FV = Future Value, PV = Present Value, i = interest rate t = time, A = annuity FV = PV(1 + i)t PV = FV/(1 + i)t FV of A = A((1 + i)t 1 / I) Annuity

y = A/i

Externalities In economics, an externality, or transaction spillover, is a cost or benefit that is not transmitted through prices and is incurred by a party who did not agree to the action causing the cost or benefit.[dubious discuss] 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. Market Failures In the case of both negative and positive externalities, Public Goods In economics, a public good is a good that prices in a competitive market do not reflect the full costs is both non-excludable and non-rivalrous in that individuals or benefits of producing or consuming a product or service. can not be effectively excluded from use and where use by Also, producers and consumers may neither bear all of the one individual does not reduce availability to others.[1] costs nor reap all of the benefits of the economic activity, Examples of public goods include fresh air, clean water, and too much or too little of the goods will be produced or knowledge, lighthouses, open source software, radio and consumed in terms of overall costs and benefits to society. television broadcasts, roads, street lighting. Public goods For example, manufacturing that causes air pollution that are available everywhere are sometimes referred to as imposes costs on the whole society, while fire-proofing a global public goods. home improves the fire safety of neighbors. If there exist external costs such as pollution, the good will be Free Rider Problem In economics, collective bargaining, overproduced by a competitive market, as the producer psychology, and political science, a free rider (or does not take into account the external costs when freeloader) is someone who consumes a resource without producing the good. If there are external benefits, such as in paying for it, or pays less than the full cost. The free rider areas of education or public safety, too little of the good problem is the question of how to limit free riding (or its would be produced by private markets as producers and negative effects). Free riding is usually considered to be an buyers do not take into account the external benefits to economic problem only when it leads to the non-production others. Here, overall cost and benefit to society is defined or under-production of a public good (and thus to Pareto as the sum of the economic benefits and costs for all parties inefficiency), or when it leads to the excessive use of a involved. common property resource. The term free rider comes from the example of someone using public transportation without Income Distribution paying the fare. If too many people do this, the system will not have enough money to operate. Another example of a free rider is someone who does not pay his or her share of taxes, which help pay for public goods that all citizens benefit from, such as roads, water treatment plants, and fire services. Asymmetric Information Adverse Selection Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information (i.e. access to different information): the "bad" products or services are more likely to be selected. A bank that sets one price for all its checking account customers runs the risk of being adversely selected against by its low-balance, high-activity (and hence least profitable) customers. Two ways to model adverse selection are with signaling games and screening games. Moral Hazard In economic theory, a moral hazard is a situation where there is a tendency to take undue risks because the costs are not borne by the party taking the risk. A moral hazard may occur where the behavior of one party may change to the detriment of another after a transaction has taken place. For example, a person with insurance against automobile theft may be less cautious about locking their car, because the negative consequences of vehicle theft are now (partially) the responsibility of the insurance company. A party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.

Factors that shift S/D of Currency 1) Taste and Preference Foreign Purchase $CND Bank $USD US Seller Effect: Increase Supply CND CND Depreciate Increase Demand USD USD Appreciate 2) Relative Interest Rate US Investor USD Bank EUR US Inv Foreign Investment Effect: Increase Supply USD USD Depreciate Increase Demand EUR EUR Appreciate 3) Relative Income Level US Buyers USD Bank Peso US Buyers Mex Seller Effect: Increase Supply USD USD Depreciate Increase Demand Peso Peso Appreciate 4) Relative Price Level ROI US = 3%, CN = 5%, CND Buyers CND Bank USD CND Buyers US Sellers Effect: Increase Supply CND CND Depreciates Increase Demand USD USD Appreciates International Finance Pros Inc Purchase Power Decrease Inflation Inc Imports Inc Foreign Direct Inv. Decr National Debt Comparative Advantage Auto Rice JP 500 100

Cons Inc Capital Outflow Decr Tourists Decr Exports Inc Competition

Theory of comparative advantage Ricardo's theory that specialization and free trade will benefit all trading partners (real wages will rise), even those that may be absolutely less efficient producers. Absolute Advantage The advantage in the production of a good enjoyed by one country over another when it uses fewer resources to produce that good that the other country does. Comparative Advantage The advantage in the production of a good enjoyed by one country over another when that good can be produced at lower cost in terms of other goods that it could be in the other country. Tariff Increase in demand for product causes no change in Price of import+tariff, but does cause increase in size of import Quota Increase in demand cause Price of import to rise, but does cause increase in size of import Free Trade Pro low import price, variety, efficient use of resources. Cons trade deficit, quality control, lower demand, unfair competition to locals, Restricted Trade Pros safeguards national security, infant industries, Lower trade deficit, increase demand of local products, government revenue. Cons: increase price of imports, less variety

A:R 1A:1/5R

R:A 1R:5A 1R:4A

TH 100 25 1A:1/4R 1) Japan has Abs Adv in both 2) Japan has Comp Adv in Auto 3) Thailand has Comp Adv in Rice Direction of Trade JP Auto TH || JP Rice TH

Theories Utilitarian Justice money has less utility for the rich than for the poor. Karl Marx Equal distribution of wealth, tax credit, transfer payments, food stamp, social security, housing prog Reasons for International Trade 1) Scarcity 2) Well being 3) Specialization 4) Resources