unit 6 macro

• Surplus


  An account has more credits than debits
• Deficit

  An account has more debits than credits
• A trade surplus occurs when exports are greater than imports
• Currency appreciation


  Exports become more expensive, imports become cheaper, decreases net exports, shifts aggregate demand left
• Currency depreciation


  Exports become cheaper, imports become more expensive, increases net exports, shifts aggregate demand right
• Total supply : domestic, foreign firms and quantities
• tariff : taxes on a imported good (supply decreases)
• consumer -> hurt if increase price, low quantity but producers -> helped
• firms want to stay competitive so they reach out to create trade barrier
• Quota -> legal amount allowed to be sold, operate less than what they want
• DWL with quota: foreign producers lose revenue
• arguments used to impose trade barrier : concern with national defense and international trade, enfants, dumping, protect domestic jobs
• trade barriers help enfants
• Dumping : foreign business floods a market knowing domestic companies can't rival -> foreign lower prices
• money flowing in from a foreign country -> credit (+)
• money leaving the US to another country -> debit (-)
• Capital and financial account : future account : stocks, bonds, real estate
• current account : movement of goods or services
• Balance of trade : difference between exports and imports
• deficit -> importing more than exporting
• CA(current)+FA(financial) = 0
• if one is current surplus , the other must be financial deficit (inverse relationship between CA and FA)
• money coming in -> increase Slf
• Exchange rates and foreign exchange market : all international transactions require a market to exchange foreign currencies
• when a currency grows in value vs another currency -> appreciation (strong)
• when a currency loses value vs another currency -> depreciation (weak)
• One has to be appreciate then the other has to be depreciate (inverse relationship)
• Determinants : TRIPS

  • T - tastes and preferences
  • R - real interest rates
  • I - income (increase income, increase demand in other places)
  • P - price levels ( people go where price is cheap)
  • S - speculation (people sell and buy currency to make money : like a stock)
• foreign cost of product / us dollar cost
• exports cause money to flow into country -> currency credit
• current account balance = NX(exports - imports) + net income from abroad + net unilateral transfers
• decrease -> depreciated
• surplus cause depreciate
• decrease supply -> currency appreciate
• contractionary policy increase interest rates, increase D for currency -> appreciate increase AD
• Expansionary -> price levels increase, increase S , cheaper foreign goods, decrease demand for nation because goods become more expensive
• imports cheap -> increase imports, NX falls, AD decrease, increase S, depreciate
• real IR in country 1 greater than country 2 -> capital outflows, increase D for country 1, appreciate
• increase deficit , increase Dlf, increase real IR, attracts financial capital
• Current account deficits are offset by capital and financial account surpluses(capital inflow) while current account surpluses are offset by capital and financial account deficits(capital outflow)