Unit 7

Formulas

• Balance of Trade:
  Goods Exports + Goods Imports
• Balance on goods and services:
  Goods Exports + Service Exports + Goods Imports + Service Imports
• Current Account:
  Balance on goods and services + Net Investment + Net Transfers
• Capital Account:
  Foreign Purchases + Domestic Purchases

The Balance of Payment

• Balance of Payment
• Measure of money inflows and outflows between the united States and the Rest of the World (ROW).
• Inflows are referred to as CREDITS.
• Outflows are referred to as DEBITS.
• The Balance 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 - Imports 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
• 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
• The balance of capital ownership
• Includes the purchase of both real and financial assets.
• Direct investment by U.S. firms/individuals in a foreign country are debits to the capital account.
• Purchase of foreign financial assets represents a debit to the capital account.
• Purchase of domestic financial assets by foreigners represents a credit to the capital account.
• Relationship between Current and Capital Account
• The Current Account and Capital Account should zero each other out.
• That is...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 StatesFederal 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.
• Where there's a balance of payments the Fed depletes
• Active v. Passive Official Reserves
• The United States is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate.

  Mechanics of Foreign Exchange (FOREX)

  • Foreign Exchange (FOREX)
  • The buying and selling of currency
  • Ex. In order to purchase souvenirs in France, it is first necessary for Americans to sell their Dollars and buy Euros.
  • Any transaction that occurs in the balance of Payments necessitates foreign exchange.
  • The exchange rate (e) is determined in theforiegn currency market.
  • Changes in Exchange Rates
  • Exchange rates (e) are a function of the supply and demand for currency.
  • An increase in the supply of a currency will decrease the exchange rate of a currency.
  • An decrease in the supply of a currency will increasethe exchange rate of a currency.
  • An increase in the demand of a currency will increasethe exchange rate of a currency.
  • An decrease in the demand of a currency willdecrease the exchange rate of a currency.
  • Appreciation and Depreciation
  • Appreciation of a currency occurs when the exchange rate of that currency increase (e↑)
  • Depreciation of a currency occurs when the exchange rate of that currency decrease (e↓)
  • Exchange Rate Determinants
  • Consumer Tastes
  • Relative Income
  • Relative Price Level
  • Speculation
  • Exports and Imports
  • The exchange rate is a determinants of both exports and imports.
  • Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relativelycheaper thus reducing exports and increasing imports.
  • Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports.
  • Floating/Flexible Rates
  • Depends on demand and supply of that currency vs. other currencies.
  • It is very sensitive to the business cycle
  • Provide options for investment
  • Fixed Rates
  • Based upon a country's willingness to distribute currency and the ability to control the amounts.

    Absolute Advantage

    • Individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time (or can produce a good using the least amount of resources.)
    • National: exist when a country can produce more of a good/service than another country in the same time period.

    Comparative Advantage

    • A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner.
    • Ex. for input: number of hours to do a job, number of acres to feed a horse, number of gallons of paint to paint a house.
    • Ex. for output:

    Specialization and Trade

    • Gains from trade are based on comparative advantage, not absolute or advantage.

Unit 6

Balance of Payments

measure of money inflows and outflows between the U.S. And rest of the world (ROW)

• -inflows are refereed to as credits
• -outflows are refereed to as Debits

the balance of payments is divided into 3 accounts.

• -current account
• -capital / financial accounts

Current Account

Balance of Trade or Net Exports

• -exports or Goods/ services – import of Goods/ services.
• -Exports create a credit to the balance of payments.

Net Foreign Income

• -income earned by U.S. Owned foreign assets income paid to foreign held U.S owned Brazilian bonds – interest

Capital / Financial Account
balance of capital ownership
Includes the purchase of both real/ financial assets .
Direct investment in the U.S is a credit to the capital account.
Direct investment by U.S firms / individual in a foreign.
Purchase of foreign financial assets represents a debit to the capital account

Purchase of domestic financial assets by foreigners represents a credit to the capital account.

• Relationship between Current and Capital Account

Current account and the capital account should zero each other out.
If the current account has a negative balance (deficit)

Official Reserves
foreign currency holdings of the U.S Fed systems .
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 vs. Passive Official Reserves
U.S. Is passive in the use of official reserves. Does not seek to manipulate exchange dollar.

