Topic Summary 4, 5, 6, 7 (Economics PDF)

# Topic 4 & 5 ## Unemployment * **unemployment rate** = unemployed / (employed + unemployed) * **not in labor force** = a person not actively looking for work * **labor force** = employed + unemployed * **population** = labor force + not in labor force * **employed** = any person 16 years or older...

# Topic 4 & 5 ## Unemployment * **unemployment rate** = unemployed / (employed + unemployed) * **not in labor force** = a person not actively looking for work * **labor force** = employed + unemployed * **population** = labor force + not in labor force * **employed** = any person 16 years or older who is working for payment, works without pay in a family enterprise or has a job but is temporarily absent. * **unemployed** = any person 16 years or older who is not working, is available for work and has made efforts in finding work in the previous 4 weeks. * **underemployment** = when a person is employed haven't fully utilized their skills, education or experience, resulting in lower pay than desired. **Labor Force Participation rate** = labor force / total population 16 years older **Discouraged-worker effect** = when people who are willing to work are unable to find jobs grow discouraged and stop looking → are dropped out of labor force and not counted as unemployed. ## Expansionary Monetary Policy * **interest rate** ↓ * **money supply** ↑ through open market operations * **borrowings money** is cheaper * **business/consumer spending** ↑ * **increase** **aggregate demand** by * **cost of unemployment** * loss of job skills and human capital * permanent loss of output of goods and services * loss in government revenue * social problems increase in crime rate. * **money supply** ↓ to control unemployment * **central bank buying government securities** * **more money in the economy** * **increase spending** ## Expansionary Fiscal Policy * **government spending** ↑ * **taxes** ↓ * **increase government spending** * **more money flow** * **demand** ↑ * **business hiring workers** to meet consumer demands. * **taxes decrease** (disposable income) * **increase consumer spending** ### Categories of Unemployment * **cyclical unemployment** = unemployment due to recession. * **company lay off workers** * **frictional unemployment** = people are in between jobs ex grad students * **seeking for better opportunities** * **short term and normal in job market** * **structural unemployment** = when there is a mismatch between the skills workers have and the skills needed for available jobs. * **ex new technology** * **need training or education** * **long run to fix** # Topic 6 * **produce goods or services at a lower opportunity cost than another** * **encourages specialization and trade, leading to greater and benefits for all involved parties.** ### Comparative Advantages (David Ricardo) * **when one country can produce more of a good and services compared to another country using the same amount of resources.** * **(who can produce more with the same amount)** ### Absolute Advantages (Adam Smith) * **the ratio at which a country can trade domestic products for imported products.** * **(One good exchanged for another between countries)** * **determine how the benefits from trade are shared** * **(favorable terms) country gets more value from its exports compared to what they pay for imports** **Terms of Trade** = * **Trade deficit** = import > export * **Trade surplus** = export > import **The economic basis for Trade: Comparative Advantage** * Corn Laws = tariffs, subsidies and restrictions enacted by the British Parliament in the 19th century * ** discourage imports** * **encourage exports** * **Theory of Comparative Advantage (Ricardo's Theory)** * **specialization and free trade will benefit all trading partners (even less efficient)** * **real wages will rise** ### Advantages of international trade * **Increase** in work output * **Enjoy varieties** of goods * **Increase in efficiency** * **Enjoy Economies of Scale** * **Higher income and higher rate of economic growth** * **Earn foreign exchange rate** * **Benefit for political, economy, social and technology links** ### Disadvantages of International Trade * **Depletion in country's reserves** (gradual reduction of foreign reserves) * **Trade defiict** * **Struggle to pay for essentials** * **Economic and Political Dependence** * **Economic exploitations** * **Developed countries rely on developing country for trade** * **Political control = powerful country impose policies on weaker ones, limiting sovereignty** * **Increase vulnerability.** * **Dependence on foreign goods during economic downturns may struggle to secure essentials.** * **High transportation costs** ### For Protection 1. **Protection saves job** (higher cost on imports) * **encourage consumers to buy domestic goods** * **Job creation & meets business demands** 2. **Unfair trade practices** 3. **Cheap foreign labor** makes competition unfair 4. **Protection safeguards national security (protects countries own resource** 5. **Protection discourages dependency** 6. **Environmental concerns (impose tariffs from countries with poor environmental practices can encourage standards** 7. **Safeguarding infant industries (protcet domestic industries)** ### For Free Trade 1. **Citizens in both countries involved in trade end up paying less and consuming more** ### Free Trade or Protection * **Barriers on imposed goods (Barriers to the free flow of goods and services imposed by a country to protect it's domestic industries)** ### Advantages for Protectionism 1. **Reduce deficit in Balance of Payments** 2. **Government revenue ↑ (tariffs)** 3. **Protect infant industries** 4. **Prevent dumping** 5. **Create job opportunities** 6. **Diversify the economy (broad economic activity)** ### Protectionism * **Protects countries own resources** * **Not absolute tools** 1. **Tariffs:** tax on imports 2. **Quota:** restriction on the volume of imports 3. **Subsidies on export:** encourage exports to be competitive 4. **Exchange controls:** restrict supply of foreign currencies in the country 5. **Embargo:** direct control by the government to restrict certain goods and services brought in the country. # Topic 7 **Capital & Financial Account** * **shows the balance of monetary in and out of the country.