Franco's AP Macroeconomics Blog

Monday, May 16, 2016

Unit 7- Absolute and Comparative Advantage

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 resources
National- exists when a country can produce more a good/service than another country can in the same time period or using the same amount of resources

Comparative Advantage

A person or a nation has a comparative advantage when it can produce the product at a lower domestic opportunity cost than can a trading partner.

Examples of output problems

1. meat produced in a day

2. video games produced in a year

Example of input problem

1. hours to make a video game

Specialization and trade

Gains from trade are based on comparative advantage
Country should import whichever product they do not have the advantage in producing

Unit 7- Balance of Payments

Balance of payments

Measures 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 of payment is divided into three accounts:

1. Current account

2. Capital/financial account

3. Official reserves account

Double entry book keeping- Every transaction in the balance of payments is recorded twice

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

- Interest payments on U.S. owned foreign assets

- Net transfers are usually unilateral

- Foreign aid- a debit to the current account.

Capital Account

balance of capital ownership
Includes the purchase of both real and financial assets
Direct investment in the United States is a credit to the capital account
Direct investment by United States firms/individuals in a foreign country are a debit to the capital account- Ford factory in China
Purchase of foreign financial assets represents a Debit to the capital account- Franco buys stock in Saudi Aramco
Purchase of domestic financial assets by foreigners represents a credit to the capital account.

Relationship between current and capital account

The current account and the capital account should zero each other out
if the current account has a negative balance (deficit) then the capital account should then have a positive balance (surplus).

Official reserves

foreign currency holdings of the U.S. FED
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.
The U.S. is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate
China is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate with the U.S.

Formulas

1. Balance of trade- Good exports + goods imports

2. Balance on goods and services-

Goods exports + service exports + goods imports + service imports

3. Current Account- Balance on goods and services + net investment + net transfers

4. Capital account- Foreign purchases + domestic purchases

Thursday, April 7, 2016

Unit 4- Money Supply

Calculating Money Supply

When a customer deposits cash or withdraws cash from their deposit account it has no effect on money supply it only changes: the composition of money, excess reserves, and required reserves
When the fed buys or sells bonds, the money goes to ER

Required Reserve = Amount of deposit x required reserve ratio

Excess Reserves = Actual Reserves - Required Reserves

Maximum amount a single bank can loan = the bank's ER

Money multiplier = 1 / reserve ratio

Total Change in Loans = ER x money multiplier

Total Change in the money supply = (ER x money multiplier) + securities bought by FED

Unit 4- Tools of Monetary Policy

Reserve Requirement

Only a small percent of your bank deposits is in the safe; the rest of your money has been loaned out; this is called "Fractional Reserve Banking".
FED sets the amount that banks must hold.
The reserve ratio is the % of deposits that banks must hold in reserve and not loan out.
When the FED increases the money supply, it increases the amount of money held in bank deposits.
Recession- Decrease the Reserve Ratio; Money supply increases, interest rates decrease, Aggregate Demand increases
Inflation- Increase the Reserve Ratio; Money supply decreases, interest rates increase, Aggregate Demand decreases

Discount Rate

Interest rate that the FED charges commercial banks
To increase money supply, FED should decrease the discount rate
To decrease money supply, FED should increase the discount rate

Open Market Operations

The FED buys/sells government bonds
most important and widely used tool monetary policy.
To increase money supply, FED buys bonds.
To decrease money supply, FED sells bonds

Unit 4- Banks and the FED

Function of Banks

A bank is a financial intermediary- uses liquid assets to finance the investments of borrowers.
Fractional Reserve Banking- depository institutions hold liquid assets less than the amount of deposits; can take the form of currency in bank vaults or bank reserves deposits held at the Federal Reserve

T-Account (Balance Sheet)- statements of assets and liabilities
Asset (Amounts owned)- items to which a bank holds legal claim; the use of funds by fiancial intemediares
Liabilities(Amounts owed)- the legal claims against a bank; the source of funds for financial intermediaries

Function of the FED

issues paper currency
sets reserve requirements and holds reserves of the bank
lends money to bank and charges interest
check clearing service for banks
acts as a personal bank for government
supervises member banks
controls money supply

Reserve Requirement

FED requires bank to always have some money readily available to meet consumers' demand for cash, this amount is set by the FED is the required reserve ratio
the required reserve ratio is the percentage of demand deposits that must not be loaned out
required reserve ratio usually = 10%