Final Flashcards
1
Q
parallel shift
A
150 = 5P + 10Q –> 300 = 5P + 10Q
2
Q
non-parallel shift
A
150 = 5P + 10Q –> 150 = 5P + 5Q
3
Q
PPF and main points
A
- possible combinations of 2 goods that cna be produced given available resources and tech
- A: feasible but inefficient
- B: feasible and efficient
- C: feasible, efficient, specialised
- D: not feasible
4
Q
opportunity cost
A
- loss of good Y by producing one more of good X
- given by absolute slope of PPF
- A: OC = 0
- B: >0
5
Q
shifts in PPF
A
- increase in resources
- parallel shift to right
- biased tech improvement
- non-parallel shift in favor of one good
6
Q
- PPF equation
- How to graph?
- How to graph increase in total materials?
A
- Q of material per Good A x Good A + Q of material per Good B x Good B = total materials available
- Graph: Set Good A, then Good B = 0 and then plot
- Set equation equal to new total materials, then set Good A and then B = 0
7
Q
new P and Q when demand and supply decrease?
A
P is ambiguous; Q decreases
8
Q
Ricardian model of trade
A
- explains gains from trade on basis of differences in technology between countries
- technology = constant returns to scale
- same number of workers available, different quantities of labor needed to produce one good
- some predictions unrealistic but basic prediction (country will tend to export goods in which they have a comparative advantage) has been confirmed
9
Q
Assume each country has 100 workers.
- Which country has the absolute advantage in both goods?
- What are the PPF equations of each country?
- What are the opportunity costs of both countries? (table)
- Which country has the comparative advantage in which good?
- Which country should specialise in which good?
- Which country should export which good?
- How has the position of each country on their PPF changed?
A
- Country 1
- Country 1: 5A + 10B = 100; Country 2: 40A + 20B = 100
- see picture
- Country 1 has CA in apples; Country 2 has CA in bananas
- Country 1 specialises in apples; Country 2 specialises in bananas
- Country 1 exports apples; Country 2 exports bananas
- each country can now consume outside PPF
10
Q
Heckscher-Ohlin Model of trade
A
- explains gains from trade on basis of differences in resources and endowments between countries
- Two factors: capital and labor
- Same technology in both countries
11
Q
Country 1 has 1000 units of capital and 600 workers; country 2 has 600 units of capital and 1000 workers.
- What is the production of computers intensive in? shoes?
- Which country is labor abundant and which is capital abundant?
- What are the PPF equations for each country?
- What are the PPF graphs for each country?
- Which country has comparative advantage in computers? shoes?
- Which country specialises in computers? shoes?
- which country exports which good?
- how does the PPF position of each country change?
A
- computers is capital intensive; shoes is labor intensive
- Country 1 is capital abundant; Country 2 is labor abundant
- Country 1: 10C + S = 1000, 4C + 20S = 600; Country 2: 10C + S = 600, 4C + 20S = 1000
- see picture
- Country 1 has CA in computers; Country 2 has CA in shoes
- Country 1 incompletely specialises in computers (produces more computers than shoes); Country 2 incompletely specialises in shoes (produces more shoes than computers)
- Country 1 exports computers; Country 2 exports shoes
- each country can consume outside PPF
12
Q
leontief’s paradox
A
US exports less capital intensive than US imports even though US capital abundant
13
Q
current account balance
A
balance on goods+services+income+current transfer
- services: transport services/travel balance
- income: compensation of employees working abroad, investment income
- current transfer: economic assistance (foreign aid)
14
Q
Japan’s current account 1990-2004
A
- Japan kept surpluses, US increased deficits
- recently CA decreasing although still positive, balance of goods become negative overall
15
Q
J-curve
A
- depreciation in yen - yen-dollar rate rises
- trade balance becomes deficit in Japan
- after time lag export volume increases because Japanese exports cheaper, import volume decreases because foreign goods more expensive
- trade balance moves to surplus
16
Q
Japan’s trading partners
A
- US most important trading partner in imports and exports, more than EU
- 2008 China overtook US until 2012, then US took over again for exports
- 1990-2001 US larger than China, then China overtook 2002-present for imports
- Japan sells more to US, buys more from China
17
Q
inter-industry trade
A
- characterizes Japanese trading structure
- Jp imports raw materials and exports manufactured goods
- Jp has comparative advantage in manufactured goods
