Jackson+P

=__**COMPARATIVE ADVANTAGE**__=

A Comparative Advantage is a relatively simple concept. Take two countries as an example who each produce wheat and corn: America and Canada. The United States can produce 100 pounds of corn at the expense of no wheat, or 120 pounds of wheat at the expense of no corn in one day. Canada can produce 60 pounds of corn, or 80 pounds of wheat in a day. If the united states allocates all of its resources to corn, they will produce 100 pounds at the cost of 120 pounds of wheat. One can say that the **__Opportunity__** **__Cost__** of producing the corn will be 120 pounds of wheat, or for every pound of corn produced, the United States pays an opportunity cost of 1.2 pounds of wheat. Canada can produce 1 pound of corn at the expense of 1.3 pounds of wheat. Because the United States can pay a lower opportunity cost for every pound of wheat, we can say the United States has a **__Comparative Advantage__** in corn production (because their opportunity cost is lower). However, Canada has a comparative advantage in wheat, because they lose less corn when producing 1 pound of wheat compared to the United States (3/4 of a pound vs 10/12 of a pound). If the situation between two countries is simplified like this one, __**a** **country can only have 1 comparative advantage in 1 product!**__

media type="custom" key="12206834" This video offers a simple description of what a comparative advantage is (in a goofy yet somewhat entertaining animation format).

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A nice example of comparative advantage in the North Pole. Hermie (the weird elf that shows up in all of the Rudolf movies) wants to be a dentist. What a fool! He has no idea about how much of a comparative advantage the North Pole elves have in Toy Making over dentistry!! If all of the elves worked on teeth for a whole year, they would lose all of those awesome toys that they could have spent their time making! Obviously, all elves are naturally great at making toys, not at fixing teeth, so it is much more efficient for them if they spend all of their time making toys (as they have a significantly lower opportunity cost for toy making rather than dentistry). At maximum efficiency, they can make enough toys to provide for all of the world's children. But none of them (except Hermie) has any training in the field of teeth, so they would be horribly inefficient, and would lose that hefty supply of toys as opportunity cost!

If you STILL do not understand, click HERE

Nice job Jackson. You apply these concepts correctly and in a fun way. Well done. 10/10

=__**EXTERNALITIES:**__=

In economics, an ** externality ** , or transaction ** spillover ** , is a cost or benefit not transmitted through prices that is incurred by a party who did not agree to the action causing the cost or benefit. The cost of an externality is a ** negative externality **, or ** external cost ** , while the benefit of an externality is a ** positive externality ** , or ** external benefit **.

__** Positive externality: **__
A positive externality is the benefit that comes from consumption or the production of a product by society. Positive externalities occur when the the marginal social benefit outweighs the marginal private benefits, or when the benefits of using the product outweigh the cost to produce it. Some excellent examples of positive externalities are provided below:

"__**when my neighbors plant and maintain beautiful unfenced gardens, which I get to enjoy at virtually zero cost**__; __**when a farmer imposes a conservation easement that prevents development for non-agricultural purposes**__ (although would-be devleopers might consider the externality to be negative); __**owners of tree farms, which absorb carbon and produce oxygen**__ (but when the trees are cut, they create negative externalities which offset the positive ones); __**the occasional inventor who does not obtain or enforce a patent or, in many cases, inventors whose inventions are so immensely valuable that the value obtained during the life of the patent comes nowhere close to capturing all of the social value created**__; __**creators of goods, such as dress designs, that are not (yet) subject to intellectual property rights, and so can be “knocked-off” by others and produced at lower cost;**__ and the list goes on."

Lets discuss the previous example of a neighbor planting a garden. The neighbor pays a certain amount of money, and uses much of his or her own time to buy materials for, and implement a garden in his front yard. Although the costs of this garden may be large, the marginal social benefits outweigh them. Every neighbor can enjoy his/her beautiful garden for zero cost, the garden provides a speck of beauty for a possibly bleak neighborhood, and the planter can enjoy the fact that everybody likes his garden. Below is the graph of a typical positive externality: As you can see by looking off of the graph, the original market equilibrium was at Q*,P*. However, due to the benefits of buying the product, the demand for said product goes up, thereby moving the equilibrium point to Q',P'. As you can also see, the typical demand curve is replaced by what is known as the benefits curve. The original curve was the benefits for the producer for producing the product, and the second benefits curve is the benefits for the typical consumer of said good.

__** Negative externality: **__
Just like a positive externality, a negative externality is the affect of buying or producing a product. A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision. If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it. Since consumers make a decision based on where their marginal cost equals their marginal benefit, and since they don't take into account the cost of the negative externality, negative externalities result in market inefficiencies unless proper action is taken. In short, buying or producing has an added cost to it that people don't have to directly pay for.

