Unit 7 - The Balance of Payment

Definition

• Measure of money inflows and outflows between U.S and the rest of the worlth (ROW)
• Inflow: credits
• Outflow: debits
• The balance of payment is divided into 3 account
• Current account
• Capital/Financial account
• Official reserves

Double Entry Bookkeeping

• Every transaction in the balance of payments is recorded twice in accordance with standard accounting practice. 

Current Account

• Balance of trade and Net exports
• Export of goods/services - Imports of goods/services
• Export create credit
• Import create debit
•  

Net Foreign Income
Income earned by U.S owned foreign asset - income paid to foreign held U.S asset

Net Transfers
Foreign aid -> debit to current account

Capital/Financial Account

• The balance of capital ownership
• Includes the purchases of both real and financial assets
• Direct investment in the U.S is a credit to capital account
• Direct investment by U.S firms/individuals in a foreign country are debit to capital account
• Purchase of foreign financial assets represents a debit to the capital account

Relationship between Capital and Current Account

• The current account and Capital account should zero each other out
• If the current account has a negative balance (deficit), then the capital account should then ahve a positive balance (surplus)

Official Reserves

• the foreign currency holdings of the U.S Federal 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 payment deficit, the Fed depletes its reserves.

Active vs. Passive Official Reserve

• The U.S is passive in its use of official reserves. It doesn't seek to manipulate the dollar exchange rate
• The people's Republic of China is active in its use of official reserve. It actively buys and sell dollars in order to maintain a steady exchange rate with the U.S

Unit 6 - Economic Growth and Productivity

Economic Growth

• Sustained increase in real GDP over time
• Sustained increase in real GDP per Capita over time

Why Grow?

• Leads to greater prosperity for society
• Lessens burden of scarity
• Increases the general level of well being

Conditions for Growth

• Rule of Law
• Sound legal and Economic Institution
• Economic freedom
• Respect for private property
• Political and Economic Stability
• Low inflationary expectation
• Willingness to sacrifice current consumption in order to grow
• Saving
• Trade

Physical Capital

• Tools, machinery, factories, infrastructure
• Physical capital is the product of invesment
• Investment is sensitive to interest rate and expected rate of return

Rate of Return

• It take capital to make capital
• Capital must be maintained.

Unit 5 - Laffer Curve

Definition

• A trade off between tax rate and government revenue.
• Used to support the supply side economic.
• As tax increase from 0 to some max level then decline

*Criticism of Laffer Curve

• Research suggest that impact of tax rate on incentive to work, save and invest are small.
• Tax cut also create demand, which can fill inflation -> demand exceeds supply.
• Where the economy is actually located on the curve is difficult to determine. 

Reaganomics:
Lower marginal tax rate -> deficit

Unit 5 - Supply-SIde Economics (Reaganomics)

• Tend to believe AS curve will determine level of inflation, unemployment and economic growth.
• To increase the economy, you take action to shift AS curve to the right. Always benefiting companies first.
• Focus on marginal tax rate.

              +The amount paid on the last dollar earned or on each additional dollar.

• If they reduce marginal tax rate, you encourage more people will work longer, which they will forgo their time for income.
• Lower taxes are incentives for businesses to invest
• Lower taxes are incentives for people to increase saving -> create lower interest rate for increases in business investment.

Unit 5 - Long Run Phillips Curve

Because the LRPC exist at the natural rate of unemployment, structural changes in the economy that affect unemployment will also cause LRPC to shift

• +Increase in unemployment: LRPC ->
• +Decrease in unemployment: LRPC <-

Changes in the AS/AD model can also be seen in the Philips Curve
Think of changes in AS/AD affects the PC like 2 sets as mirror image
Note:

• The 2 models are not equivalent. AS/AD model is static. PC includes changes over time. Whereas AS/AD shows one time changes in price level as inflation or deflation.
• Phillips Curve illustrate continuous changes in price level as either increased inflation or disinflation.

Disinflation

• Reduction in inflation rate from year to year, usually displayed in LRPC
• Also occurs when AD declines
• In short run, profits fall and unemployment increase

Deflation
Actual drop in price level.