18
Q
intra-industry trade
A
- low level in Japan
- country exports and imports w/in same industry
- e.g. manufactured imports low in Japan
- IIT has value between 0 and 1
19
Q
reason for low intra industry trade in Japan
A
if Japanese consumers prefer domestic companies’ designs over foreign ones then no need to import foreign goods
20
Q
criticisms for trade increasing inequality
A
- trade-wage inequality anomaly
- data show: +ve relationship b/w trade and wage inequality in Mexico and US
- HO model shows: +ve relationship b/w trade and wage inequality in US but -ve relationship in Mexico, Mexico will have increase in low skill workers and decrease in high skill works which brings down income per capita
- price-wage anomaly
- data show: relative price of HS goods decreased compared to LS goods
- HO model shows: increase in HS wage driven by increase in price of HS goods
- volume of trade
- trade-based explanations criticized due to small volume of trade
21
Q
trade increasing inequality explanation US and Mexico
A
- both Mex and US experienced increased inequality
- trade and wages increase in both countries
- assumed that trade –> increased inequality
22
Q
resolving whether trade increases inequality
A
- capital-skill complementarity
- sharp decline in capital prices increased demand for HS workers who complement equipment, demand for LS workers decreased (substitutes)
- FDI
- FDI shifts production from US to Mex, increases US’s outsourcing of low skills to Mexico
- these goods considered HS by Mex standards
- skill intensity increases in Mex and US, increasing relative demand and wage of HS compared to LS workers
23
Q
GDP
A
- gross domestic product
- total market value of final goods and services produced in a country in a period
- concerned w/ where produced
24
Q
GNP
A
- gross national product
- total market value of final goods and services produced by a nation in a period
- concerned w/ who produced
25
Q
three approaches to calculating GDP
A
- production
- income
- expenditure
- all equivalent
26
Q
net export eqn
A
X-M=S-I
- S=national savings
- I=investment
27
Q
GDP eqn
A
GDP = C + I + G + X - M
28
Q
GDP deflator eqn
A
nominal GDP/real GDP *100
29
Q
what is GDP a good measure of?
A
- well-being (quality of life)
- increase in GDP –> increase in life expectancy and literacy rate
- alternative measure (better) = GDP + leisure - environmental pollution
30
Q
- flow
- stock
A
- flow: quantity measured per unit time (income)
- stock: quantity measured at a given time (wealth)
31
Q
unemployment rate
A
percentage of labor force that is unemployed
32
Q
unemployment rate eqn
A
- # unemployed/laborforce
- labor force = #employed + #unemployed
33
Q
laborforce participation rate eqn
A
labor force/adult population *100
34
Q
inflation rate
A
percentage change in price level from previous period
35
Q
CPI eqn
A
price of basket of goods and services in year t / price of basket of goods and services in base year
36
Q
- nominal interest rate
- real interest rate
A
- IR that measures change in amount of money
- IR that measures change in purchasing power
37
Q
fisher eqn
A
nominal interest rate = RIR + inflation rate
38
Q
total value added example
A
39
Q
- find nominal GDP for each year
- find real GDP for each year
- find the GDP deflator for each year
A
- PHDxQHD + PHxQH
- 2001: 200
- 2002: 600
- 2003: 1200
- PHD2001xQHD + PH2001xQH
- 2001: 200
- 2002: 350
- 2003: 500
- nominal GDP/real GDP x100
- 2001: 100
- 2002: 171
- 2003: 240
- e.g. price level increased 71% from 2001 to 2002
40
Q
- find CPI for each year
- find the inflation rate for each year
A
- PHDxQHD + PHxQH / PHDBYxQHDBY + PHBYxQHBY
- 2001: 100
- 2002: 175
- 2003: 250
- CPI-CPIBY / CPIBY
- 2002: 75%
- 2003: 43%
41
Q
classical model
A
- prices and wages are flexible
- invisible hand works
- full employment in labor market
- GDP determined by potential output (supply-side)
- Sayes’ Law: demand determined by supply
- fiscal policy doesn’t affect GDP
- gov. expenditure doesn’t affect labor market
- increase in G cancelled out by decrease in I so GDP holds
42
Q
Keynesian model
A
- prices and wages aren’t flexible
- invisible hand doesn’t work
- output determined by aggregate demand (principle of effective demand)
- output determines employment
- not necessarily at full employment (unemployment can exist)
- fiscal policy can affect GDP
- gov. expenditure can affect aggregate demand
- changes output
43
Q
A
output = C+I+G = 0.75Y + 325
44
Q
- quantity theory of money
- classical theory
A
M=kPY
- k=constant
- P=price level
- Y=output (GDP)
- M=money supply
- money side and goods side separated
- called classical dichotomy
45
Q
can monetary policy affect GDP in classical theory?