One excellent example that comes to mind is buying a car. Cars are great, they allow us to quickly drive ourselves from one place to another that might take us hours to walk to. However, cars use fossil fuels, and when you burn fossil fuels, you create greenhouse gasses, pollution, and global warming. In this case, cars have a negative externality, because although the consumer of the car pays, say, $30,000, global warming caused by the car costs even more, thereby adding another cost to the car on society. Here is a typical negative externality in graph form. As you can see off of this graph, the equilibrium for a certain product was originally at Q*, P*. However, it has been shifted to Q', P'. Why? Because of a negative externality! The original supply curve, also known as the cost curve, has been shifted up. This is because there is an added cost to the product that the producers don't necessarily have to pay for, but the consumers do. Therefore, to consumers, they have to pay __more__ for that product, thereby decreasing demand, (benefits) and shifting the equilibrium point left.

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This video explains what positive and negative externalities are, and gives some straight forward examples for each.

These two in the video are sort of odd folk. Anyways, fun that there is a video of it. Cause we hear folks talk like this all the time...at least in econland. One more step though....what should the neighborhood do for that person who spends all the money to plant the garden and make things beautiful? Could they provide a Pigouvian subsidy? In other words, help by chipping in to the cost? 10/10 -SW

=__**Unit 3 - Unemployment**__=

Unemployment, or joblessness, occurs when there are people without jobs who have also actively sought out new work within the past 4 weeks. Generally, unemployment is measured by the unemployment rate, or the **total number of unemployed individuals divided by the total labor force**.


 * Classical Unemployment:**

Classical employment is unemployment caused by a minimum wage increase to above equilibrium. The red line represents a new minimum wage set by the company and/or government. The old equilibrium represents the old wage / job demand. When the red line is implemented, more people demand the job because they get paid more. Therefore, the number of people demanding jobs exceeds the number of vacancies available, and unemployment is the leftover result.


 * Cyclical Unemployment:**

Cyclical unemployment occurs when there is not enough aggregate demand in the economy to provide jobs to everybody who wants to work.

When the demand for a product falls, less production is needed and therefore less workers are needed. Since wages are sticky (since companies want to save as much money as possible), so they do not fall to meet an equilibrium level. This causes mass unemployment. This creates a kind of unemployment in the economy known as cyclical unemployment.


 * Structural Unemployment:**

Structural unemployment is a natural kind of unemployment.



It occurs when the skills required in a vacant job are not met by the people searching for the job. Because people searching for a job don't have the skills required for that job, they remain unemployed. A perfect example of structural unemployment! The storm trooper is currently unemployed, but when he goes to find a job, he cannot get hired, because his only skills include shooting, moving people along, and ineffectively looking for wanted droids. This is a perfect example of structural unemployment because of the skill mismatch.


 * Frictional Unemployment:**

Frictional unemployment is a small portion of what makes up the full unemployment rate. Frictional unemployment occurs when a person is temporarily unemployed due to the time it takes to change to a new job. It is constantly in flux, and at often times it is very small. However, it is still counted under the unemployment rate.


 * Full Employment:**

This special circumstance occurs when you have have no __unnatural__ unemployment. This means that you have no cyclical unemployment or classical unemployment in an economy. The reason why frictional and structural are not counted under a "full employment" scenario is because **they will always exist no matter what**. People will always change jobs, its impossible to change that. And there is obviously always going to be some skill mismatch between required skills and skills possessed by the unemployed. Because some unemployment still exists, full employment is considered to be between 3 and 6%.

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This video shows a few examples of typical people who want to consider themselves unemployed. It also shows that the only kind of person who is counted under the unemployment rate is someone who is totally unemployed (not underemployed) and is actively looking for a job (not just sitting idly by). 10/10 Excellent application of unemployment Jackson. The Stormtrooper poster cracked me up! Nice job.

=__**Unit 3 - Real VS Nominal**__=

People often discuss things such as interest rates and GDP with the fragile nature of our economy being a top discussion. However, many people do not often realize that there is 2 kinds of these things: Nominal and Real.

