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1
Q

parallel shift

A

150 = 5P + 10Q –> 300 = 5P + 10Q

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2
Q

non-parallel shift

A

150 = 5P + 10Q –> 150 = 5P + 5Q

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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
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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
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5
Q

shifts in PPF

A
  • increase in resources
    • parallel shift to right
  • biased tech improvement
    • non-parallel shift in favor of one good
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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
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7
Q

new P and Q when demand and supply decrease?

A

P is ambiguous; Q decreases

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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
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9
Q

Assume each country has 100 workers.

  1. Which country has the absolute advantage in both goods?
  2. What are the PPF equations of each country?
  3. What are the opportunity costs of both countries? (table)
  4. Which country has the comparative advantage in which good?
  5. Which country should specialise in which good?
  6. Which country should export which good?
  7. How has the position of each country on their PPF changed?
A
  1. Country 1
  2. Country 1: 5A + 10B = 100; Country 2: 40A + 20B = 100
  3. see picture
  4. Country 1 has CA in apples; Country 2 has CA in bananas
  5. Country 1 specialises in apples; Country 2 specialises in bananas
  6. Country 1 exports apples; Country 2 exports bananas
  7. each country can now consume outside PPF
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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
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11
Q

Country 1 has 1000 units of capital and 600 workers; country 2 has 600 units of capital and 1000 workers.

  1. What is the production of computers intensive in? shoes?
  2. Which country is labor abundant and which is capital abundant?
  3. What are the PPF equations for each country?
  4. What are the PPF graphs for each country?
  5. Which country has comparative advantage in computers? shoes?
  6. Which country specialises in computers? shoes?
  7. which country exports which good?
  8. how does the PPF position of each country change?
A
  1. computers is capital intensive; shoes is labor intensive
  2. Country 1 is capital abundant; Country 2 is labor abundant
  3. Country 1: 10C + S = 1000, 4C + 20S = 600; Country 2: 10C + S = 600, 4C + 20S = 1000
  4. see picture
  5. Country 1 has CA in computers; Country 2 has CA in shoes
  6. Country 1 incompletely specialises in computers (produces more computers than shoes); Country 2 incompletely specialises in shoes (produces more shoes than computers)
  7. Country 1 exports computers; Country 2 exports shoes
  8. each country can consume outside PPF
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12
Q

leontief’s paradox

A

US exports less capital intensive than US imports even though US capital abundant

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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)
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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
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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
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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
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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
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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
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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

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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
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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
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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
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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
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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
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25
three approaches to calculating GDP
* production * income * expenditure * all equivalent
26
net export eqn
X-M=S-I * S=national savings * I=investment
27
GDP eqn
GDP = C + I + G + X - M
28
GDP deflator eqn
nominal GDP/real GDP \*100
29
what is GDP a good measure of?
* well-being (quality of life) * increase in GDP --\> increase in life expectancy and literacy rate * alternative measure (better) = GDP + leisure - environmental pollution
30
* flow * stock
* flow: quantity measured per unit time (income) * stock: quantity measured at a given time (wealth)
31
unemployment rate
percentage of labor force that is unemployed
32
unemployment rate eqn
* #unemployed/laborforce * labor force = #employed + #unemployed
33
laborforce participation rate eqn
labor force/adult population \*100
34
inflation rate
percentage change in price level from previous period
35
CPI eqn
price of basket of goods and services in year t / price of basket of goods and services in base year
36
1. nominal interest rate 2. real interest rate
1. IR that measures change in amount of money 2. IR that measures change in purchasing power
37
fisher eqn
nominal interest rate = RIR + inflation rate
38
total value added example
39
1. find nominal GDP for each year 2. find real GDP for each year 3. find the GDP deflator for each year
1. PHDxQHD + PHxQH * 2001: 200 * 2002: 600 * 2003: 1200 2. PHD2001xQHD + PH2001xQH * ​2001: 200 * 2002: 350 * 2003: 500 3. nominal GDP/real GDP x100 * 2001: 100 * 2002: 171 * 2003: 240 * e.g. price level increased 71% from 2001 to 2002
40
1. find CPI for each year 2. find the inflation rate for each year
1. PHDxQHD + PHxQH / PHDBYxQHDBY + PHBYxQHBY​ * 2001: 100 * 2002: 175 * 2003: 250 2. CPI-CPIBY / CPIBY * 2002: 75% * 2003: 43%
41
classical model
* 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
Keynesian model
* 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
output = C+I+G = 0.75Y + 325
44
* quantity theory of money * classical theory
M=kPY * k=constant * P=price level * Y=output (GDP) * M=money supply * money side and goods side separated * called classical dichotomy
45
can monetary policy affect GDP in classical theory?
* no * increase in money supply just increases price level (inflation)
46
Keynesian model of money supply
* 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
48
nominal exchange rate
the rate at which a person can trade the currency of one country for the currency of another
49
real exchange rate and equation
* 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
overall real exchange rate equation
* =(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
appreciation
* dollar can buy more yen * appreciation of dollar, depreciation of yen * strengthening
52
depreciation
* dollar buys less yen * depreciation of dollar, appreciation of yen * weakening
53
theory of purchasing power parity (long run)
* 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
overall real exchange rate equation if PPP theory holds
* (exP)/P\*=1 * real exchange rate doesn't change * e=ratio of foreign price level to domestic price level
55
problems with PPP theory
* 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
56
mundell fleming model
* 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
postwar exchange rate system in Jp
* 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
exchange rate system in Jp since 1970s
* 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
value of yen 1980-85
* 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
value of yen post-Plaza agreement
* 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
international capital parity equation
(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
deviation from covered interest parity
DEV = (1+RUS)(f/s)-(1+RJA) * deviation signals existence of capital controls * implies that capital market not integrated with international capital markets
63
You have 1JPY now and invest this in a JPY denominated asset. Assume RJA = 0.01. Assume exchange rate is 100JPY/USD.
* 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
equality of LHS and RHS for covered interest parity
* 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

International Economics (2 decks)

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