Chapter 32

Chapter 32: Theory of the Open Economy
•Market for loanable funds
  -open economy
   +S=I+NCO
  -Supply of loanable funds
   +from national saving (S)
  -Demand for loanable funds
   +from domestic investment (I)
   +and Net Capital Outflow (NCO)
 •loanable funds are domestically generated flow of resources available for capital accumulation
 •purchase of capital asset
  -adds to demand for loanable funds
 •Higher real interest rate
  -encourages saving
  -discourages investment
  -discourages Americans from buying foreign assets
  -encourages foreigners to buy US assets
 •supply of loanable funds slopes upward
 •demand slopes downward
 •at equilibrium interest rate
  -amount that people want to save
  -exactly balances the desired quantities of domestic investment and net capital outflow
•market for foreign-currency exchange
  -NCO=NX
 •if trade surplus NX>0
  -foreigners buy more US goods and services than Americans buy foreign
  -Americans use foreign currenvy
   +buy foreign assets
    ~capital is flowing abroad, NCO>0
 •if trade deficit NX<0
  -Some of this spending
   +financed by selling of American assets
 •supply of foreign-currency exchange
  -Net capital outflow
  -quantity of dollars supplied - buy foreign assets
  -supply curve -- vertical
    +quantity of dollars supplied for net capital outflow
    +doesn't depend on real exchange rate
 •demand for foreign-currency exchange
  -net exports
  -quantity of dollars demanded - buys US net exports of goods and services
    +higher real exchange rate
 •equilibrium exchange rate
  -demand for dollars by foreigners arising from us net exports
  -exactly balances supply of dollars from Americans arising from us net capital outflow
•NCO: link between 2 markets
 •Identities
  -S=I+NCO
  -NCO=NX
•Government Budget deficits
  -negative public saving
  -reduces national saving
  -reduces supply of loanable funs
  -increase in interest rate
  -crowd out domestic investment
  -decrease in foreign supply of foreign-currency exchange
  -exchange rate appreciates
  -net exports fall
  -push trade balance toward deficit

Chapter 31

Chapter 31 Open-Economy Macroeconomics: Basic Concepts
* Closed Economy
* Open Economy
•Flow of good
  •exports
   -goods/services
   -produced domestically
   -sold abroad
  •imports
   -produced abroad
   -sold domestically
  •net exports/ trade balance
   -value of nation's exports
   -minus value of imports
  •trade surplus
   -excess of exports over imports
  •trade deficit
   -imports over exports
  •balanced trade
   -exports equal imports
 •Factors
   -tastes of consumers
   -prices of goods home and abroad
   -exchange rates
   -incomes of consumers
   -cost of transporting goods from country to country
   -gov't policies toward international trade
•Flow of financial resources
  •Net Capital Outflow
   -purchase of foreign assets by domestic residents
   -minus the purchase of domestic assets by foreigners
  •Variables that influence net capital outflow
   -real interest rates paid on foreign and domestic assets
   -perceived economic and political risks of holding assets abroad
   -government policies that affect foreign ownership of domestic assets
•Equality of NX & NCO
  •NX
    -imbalance between exports and imports
  •NCO
    -imbalance between amount of foreign assets and amount of domestic assets
  •NCO=NX
 •When NX>0 (trade surplus)
  -selling more good and services to foreigners than buying from them
 •When NX<0 (trade deficit)
  -buying more goods and services from foreigners than selling to them
 •Open Economy: Y=C+I+G+NX
 •Savings: S=Y-C-G
                  S=I+NX
 •NX=NCO
  -S=I+NCO
  -Saving= Domestic Investment+Net Capital Outflow
 •Trade Surplus: Exports>Imports
  -NX>0; Y>C+I+G; S>I; NCO>0
 •Balanced Trade: Exports=Imports
  -NX=0; Y=C+I+G; S=0; NCO=0
 •Trade Deficits: Exports<Imports
  -NX<0; Y<C+I+G; S<0; NCO<0


 
 

Chapter 30

V= Velocity of Money
P= Price Level (GDP Deflator)'
Y= Real GDP
M= Quantity of Money
Deflation- the price falling is associated with this
Inflation- the percentage change in consumer price index
Zimbabwe reached 24,000 percent in inflation.
A decrease in price index causes shift right deflation.
Federal Reserve buys bonds money supply shifts right, price level rises
When money is vertical so the money supply curve is vertical
Price level rises , value falls so people want more money
Money demand is determined by price level but not interest rate
Inflation tax is determined by revenue government creates from printing money.