UNIT 5: Supply side economics and the Laffer curve

  Supply side Economics Reaganomics

    

Makes changes in AS but not AD and it determines the level of inflation, unemployment  and economic growth

-          Lower marginal tax rate induce more work this AS increases. It also makes leisure more expensive and work more attractive.

-           Supply side economist support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transferred payment such as unemployment compensation and welfare programs provide disincentives to work, invest, innovate and undertake entrepreneur inventions

           Incentive to save and invest

        1.      High marginal tax rate can reduce the rewards for savings and investments.
        2.      Consumption might increase,but investment depend upon savings.
        3.      Lower marginal tax rates encourage saving and investment.

L    Laffer Curve

       It depicts a theoretical relationship between tax rate and government revenue. As tax rate increase from zero, government revenues increase from zero to some maximum level and then decline.

Criticisms of the Laffer curve.

        1.     research suggests that the impact of tax rates on incentives to work, save and invest are small.
        2.      Tax cuts also increase demand which can fuel inflation, which causes demand to exceed supply.
        3.      Where the economy is actually located on the curve is difficult to determine

Three Tools of Monetary Policy

1. Reserve Requirement

Only small % of your bank is safe.

• ER is loaned out  "Fractional Reserve Banking"
• FED sets the ER. 
• When FED increases MS, it increases the amount of money held in bank deposits. 

Recession

• Decrease RR
• Banks have less money and more ER.
• Banks create more money by loaning out excess reserves.
• Money supply increases, interest rate decreases, and AD increases.

Inflation

• Increase RR
• Banks hold more money and less ER.
• Banks create less money.
• Money supply decreases, interest rate increases, and AD decreases. 

2. Discount Rate

Interest rate that the FED charges commercial banks.

• To increase money supply, FED should lower discount rate (Expansionary)
• To decrease money supply, FED should increase discount rate (Contractionary)

3. Open Market Operations

The FED buys/sells government bonds (securities).

• To increase MS, FED should buy government securities.(Expansionary)
• To decrease MS, FED should decrease government securities.(Contractionary

Expansionary (Easy Money)

• OMO: Buy bonds
• Discount Rate: Decrease
• Reserve Requirement: Decrease

Contractionary (Tight Money)

• OMO: Sell bonds
• Discount Rate: Increase
• Reserve Requirement: Increase

Federal Fund Rate: 

• Where FDIC member banks loan each other overnight funds.

Prime Rate:

• Interest rate that banks give to their most credit-worthy customers. 

The Value of Money

The Value of Money

Simple Interest Formula

• V = ((1 + r) ^ n) * p 
• V = future value of $
• P = present value of $
• r = real interest rate (nominal rate - inflation rate)
• n = year
• k = number of times interest is credited per year

Compound Interest Formula:

 V = ((1 + r/k)^ nk)*p

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded. 

Money Demand Factors

1. Change in price level
2. Change in income
3. Changes in taxation hat affect investment

Financial Assets vs. Financial Liabilities

Asset

• stocks and bonds whose benefits to the owner depends on the issuer of the asset meeting certain obligations
• (what you get)

Liabilities

• incurred by the issuer of a financial  asset to stand behind the issued asset
• (risk gain or lose)

Stocks vs. Bonds

Stocks

• Financial asset that can vague ownership in a cooperation

Bonds

• Promise to pay certain amount of money plus interest in the future

Bank: A financial intermediary

• Uses liquid assets (i.e. bank deposits) to finance investment to borrowers
• Process is known as Fractional Reserve Banking.

Fractional Reserve Banking

• A system in which depository institutions hold liquid assets less than the amount of deposits. 
• Can take the form of:
1. Currency in bank vaults
2. Bank Reserves: deposits held at the federal reserve. 

T-Account (Balance Sheet)

• Statement of assets and liabilities. 

