Macroeconomics 1

Summary of the country’s transactions with other countries for a given year.

Current Account + Financial Account = 0

The balance of payments on G&S plus net international transfer payments and factor income. If the amount it paid to foreigners was more than the amount received, a country runs a current account deficit. (opposite case: current account surplus). Responds only to the real exchange rate!

Payments on G&S: The difference between exports and imports during a given period

Trade Balance: The difference between a country’s exports and imports of goods (without services).

The difference between sales of assets to foreigners and purchases of assets from foreigners during a given period. If the value it sold to foreigners more than the value it bought from foreigners, a country runs a financial account surplus. (opposite case: financial account deficit).

Each account shows payments from foreigners and payments to foreigners.

Gross National Product

Difference to the GDP: It does include international factor income (e.g. funds immigrants send home to their families are not subtracted from GDP)

from countries in which capital is cheap to countries in which capital is expensive. Reason: International differences in investment opportunities (à rapidly growing economy = higher possible returns for investors).

International transactions require a foreign exchange market were currencies can be exchanged (because each country has another currency and you usually buy G&S in the domestic currency of that country and not your own currency)

The prices at which currencies are traded. The price of a country’s money in terms of another country’s money.

The rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied

1) Tastes: US tourists love Japan, so the demand for YEN increases while the supply for US$ increases as well (they offer more dollars to buy more Yen)
2) Price Level (Inflation): If the inflation rate in my country is higher than in another country, I wand to buy the other country’s currency so my money doesn’t lose it’s value that fast.
3) Income: If I have higher income (e.g. country cuts income taxes) I have more money to spend. I would buy other currencies.
4) Interest Rates: If I have more IR on another currency, I want to buy the other currency to benefit from the higher IR

increasing value of one currency in terms of other currencies. It appreciates

loss of value of one currency in terms of other currencies. It depreciates

a rule governing policy for the exchange rate. There are two main types:

Fixed Exchange Rate: Rate is held at or near a particular target against some other currency

Floating Exchange Rate: Rate is allowed to go wherever the market takes it

Surplus: If it wants to fix ER above its equilibrium, it must buy genos and sell dollars

Shortage: If it wants to fix ER below its equilibrium, it must sell genos and buy dollars

A reduction in the value of a currency that previously had a fixed Exchange Rate

An increase in the value of a currency that previously had a fixed Exchange Rate

Periods of economic upturn when output and employment are rising.

The short-run alternation between recessions and expansions.

Point at which economy turns from expansion to recession

Point at which economy turns form recession to expansion

A rising overall level of prices.

Drawbacks: Discourages people from saving (cash loses value over time).

A falling overall level of prices.

Drawbacks: Discourage people from spending (holding money back because it gains value over time)

When overall level of prices changes slowly or not at all

The basis for measuring inflation.

Examples: PPI, CPI and GDP Deflator

Number of people not employed but actively looking for a job

(excludes discouraged workers, marginally attached workers, and underemployed)

would like to be employed and have looked for a job in the recent past but are not currently looking for work (e.g. discouraged workers, nonworking people that are not looking for a job because there are currently no suitable jobs available). 

Involuntary part-time workers who would prefer to work full time but cannot find a job

A period in which real GDP is growing but unemployment rises, often follows recessions

Unemployment due to the time workers spend in job search (e.g. taking the first job offered not always makes sense).

Unemployment that results when there are more people seeking jobs in a particular labor market than there are jobs available at the current wage rate.

Minimum wages, labor unions, efficiency wages, side effects of government policies such as unemployment benefits, and mismatches between employees and employers lead to structural unemployment