Econ 202 Exam 2

Front 1

Forces determining Exchange Rates

Back 1

1. Country's income
2. Country's prices
3. Interest rates
4. Trade policy

Front 2

Nations gain by...

Back 2

1. Specialization in goods/services with the lowest opportunity cost.
2. Trading for other goods/services.

Front 3

2 Types of Trade Barriers and examples

Back 3

1. Natural
- Geography (an island)
- Language

2. Unnatural
- Tariffs (a tax levied on imports)
- Import quotas (a limit on goods imported)

Front 4

When do we produce?

Back 4

Cost of production < Cost of buying

Front 5

Comparative Advantage

Back 5

"The ability to produce at a lower opportunity cost than others."
- Result of being better suited to produce.
- Nations gain by specializing in production for which you have the lowest opportunity cost. This increases the productivity of the entire system.

Front 6

Absolute Advantage

Back 6

The ability of a party to produce something using fewer resources than others.

Front 7

What is the difference between Absolute and Comparative Advantages?

Back 7

ABSOLUTE versus RELATIVE productivity differences.
Comparative advantage incorporates the concept of opportunity cost, what is given up for the other good.

Front 8

Three policies used to restrict trade:

Back 8

1.) Tariffs (taxes on imports)
2.) Quotas (quantity limits places on imports)
3.) Regulatory Trade Restrictions (government imposed)

Front 9

Sources of Gain from Trade:

Back 9

1. Specialization --> greater efficiency
2. Large scale production --> lower cost
3. Competition --> greater efficiency
4. Competition --> better political institutions
5. Nations can exploit comparative advantage

Front 10

In 2009, the U.S. imported $_____ worth of Chinese goods, and exported $_____ worth.

Back 10

296, 70

Front 11

Balance of Payments

Back 11

Record of transactions between 1 country and all others.
- Record of payments across borders.

Front 12

Economic Growth: definition

Back 12

Growth rate of per capita real GDP

Front 13

Balance of Merchandise Trade

Back 13

The difference between the value of goods exported and goods imported.
- A deficit is not a good implication of how the US economy is doing in international markets, because it doesn't include services.

Front 14

Balance of Trade

Back 14

The difference between the value of goods and services imported and exported.

Front 15

In the 20th Century, U.S. economic growth averaged _____ per year.

Back 15

2%

Front 16

Rule of 70

Back 16

With annual growth rate of x, the level of a variable doubles every 70/x years.

Front 17

Current Account

Back 17

Part of the BOP (Balance of Payments), includes short term payments.
- imports & exports
- interest off of current investments
- net transfers (foreign aid, gifts, and other transfers sent without exchanging goods/services such as a bond)
- Net investment income (Interest gained on foreign assets - Interest lost to foreigners)
-- Creates demand for dollars to buy GOODS/SERVICES.

Front 18

If a trade deficit grows, it means that a nation is importing more than they are exporting.
- This also means that the SUPPLY of dollars exceeds the DEMAND of dollars.

Back 18

Hello

Front 19

Capital Account

Back 19

Measures the flow of payments between countries for financial assets.
- Stocks (the continuing profit)
- Bonds
- ownership rights to property
-- Creates demand for dollars to buy ASSETS.

Front 20

If there is a BOP surplus or deficit?

Back 20

They are excluding Government Financial Transactions (buying & selling currencies).

Front 21

Deficit

Back 21

More payments flowing out than in

Front 22

Surplus

Back 22

More payments flowing in than out

Front 23

The U.S. GDP has growing rapidly in the past few years. Why?

Back 23

The transformation from a goods --> service economy.

Front 24

What is meant by the Accounting Identity of the BOP?

Back 24

Together, the two accounts (Current and Capital) must balance.

Therefore...

Current account deficit = Capital account surplus

Front 25

State of BOP in the U.S.

Back 25

We have...

1. Goods deficit (more out than in)
2. Service surplus (more in than out)
3. Current account deficit
4. Capital account surplus

Front 26

Two routes for a current account deficit:

Back 26

1.) Import driven
-- Current account,
****

Front 27

Observations leading to Solow I:

Back 27

1. The wealthy have more capital goods.

2. Investment and growth go together.

Front 28

Conclusion of Solow I.

Why is this faulty?

Back 28

Due to the production function, Y=f(L,K), you should increase capital to stimulate economic growth.
Why?
-- 2 empirical observations
-- To increase output per worker with more/better tools.

Fault: Correlation is not Causation.

Front 29

The production function is..

Back 29

Y = f(L, K)
Output is a function of Labor and Capital. Therefore, because labor is fixed, to increase Y you need to increase K.

- This is at the heart of Solow I.

Front 30

Two characteristics of Production-function graph

Back 30

1. Increase K --> Increase Y

2. Increases in Y decline

Front 31

In the Production-Function graph, what causes the shape?

Back 31

Due to decreasing marginal returns, the curve's slope becomes flatter as each additional input creates less output.

Front 32

Steady State

Back 32

"When there is no change in capital."
(K*, Y*)
-- When diminishing returns leave no incentive to buy more capital.
-- Therefore, there is no new INVESTMENT and no GROWTH.

