Economics Exam #2 Notes_2008

For goods a country imports it gets consumption goods

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For goods a country imports, it gets consumption goods : Saudi Arabia imports stereos: = =.01, Saudi Arabia pays .01 (1%) of its domestic price for stereos Japan imports oil: == .02, Japan pays .02 (2%) of its domestic price for oil Saudi Arabia (200,0) Japan (0,50) Saudi Arabia will export 60 barrels of oil to import 30 stereos Saudi Arabia consumption: (140, 30) Japan consumption: (60, 20) Comparative Advantage Production: US Canada TVs 6 4 Cloth 24 8
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Economics Lecture #18 07:12 Comparative advantage GRAPH US Canada TVs 4 yards 2 yards Cloth . 25 TVs .5 TVs Range of terms of trade for TVs: 2 yards<1 TV<4 yards Range of terms of trade for cloth: .25 TVs<1 yard<.5 TVs Production gains from export: TV-P w =.33 Cloth-P w =3 US exports cloth: =1.32 (132%), US gets 32% more Canada exports TVs: =1.50(150%),Canada get 50% more Consumption gains: US imports TVs: ¾=.75 (75%) US pays 75% of autarkic price Canada imports cloth: =.67 (67%) Canada pays 67% of autarkic price Production, opportunity cost Canada US Calculators 100, 5 5,000, 5 Timber 500, .2 25,000, .2 No trade because the opportunity costs are equal, so there’s no comparative advantage, so there is no benefit from trade
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Economics Lecture #19 07:12 Aggregate Supply and Demand
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Economics Lecture #19 07:12 AD= Total spending in the economy (C+I+G+X n =GDP) at various price levels (everything bought) AS= Total output in the economy at different price levels (everything produced) Aggregate demand- downward sloping curve, so lower price level=more Q (spending) ( GRAPH ) Reasons its downward sloping a.1. Wealth effect (C)- At lower price levels, real wealth (wealth includes all assets, which makes it different from income) is greater, so consumption spending is higher; vice versa a.2. Interest rate effect (I)- i=r+p (nominal interest rate=real interest rate + inflation), and p also equals price level, and changes in p with r staying constant leads to changes in i, which changes investment spending. If the price level decreases, inflation is lower (p), so the nominal interest rate is lower (i), so investment increases (it costs less for businesses); vice versa Investment Market ( GRAPH ) Investment is generated by business Marginal efficiency of investment (MEI)=f{business expectations, tax law, size and age of capital stock) Compare MEI (expected return) against cost of borrowing, the nominal interest rate (i) The lower the rate of return, the more invested because the lower the interest rate, the lower the cost of investment for firms, so they invest more A tax credit shifts I D out (to I 1 ) a.3. Foreign price effect (X n )- If the price falls, X n increases (exports increase and imports decrease); vice versa Fiscal policy and monetary policy shift AD ( GRAPH ) Expansionary policy works to stimulate spending and increase aggregate demand (shift from AD 0 to AD 1 ) Contractionary policy works to restrain total spending so that at every price level spending is less (shift from AD 0 to AD 2 ) Change in price level= change in total spending, so change/shift in demand is from a change in monetary/fiscal policy or expectations Aggregate Supply curve- Total output in the economy=total income ( GRAPH ) Classical range of AS- represents full employment output (on PPC) Represents the highest prices can go
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