Unit 7 Notes Continued....
Foreign Exchange (FOREX):
- The buying and selling of currency.
- Any transition that occurs in the Balance
of Payments necessitates foreign exchange.
- The exchange rate (e) is determined in the
foreign currency market.
Changes in Exchange Rates:
·
Exchange rates (e) are
a function of the supply and demand for currency.
- ⬆Supply of a currency à ⬇in
exchange rate of a currency
- ⬇Supply of a currency à ⬆in
exchange rate of a currency
- ⬆Demand for a currency à ⬆in
exchange rate of a currency
- ⬇Demand for a currency à ⬇in
exchange rate of a currency
Appreciation &
Depreciation:
- Appreciation: When the exchange rate of
that currency ⬆ (e⬆)
- Depreciation: When the exchange rate of
that currency ⬇ (e⬇)
Exchange Rate Determinants:
- Consumer Tastes
- Relative Income
- Relative Price Level
- Speculation
Exports and Imports:
- Appreciation: U.S. goods à more expensive
- Foreign goods à cheaper = Reduces exports and increasing
imports
- Depreciation: U.S. goods à cheaper
- Foreign goods à more expensive = Increasing exports and
reducing imports
Flexible Rates:
- It’s very sensitive to the business cycle and
it provides options for investments
Fixed Rates:
- It is based on a countries willingness to
contribute currency and control the amount.
Absolute Advantage:
- Individual: Exists when a person can produce
more of a certain good/service than someone else in the same amount of
time (or can produce a good using the least amount of resources)
- National: Exists when a country can produce
more of a good/service than another country can in the same time
period.
Comparative Advantage:
- A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner.
Examples
of Output Problems:
- Words per minute
- Miles per gallons
- Tons per acre
- Apples per tree
- Televisions produced per hour
Examples
of Input Problems:
- # of hrs to do a job
- # of acres to feed a horse
- # of gallons of paint to paint a house
Specialization and Trade:
- Gains from trade are based on comparative advantage, not absolute advantage.
Help Links:
Your notes are very helpful and easy to understand. I can see how Absolute Advantage can affect the country's Economic growth. For example, China produces all kinds of goods and is one of the biggest exporters. This gives China an Absolute Advantage over the other countries.
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