Front 33

What is significant about the Long-Run equilibrium in the Solow I model?

Back 33

Due to diminishing returns, equilibrium is in the steady state. No more capital investment leads causes an absence of growth.

Front 34

What question stimulated Solow II?

Back 34

Why do we continue to see growth in certain places? (Technology)

Front 35

Technological Advance

Back 35

New techniques or methods that enable production of more output per unit of input.

Front 36

Solow II

Back 36

"New technology brings new growth."
- Technology is the answer to sustained growth.

Front 37

How do we get technological advancement?

Back 37

Random, exogenous innovations.

Exogenous: "Introduced from/produced outside of the organism/system."

EXOGENOUS technology shocks are RANDOM. - assumption of Solow II

Front 38

Policy Implications of Solow II

Back 38

1. Investment goods (tech)
-- Dam in Ghana, thought to produce jobs, as well as a fishing and aluminum industry.

2. Aid for Investment
-- Shoe factory in Tanzania, financed by the World Bank.

Front 39

Real life issues with Solow II

Back 39

1. No convergence is seen.

2. Despite aid, countries like Zimbabwe and Liberia are poorer than before.

3. Special interests can cause aid to increase when dictators take over.

Front 40

What changes "Y"?

Back 40

1. Capital
2. Labor
3. Technology
4. Natural resources and land

Front 41

What is at the center of Modern Growth Theory?

Back 41

The idea that growth comes from different political and economic institutions.
- This growth is endogenous.

Front 42

Institution

Back 42

A significant practice, relationship, or organization in a nation.
-- They define the environment in which decisions are made.
---- Should I work for this? Will it be stolen from me?
---- Define acceptable behavior.
---- Determine Costs and Benefits (Incentives)

Front 43

Endogenous

Back 43

Caused by factors within an organism/system.

The Modern Growth Theory assumes growth is endogenous, created by certain INSTITUTIONS that create INCENTIVES for growth.

Front 44

3 Observations of Modern Growth Theory

Back 44

1. investment/production require patience and sacrifice. My investing/spending now, you can get more payoff later.

2. Investment and Production occur naturally under certain conditions.
--- If expected returns are more than costs, investments (therefore growth) will occur.

3. Many factors diminish expected returns.
-- Political risk & Instability
-- Inflation risk
-- High taxes

Front 45

Institutions that foster growth:

Back 45

1. Political stability
2. Stable money and prices
3. International trade
4. Private property rights
5. Taxes high enough for an effective Gov.
6. Taxes low enough for profitable production incentives.
7. Flow of capital across borders.
8. Competitive markets

Front 46

Aggregate Supply (AS):

Back 46

Supply of ALL final goods and services

Front 47

Aggregate Demand (AD):

Back 47

Demand for ALL final goods and services

Front 48

General idea behind Growth Theory:

Back 48

Spending fuels economic recovery.

Front 49

Why does the AD curve slope down (movement along AD curve)?

Back 49

1. Wealth Theory (P rises, C falls)
2. Interest Rate Theory (P rises, S falls, R rises, I falls)
3. International Theory (P rises, [ex fall - imp rises] X falls)

Front 50

5 factors that will SHIFT AD curve:

Back 50

1. Real Income (+)
2. Foreign Income (+)
3. Expected Income (+)
4. Expected Inflation (+)
5. Exchange rates

Front 51

Dollar appreciation

Back 51

When the dollar value rises versus other currencies, becomes more valuable in the world market.
-- if the Canadian dollar appreciates relative to the euro, the EXCHANGE RATE FALS - it takes fewer Canadian dollars to purchase 1 euro

Front 52

Dollar depreciation

Back 52

When the dollar value falls versus other currencies, becomes less valuable in the world market.
-- if the Canadian dollar depreciates relative to the euro, the EXCHANGE RATE (the Canadian dollar price of euros) rises - it takes more Canadian dollars to purchase 1 euro

Front 53

2 main types of Input Prices

Back 53

1. Wages (for workers)
2. Interest Rates (for loans to buy capital)

Front 54

How do firms react when price level rises?

Back 54

It depends on relationship between input and output prices.

- If both shift the same, there is no incentive to change output.
- If output prices rise but input prices don't (due to stickiness of wages and contracts), a business will increase production as price rises.

Front 55

Why are output prices more flexible than input prices?

Back 55

1. Output prices are set by the market, and therefore can change easily.

2. Input prices (wages especially) are stickier because they often involve contracts.

Front 56

Y* =....

Back 56

Full employment output, which is sustainable in the long run.
- Is also the Natural Unemployment rate, where u = u*

Front 57

LRAS shift when...

3 factors that influence this are:

Back 57

Permanent changes occur that impact a nation's ability to produce.

1. Resources (storm)
2. Technology (more efficient tractor)
3. Institutions (political insecurity emerges)

Front 58

Shift factors of SRAS

Back 58

1. Supply shocks (+)(-)
-- ex. weather
2. Input prices (-)
-- ex. oil prices rise
3. Expected Inflation (-)