** * **includes special drawing rights from the IMF and central bank reserves** * **official financing account/reserve assets** ### Long Term Capital Flow (more than a year) * **Foreign Direct Investment (FDI) = one country invest directly in another country's business or assets ** (buildings) * **Portfolio Investment = buying shares, stocks, bonds or other assets in a foreign company.** ### Short Term Capital Flows * **Hot money flows** = investors move quickly between countries to take advantages of short-term interest rate or favorable exchange rate. ### Errors and Omissions * **ensure Bop sum is zero** ### Current Account 1. **Trade Balance** = measures the differences between country's exports and imports 2. **Service Balance** = measure value of services exported to other countries. vs. the services imported from other countries. 3. **Net Income Balance** = (income receive from abroad) minus (income paid to foreign residents) 4. **Unrequited Transfer Balance** = (unilateral transfers) - money is sent without expecting in return. ### The Balance of Payments * **Calculations** 1. **Merchandise Trade Balance** = merchandise exports / merchandise imports 2. **Service Balance** = service exports / service imports 3. **Balance on Current Account** = trade balance + service balance + net investment + unrequited transfers 4. **Balance Capital Account** = capital flow + short term capital flow 5. **Overall Balance** = balance on current account + balance on capital account + errors and omissions = overall balance 6. **Official Financing Account / Reserve Assets** = balance on current account + balance on capital account + balance on service account 7. **Basic Balance** = balance on current account + long term capital account + errors and omissions **Key Points** * **Debit (-)** = Transaction that supplies the country's currency (supplying RM to buy yen) * **Credit (+)** = Transaction that creates demand for the country's currency (supplying Euros to demand RM to buy Malaysian goods) * **The BOP is the record of a country's goods & services and assets with the rest of the world** * **Measures all financial transaction and the flows of currencies in and out of the economy within a period, usually a year** * **Bop sum must be zero** # Topic 8 ## Floating Exchange Rate * **Exchange rates are determined by market forces - supply and demand for the currency.** ### Appreciation * **Demand for currency ↑, supply ↓** * **Value ↑** ### Depreciation * **Demand for currency ↓, supply ↑** * **Value ↓** ### Advantages of a Floating Exchange Rate * **Quickly adjust to equilibrium** * **Independent monetary and fiscal policies** * **Reduces speculation** ### Disadvantages of a Floating Exchange Rate * **Volatile, uncertainty for business/investors** * **Vulnerable to speculation** ## Fixed Exchange Rate * **The government decides what its currency is worth compared to other currencies & keeps it at the value.** ### Types of Fixed Exchange Rate Systems * **Gold Standard:** = exchange your money for gold at a fixed rate * **Bretton Woods:** = countries need to peg their currencies in terms of US dollar instead of gold. ### Advantages of Fixed Exchange Rate * **Stability in exchange rate. Easier for planning** * **Discourage speculation.** * **The price of one country's currency in terms of another country's currency** ### Disadvantages of Fixed Exchange Rate * **Fixed rate inappropriate can cause problems of deflation or inflation.** * **The rate is not managed well** * **Limits response to economic changes.** ## Functions of Exchange Rates: * **Easier to bring in foreign goods and services** * **Paying off external debts** * **Making investments outside the country** * **Protecting value of foreign currency** ## Factors Influencing Exchange Rate: 1. **Demand and supply in foreign exchange** 2. **Total income and expenditure in domestic economy** 3. **Output capacity and level of employment in domestic economy** 4. **Growth in money supply** = **depreciation of the currency** ## The Hodge-Feedback Effect * **When a country’s economy grows, leading to increased economic activity worldwide. This “feed back” into the original country, boosting the economic further.** ### How? * **Country A experiences booming economy = Country B exports ↑, Country A imports from Country B = Country B exploits economy = creating a cycle of economic growth** ## Law of One Price * **Price of the same goods should be the same in other countries.** * **When adjusted for foreign exchange rate.** ## Purchasing Power Parity (PPP) * **PPP Theory** = Exchange rate adjust to reflect changes in price levels. ## Impact of Inflation * **If country experience inflation = experience depreciation** ## Determinants of Import * **Consumption and Investment behavior** * **Relative price** = **comparative between domestic and foreign goods** ## Determinants of Export * **Global economic activity** * **Price comparison**