When people say something is nominal, they mean that it is in terms of our current money. (i.e nominal interest rates are currently 2%, or nominal GDP is 1 trillion). One common misconception about these 2 things is that they remain constant. But some people don't remember to factor in inflation. Inflation is the rate at which goods or services go up in price. And when they go up in price, 1 unit of currency is suddenly worth less. In short, inflation decreases the purchasing power of our currency, because more dollars now is worth less dollars back then.
 * Nominal:**

When people talk about real GDP and interest rates (obviously there are more things that you could apply the term to), they are talking about things that have been adjusted for inflation. When practicing problems that differentiate between nominal and real, its important to remember that nominal is the term in terms of today's money, and real is in term's of the base year's money.
 * Real:**

This table provides a nice example of what nominal GDP growth looks like compared to real GDP growth. In 2011, GDP grew nominally by 6.2 % in May, but because of the 3.3% inflation, the REAL GDP was only 2.9%. That's a big difference considering that the United States GDP is 15 trillion (nominally)! I mean, the government could release __nominal__ figures to stimulate economic growth, or real figures to diminish it... but the government is too nice to do that kind of stuff.

But basically, the only difference between nominal and real things is that real is factored with inflation, and nominal is not.

One interesting fact about real interest rates: They can be positive, zero, or negative! Real interest rates are approximately equal to nominal interest rates - inflation. That means, if you have a 1% nominal interest rate, and 5% inflation, you're really paying -4% interest! So in terms of real money, you're paying back less than what you originally paid! This works all three ways, negatively, positively, and at zero. 10/10 Nice points. Borrowers love negative real interest rates! Yahoo!

=__**Unit 4 - Crowding Out**__=

Usually when economists use the term "crowding out" they are referring to the fact that government spending is using up resources that would normally be used by the private sector. This forces interest rates up, disencentivizing investment spending.

Crowding out is an effect that takes place during an Expansionary Fiscal Policy scenario. Since expansionary fiscal policy causes aggregate demand to rise, the demand shift causes an increase in GDP, a decrease in unemployment, and an increase in inflation. However, to cause an expansion, the government must start spending like mad in order to account for the small (compared to consumer spending) share in GDP. But there is no way that a government can afford that without borrowing money, so the government borrows **A LOT.** However, besides increasing the debt, whats the big deal? The big deal is that the government forces itself into the marketplace with its new money, to buy supplies for the highway bill, or to buy solar panels for that new array. This not only uses up resources that other companies could be utilizing, but it also hikes interest rates up. Since interest rates have been driven up, investment spending goes down since people don't want to pay the higher interest rates caused by government spending. This is known as "Crowding Out".

media type="youtube" key="9wcwnBewdb0" height="315" width="560" This video goes a bit more in depth as to why the private sector is crowded out because of an expansionary fiscal policy. It explains that one of the sources of the crowding out is because predicted rates rise, and so purchases and investments drop accordingly because consumers and investors want to preserve profits.



This cartoon shows a picture of President Obama taking credit for bringing private sectors back to America. One controversy of his presidency is that he drove the private sector away in the first place with his massive spending package that borrowed almost 1 trillion dollars from China. This is a perfect example of crowding out. Borrowing that much money and then spending it forced the government into the market place and drove away investment spending. The already small private was completely crowded out because of this, and left for better markets. What's funny about this cartoon is that the sun could be viewed as rising or setting, which could mean that Obama might be taking credit for driving the private sector away... **And if Baylor claims that he is the first one to find this picture, let it be known that I found it first. Great application of this concept Jackson. Certainly the issue of debt has some consequences that Keynsians never predicted. 10/10 **

=** The Money Multiplier: **= In macroeconomics, the term "multiplier" refers to spending the some money many times over. If the government were to spend 50 billion on road construction projects, the people who would collect that money would spend that same money again. This cycle continues until the money has all been saved away by various people. Their are many types of multipliers, one of which is known as the money multiplier. When people put money into a saving's account, they still have access to it, and earn a small interest rate in exchange for allowing the bank to loan the money out. However, the money inside of the savings account is still accessible by the depositor, and is therefore still part of the money supply. Assuming that the bank only held the minimum amount of reserves, they will loan out the rest of the money. That money is now part of the money supply again (although it is smaller than the original amount), because the borrower can use it. This effect is called the money multiplier. Not only can the original depositor use the money, but many borrowers now also have a smaller amount of money that they can spend, essentially expanding the money supply from its original state.

So, say a depositor deposited 1000 dollars into a bank with a 10% reserve policy. The bank will keep 100 dollars and (hopefully) lend out the other 900. The original money supply of 1000 has now increased to 1900, because the 900 lended dollars can be spent at will by the borrower. Then, say that same 900 dollars is deposited into another bank with a 10% reserve. The bank will keep 90, and lend out 810. This continues until there is no money left, with the end result being a 10,000 dollar money supply (up 9000 from the original 1000). This effect is known as the money multiplier.

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This video helps clear up any confusion on the concept of how banks "create" money. The money from depositors is lent out at increasingly smaller amounts to different borrowers, who then have access to that money which therefore increases the overall money supply from the original level. Good explanation. Such a powerful concept in our financial system. 10/10 -SW