A
- no
- increase in money supply just increases price level (inflation)
46
Q
Keynesian model of money supply
A
- money side and goods side not separated
- output determiend by interaction b/w goods side and money side
- fiscal and monetary policy can affect GDP
- IS = investment=savings (goods side)
- LM = liquidity-money (money side)
- y-axis = interest rate
47
Q
A
48
Q
nominal exchange rate
A
the rate at which a person can trade the currency of one country for the currency of another
49
Q
real exchange rate and equation
A
- rate at which a person can trade the goods and services of one country for the goods and services of another
- =(nominal exchange rate x domestic price)/foreign price
50
Q
overall real exchange rate equation
A
- =(exP)/P*
- P=domestic basket price (i.e. US)
- P*=foreign basket price (i.e. Jp)
- e=nominal exchange rate
- measures the price of basket in US relative to that of Jp
51
Q
appreciation
A
- dollar can buy more yen
- appreciation of dollar, depreciation of yen
- strengthening
52
Q
depreciation
A
- dollar buys less yen
- depreciation of dollar, appreciation of yen
- weakening
53
Q
theory of purchasing power parity (long run)
A
- unit of any given currency should be able to buy the same quantity of goods in all countries
- example
- assume price of coffee in US lower than Jp
- traders profit from buying US coffee and selling to Jp (arbitrage)
- demand for US coffee increases, demand for Jp coffee decreases
- causes increase in price of coffee in US, decrease in Jp
- price of US coffee = Jp
- aka law of one price
54
Q
overall real exchange rate equation if PPP theory holds
A
- (exP)/P*=1
- real exchange rate doesn’t change
- e=ratio of foreign price level to domestic price level
55
Q
problems with PPP theory
A
- doesn’t always hold in practise
- many goods not easily traded so not easy for traders to arbitrage
- even tradable goods not always perfect subsititutes
- e.g. consumers see Jp and US beer as different
- many goods not easily traded so not easy for traders to arbitrage
56
Q
mundell fleming model
A
- GDP and exchange rate are determined by interaction b/w goods side and money side
- assumes small open economy w/ perfect capital mobility
- w/ floating exchange rates only monetary policy will affect GDP
- w/ fixed exchange rates only fiscal policy will affect GDP
57
Q
postwar exchange rate system in Jp
A
- fixed
- value of yen tied to US dollar which could be converted to gold
- regulation of international capital flows
- in order to maintain foreign reserves and trade balance
- Jp isolated from foreign markets
58
Q
exchange rate system in Jp since 1970s
A
- flexible
- 1971 US dollar no longer convertible b/c amount of dollar outside US greater than gold reserves within US
- Smithsonian agreement 1971: major industrialised countries agreed to new exchange rates w/in bands of fluctuation
- true flexible system post 1973
- deregulation of international capital flows
- under flexible system no need to maintain foreign reserve
- Foreign Exchange and Foreign Trade Control Law 1980 allowed all capital movements unless prohibited
- integration of Jp markets w/ international markets
59
Q
value of yen 1980-85
A
- predicted that yen would appreciate
- actually depreciated over this period
- overvalued dollar
- high interest rate in US caused by tight monetary policy and large fiscal deficits
60
Q
value of yen post-Plaza agreement
A
- Plaza agreement 1985
- plan to push down value of dollar
- yen appreciated after this
- undervalued yen blamed for overvaluation of dollar
- US demanded more deregulation of Jp markets
- called yen/dollar working group
61
Q
international capital parity equation
A
(1+RJA)=(1+RUS)(f/s)
- RJA is interest rate on yen-denominated asset
- RUS is interest rate on dollar-denominated asset
- s is spot yen/dollar exchange rate
- f is forward yen/dollar exchange rate
62
Q
deviation from covered interest parity
A
DEV = (1+RUS)(f/s)-(1+RJA)
- deviation signals existence of capital controls
- implies that capital market not integrated with international capital markets
63
Q
You have 1JPY now and invest this in a JPY denominated asset. Assume RJA = 0.01. Assume exchange rate is 100JPY/USD.
A
- 1x(1+RJA) = 1.01
- 1USD x 100JYP/USD = 100 JPY
- when choose Jp bank: 1JPY -> yen asset -> 1x(1+RJA) k months later
- when choose US bank: 1/s USD -> dollar asset -> 1/s x (1+RUS) -> 1/s x (1+RUS)xf
- 1 x ExRateJP = (1 + ExRateUS) x f/s
64
Q
equality of LHS and RHS for covered interest parity
A
- if LHS>RHS then choose LHS
- Demand for yen-denominated asset would increase
- value of yen would increase
- yen would appreciate
- s would decrease
- LHS=RHS
- n.b. this is without capital control