Federal Reserve Bank

• 12 district federal banks
• each one is quanzi owned .7 members

Functions

1. Issues paper currency
2. sets reserve requirement and holds reserves of banks
3. Lends money to banks ( charges interest)
4. check clearing service for banks
5. act as personal band for government
6. supervise member banks
7.  control money supply in banks

I. Uses of Money

As a medium of exchange- for barter
Unit of Account- established economic worth
Storage Value- money holds its value for a period of time
II. Types of Money Commodity money:

• gets value from type of material from which it is made

Representative money:

• paper money backed by something tangible, giving it value

Fiat money:

• money because the government says so.

III. Characteristics of moneyPortableDurableDivisibleLimited SupplyAcceptableUniformIV. Money SupplyM1 Money - 75% of all money and most liquid (easy to convert)

• currency in circulation, medium of exchange

 M2 Money

• consist of M1 money along with saving account, money market accounts, and deposits held by banks outside U.S.

M3 Money

• encompasses M2 money and certificate deposits (CDs) 

Unit 4 Monetary Policy

Unit 4 Monetary Policy
Unit 4 Monetary Policy

https://youtu.be/rpoVe2yqXWI

AP Macroeconomics Video Summaries

Video Notes:
Unit 4- Part 1:
The three different types of money are commodity, representatives and fiat. Commodity money is a good used as a medium of exchange that has intrinsic value in other uses. Representative money means has no value by itself but can be traded for something of value, like the gold standard. Fiat money has no value by itself and cant be exchanged for anything of value, like the U.S. dollar today

Unit 4- Part 3:
For Money Market graphs its important to always label your axis correctly. On Y axis it is Price and in terms of money the price that is paid for money is the interest rate that is shown when money is borrowed. On X axis it's labeled quantity and since it's the money market it's labeled quantity of money. In a money market graph, supply of money is always vertical.

Unit 4- Part 4:
The Fed's tool of Monetary Policy
The FED has control over Required Reserves, Discount Rates and Buy/ Sell bonds and securities. Required Reserves is the percentage of a banks total deposits that must be kept. Discount Rate is the rate at which banks can borrow money from the FED. Buy/ Sell bonds and securities is different they don't increase or decrease the FED either buys or sells.

Unit 4- Part 7:
It is important to know that loanable funds market graphs need to be tied to the money market. This graph is labled the same way money market graph is labeled. Supply loanable funds is upward slopping which comes from the amount of money people have in banks and is dependent on savings.

Unit 4- Part 8:
Banks make money off of loans taken from them. Multiplier 1/RR and Multiple Deposit Expansion play a major role in the money creation process. Reserve requirment can not be more than 20%

Unit 4- Part 9:
The whole purpose of macroeconomics, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy as a whole such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate. 

2 Ways to Calculate GDP:
- Income Approach- add up all the income that resulted from selling all final goods and services produced in a given year ( don't use it because people lie about their income)
Formula: w+R+I+P+ statistical adjustments ( wages, rents, interests, profits)
- Expenditure Approach- add up all the spending on final goods and services produced in a given year
Formula: GDP= C (consumption) + IG ( gross private domestic investment) + G ( government spending) + XN ( net exports EX- Im) 
Compensation of employees- wages and salaries, wage in salary supplements such as pensions, health insurance and welfare
Rents- income received by the households and businesses that supply property resources
Interest- money paid to suppliers of loans
Proprietor's- comes from sole proprietor ships( you own your own business/ entreperneurship) and partnerships
Corporate profits- could include dividends, corporate income taxes, undistributed corporate profits

Statistical Adjustments- indirect business taxes, consumption of fixed capital ( depreciation), net foreign factor payment
Budget Surplus:
Formula- Government Purchases of Goods and Service + Government transfer payments - tax and fee collections
(+) = deficit
(-)= surplus

Trade Surplus- Exports - Imports
(+) = surplus
(-) = deficit

National Income-
1) Compesation of employees + rent + interest income + proprietor's income + corporate profits
2) GDP- Indirect buisness taxes- depreciation- net foreign factor payment)

DPI= National Income - product household payment + government transfer payment
Net Domestic Product ( NDP) -
Formula: GDP- depreciation
Net National Product (NNP)
Formula: GNP - depreciation
GNP= GDP + Net foreign factor payment



