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