Ch. 27

Present Value- Amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money
Future Value- Amount of money in the future that an amount of money today will yield, given prevailing interest rates
Compounding- Accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future
Risk Aversion- a dislike of uncertainty
Diversification- the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks
Firm-specific risk- risk that affects only a single company
Market risk- risk that affects all companies in the stock market
Fundamental analysis- the study of a company's accounting statements and future prospects to determine its value
Efficient markets hypothesis- theory that asset prices reflect all publicly available information about the value of an asset
Informational Efficiency- the description of asset prices that rationally reflect all available information
Random Walk- the path of a variable whose changes are impossible to predict

Ch. 26

Chapter 26 is about savings, investments, and the financial system.
Financial institutions are:
stock market
banks
mutual funds
help households save their income
Savings must equal investments in a closed economy
Price and Quantity of savings and interest rate are also governed by a supply and demand graphs
Market for loanable funds is created with:
borrowing
lending
analyze using supply and demand graphs
Bonds are simply an IOU
Equilibrium interest rate and amount of loanable funds are affected by:
tax policies
budget surpluses and deficits

Ch 24

Chapter 24 is about measuring the cost of living.
The cost of living is measured by consumer price index.
That is a measure of the overall cost of goods and services bought by a consumer.
-This uses the ratios of cost of the many goods and services
There are five steps to find CPI.
-Fix the basket
-Find the prices
-Compute the basket's cost
-Choose a base year and compute the index
-Compute the inflation rate
To calculate inflation you find the percent change in the CPI from year a to year b.
CPI is difficult to measure because of
-substitution bias
-increased variety in products for the customer
-changes in the quality of goods and services

Ch 23

The chapter's focus is on GDP, which measures the total income and total expenditure of the economy or the market value of all final goods and services within in a country in a given period of time. It is calculated as the sum of consumption, investment, government purchases, and net exports. GDP can rise over time because of an increase in output or an increase in prices, so we can distinguish between  Real GDDP and Nominal GDP.

Chapter 18

Chapter 18 covers the Factors of Production.
The factors of production include
 land: all natural resources necessary to create a good
 labor: the effort people put into making the good
 capital: assets invested in the firm by the firm for future production
One of the ideas you get out of this chapter is that in order to maximize profit
Firms hire workers up to the point where the value of the marginal product of labor equals the wage
 If they don't then they are losing money and must lay off some workers to be profitable
A firm's decision to hire is based on the value of the marginal product
Profit maximizing firms will hire at a point where value of marginal product is equal to wages
Changes in one market of a factor of production affects the other factors involved in the firm

Ch. 17

An oligopoly is a market with:
Few sellers
Similar products
Example of an imperfect competition
Simplest version is a duopoly with 2 firms and decide the quantity to sell.
They collude to form a cartel and act as a monopoly.
They don't collide for self interest:
Difficult to agree, self interest
Higher quantity, lower price and profit
Nash Equilibrium
Cheating=Pursuing own self interests.
Oligopolists form cartels and they collide over the production and price of goods.
Collusion is an agreement among firms in a market.
Firms act with self interest at a price that maximizes profit.
They use strategies like Nash Equilibrium.
Firms produce more than monopoly and less than competitive.
As number of sellers grow, the more the graph begins to look competitive.
The prisoners' dilemma shows why it is difficult for oligopolies to work.

Chapter 16

Monopolistically competitive markets are a combination of perfectly competitive and a monopoly.
Thus the firm's are:
Price takers due to competition.
Price makers because they sell slightly different products.
Monopolistically competitive markets are characterized by:
Lots of firms
Differentiated Products:
Advertisements
Brand Names
Free Entry
They produce on the downward sloping portion of ATC at a price above marginal cost.
They cause deadweight loss because price is above market cost.
Their goals are to promote brand loyalty that can be irrational at times.
These markets aren't easily government fixed like the other monopolies.

Chapter 15

This chapter is about monopolies.
It discusses how they are formed.
It discusses how they make profit.
It discusses their welfare cost.
A monopoly is a firm that is a sole seller of a product without close substitutes.
The firms become price makers.
The marginal revenue of monopoly firms arent a straight line because they hold market power.
Monopolies still produce where marginal revenue is equal to marginal cost.
Monopolies can be inefficient but are able to be regulated.

Chapter 13

This chapter is about the production of goods and the cost of that production.
Costs and production may vary as they increase.
The amount of goods made may increase at a smaller amount every time another employee is added.
All kinds of costs of production must be taken into account by suppliers to maximize profits.
Industrial organization is the study of how firms' decsions about prices and quantities depend on the market conditions they face.
A firm's average total cost is total cost divided by the quantity of the output, and its marginal cost is the amount by which total cost rises if output increased by 1 unit.