Nominal GDP- the value of output produced in current prices
- measure price increase/ inflation
Real GDP- value of output produced in constant base year prices
- adjusted for inflation
- measure economic growth
Formula for Nominal and Real GDP (Price • Quantity)
Base year- earliest year Nominal GDP = Real GDP
In years after the base year- Nominal GDP will exceed Real GDP
In years before the base year- Real GDP will exceed Nominal GDP

GDP Deflator- a price index used to adjust from nominal to real GDP
Formula: Nominal GDP/ Real GDP( 100)
- In the base year the GDP deflator = 100
- for years after the base year the GDP deflator is greater than 100
- for years before the base year the GDP deflator is less than 100

Consumer Price Index (CPI)- most commonly used measurement of inflation it measures the cost of a market basket of goods for a typical urban American family
Formula: cost of a market basket of goods in a given year/ cost of a market basket of goods in the base year (100)

Inflation-
Formula: Price index in year 2 ( current year) - price index in year 1 ( old year) / price index in year 1 (old year) • 100

Real Interest Rate vs. Nominal Interest Rate:

Nominal Interest rate- not adjusted for inflation but real interest rate is
It is the percentage increase in money you pay the lender for the use of money you borrowed (interest)
Real Interest Rate- adjusted for inflation and percentage increase in purchasing power the lender receives when the borrower repays the loan with interest

Formula:
Real Intrest Rate: Nominal Interest rate - inflation
Nominal Interest Rate: Real Rate of Interest + inflation premium

Hurt by Inflation:
1. Savers
2. Lenders/ Crediters
3. Those who are on a fixed income ( elderly, welfare, retired, pigeon plans)

Helped by Imflation:
1. Debtors
COLA: automatic wage increases when inflation occurs


Unemployment- failure to use available resources particularly labor to produce desired goods and services
Labor Force- Anybody above 16yrs of age who's able and willing to work
Employed + Unemployed = Labor Force
Not in Labor Force-
1. Military
2. Homemaker
3. Retired people
4. Disabled people
5. People in mental institutions
6. Jail/ Prison
7. Students
8. Those who are not looking for work

Unemployment Rate:
4-5% considered as full employment or natural rate of unemployment (NRU)

How to calculate the unemployment rate:
Formula- number unemployed/ number employed + number unemployed (100)

Types of Unemployment:
Frictional- people who are looking for a job, temporarily unemployed or inbetween jobs, individuals with transferable skills
Ex: high school/ college graduate looking for a job, individuals leave their jobs in hope of finding a better one
Structural- change in the structure of the labor force makes some skills opsalet, these workers do not have transferable skills
Ex: people who work for NASA
Seasonal- due to the time of the year and the nature of the job
Ex: school bus drivers, Santa Claus and Easter Bunny, life guards, construction workers, firework sellers
Cyclical- results from economic down turns such as recessions as demand for goods and services falls, demand for labor falls and workers are laid off

Two of the 4 types of u employment are unavoidable:
Frictional + Structural= Natural Rate of Unemployment

Unit 2

Circular flow diagram- represents transactions in an economy
Product market- place where goods and services are produced by businesses
Factor Market- the place where households sell resources and businesses buy resources
Firms- an organization that produces goods and services for sale
Household- a person or group of people that share their income, they also sale factors of production to businesses

GDP (Gross Domestic Product): Total market value of all final goods and services that is produced within a country's borders in a given year

GNP (Gross National Product): total market value of all final goods and services by citizens of that country on its land or foreign land

Included in GDP:
C- Personal Consumption Expenditures (65%)
IG- Gross Private Domestic Investment ( 17%)
ex: new factory equipment, factory equipment maintenance, construction of housing and unsold inventory of products built in a year
G- Government Spending (20%)
ex: school buses, teachers, salaries, community places
XN- Net Exports ( Exports- Imports) (-2%)

What's not included in GDP:
1. Intermediate goods- goods that require further processing before they are ready for final use
2. Used/ Second hand goods ( avoid double counting)
3. Purely financial transaction ( stocks and bonds)
4. Illegal activities ( drugs)
5. Unreported business activity ( unreported tips)
6. Transfer payments
- public ( social security, veterans and welfare)
- private ( scholarship)
7. Non- market activities
- volunteering
- babysitting
- any work that you preform for yourself