits to the Capital Account.
• Ex) Intel factory in San Jose, Costa Rica
• Purchase of foreign financial assets represents a debit to the Capital Account.
• Ex) Warren Buffet buys stocks in Petrochina
• Purchase of domestic financial assets by foreigners.
• The United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ.
• Official Reserves-
• Foreign currency holdings of the U.S Federal Reserve System.
• When there is a balance of payments surplus, the Fed accumulates foreign currency & debits the balance of payments.
• When there is a balance of payments deficit, the Fed depletes its reserves of foreign currency & credits the balance of payments.
• The official reserves zero out the balance of payments.

Formulas-

1. Balance of Trade-
• Net Exports Formula: Exports (-) Imports
2. Balance of Goods-
• Goods Exports + Service Exports (-) Goods Imports + Service Imports
3. Balance on Current Account-
• Balance of goods & services + Net Investments + Net Transfers
4. Balance on Capital Account-
• Domestic/Foreign Purchase
5. Official Reserves-
• Current Accounts (+, -) + Capital Account (-, +) = 0 (theoretically)