Chapter 11

Chapter 11 is about different goods in the market and how they can be separated.
They can be excludable or rival in consumption.
An excludable good, is a good that can cause people to be prevented from using the good, usually involving price.
A rival in consumption means that one person's use of a good reduces another person's ability to use the same good.
These are are exemplified using the Punnet Square.
The different types of goods are public, private, common resource, and natural monopoly.
A public good is a good that is neither rival in consumption nor excludable.
A private good is excludable and rival in consumption.
A common resource is rival in consumption, but isn't excludable.
A natural monopoly is excludable, but isn't rival in consumption.
Public goods are government made and have positive externalities.
Private goods are government made and have negative externalities.

Chapter 10

This chapters talks about the affects of externalities.
Externalities occur when important economic interactions take place outside of the market so the true cost of the good isn't shown.
Negative externalities cause the social cost of a good to be above the supply curve.
Positive externalities put the social cost of a good above the demand curve.
Both of them create market inefficiency.
The two ways to solve externalities is through private policy or government regulation.
The government's way to solve these inefficiencies is through taxes and subsidies.
Negative externalities should be taxed.
Positive externalities should be subsidized.

Chapter 8

Taxes get the government revenue therefore it is necessary.
However, taxes make the market smaller.
The larger a tax, the less revenue received as the market becomes smaller.
The Laffer Curve shows that at first revenue increases, but as it continues to increase the revenue slowly becomes less and less.
Deadweight loss of taxation is the lost gains from trade because of tax making a smaller market.
More elastic curves result in a large deadweight loss.
Inelastic curves result in the opposite.
The reduction in consumer and producer surplus is often larger than tax revenue.

Chapter 7 Blog

Key vocab that is mentioned is the willingness to pay and consumer surplus.
Consumer surplus is max amount a buyer is willing to pay for a good minus amount buyer actually pays.
Demand curves of buyers aren't drawn with steps because the changes in buyers dropping out from the new price is very small and becomes essential to create a smoother curve.
Consumers want to pay the least and producers want to receive the most possible.
Different people have different values for the same good.
Efficient markets maximize consumer surplus and producer surplus occurring at equilibrium.
Economic welfare has to do with the amount buyers save, producers make, and how even they are.

Chapter 6 blog

The chapter describes how the government can intervene in the market. However, it says multiple times the government shouldn't.
There are price floors to place minimum prices on goods.
There are also price ceilings to place maximums on goods.
These can lead to both surpluses and shortages.
Taxes puts a wedge in between what buyers pay and what sellers receive.
Taxes split the burden between the buyers and sellers, however the inelastic part of the trade takes the most burden.

Article due 9/26

It is odd how the view of crisis attacks are kind of like saying it is just governments trying to assert power or instill fear on its citizens. Crisis attacks are found in social narrative, not small things. They are often very big and have an affect on many people. This often becomes things that are so called common knowledge when it reality some of the these things didn't truly happen. Most people are trying to go along with the status quo but that is essentially following a facade version of yourself. The "emergency policies" are more or less just secret ways to grow their wealth. Lies the people in power tell are things they try to say they are trying to protect you for your own good. It is the underlying principle of why every speech apparently has some sense no matter how false or ideotic the idea sounds.

Chapter 5

Elasticity makes sense because that represents the fluidity of the market.
The price elasticity of demand is a little confusing but I understand what makes goods inelastic or elastic.
What does it mean for a good to have close substitutes?
It makes perfect sense that a good like water's demand wouldn't change if the price went up making water inelastic.
Why is it more likely for goods to be more elastic over time?
The midpoint method is slightly confusing.
The number 1 is key in determining elasticity.
More than is elastic.
Less than is inelastic.
Equal meams quantity moves at same amount proportionately as price.
Perfectly inelastic is vertical
Perfectly elastic is horizontal
Demand curve is essentially the slope of the graph.
Total revenue is equal to: (price of good)x(quantity sold)
Inelastic: increase in price leads to increase in revenue
Elastic: increase in price leads to decrease in revenue
Three Rules to Remember:
-Inelastic demand: price and revenue move same direction
-Elastic demand: price and revenue move in opposite directions
-Unit Elastic demand: revenue remains constant when price changes
Normal goods have positive income elasticity.
Necessities have smaller income elasticity.
Luxuries have higher income elasticity.

Chapter 4 Blog

I understand that a market is filled with buyers and sellers.
I believe that competitive markets are everywhere and there will always be a competitive market.
I don't understand how a Perfectly Competitive market is possible.
Would Monopoly be similar to an absolute advantage?
I'm not understanding fully the demand graph.
Would a consumer be considered a third party effect?
Would substitutes and compliments be related?
Can you explain the Supply Curve?
I understand pretty much all the rest, especially the Law of Supply and Demand.