Course Content
TOPICS IN DEMAND AND SUPPLY ANALYSIS
This chapter is covered under Reading 12 of Study Session 4. After reading this chapter, a student shall be able to: a. calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure; b. compare substitution and income effects; c. distinguish between normal goods and inferior goods; d. describe the phenomenon of diminishing marginal returns; e. determine and describe break-even and shutdown points of production; f. describe how economies of scale and diseconomies of scale affect costs.
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Demand Concept
Supply Concepts
Market Equilibrium
THE FIRM AND MARKET STRUCTURES
This chapter is covered in reading 13 of study session 4 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. describe characteristics of perfect competition, monopolistic competition, oligopoly, and pure monopoly; b. explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure; c. describe a firm’s supply function under each market structure; d. describe and determine the optimal price and output for firms under each market structure; e. explain factors affecting long-run equilibrium under each market structure; f. describe pricing strategy under each market structure; g. describe the use and limitations of concentration measures in identifying market structure; h. identify the type of market structure within which a firm operates.
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LOS A to G: Types of Market Structure
LOS H: Identification of Market Structure
AGGREGATE OUTPUT, PRICES, AND ECONOMIC GROWTH
This chapter is covered in reading 14 of study session 4 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. calculate and explain gross domestic product (GDP) using expenditure and income approaches; b. compare the sum-of-value-added and value-of-final-output methods of calculating GDP; c. compare nominal and real GDP and calculate and interpret the GDP deflator; d. compare GDP, national income, personal income, and personal disposable income; e. explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance; f. explain the IS and LM curves and how they combine to generate the aggregate demand curve; g. explain the aggregate supply curve in the short run and long run; h. explain causes of movements along and shifts in aggregate demand and supply curves; i. describe how fluctuations in aggregate demand and aggregate supply cause short-run changes in the economy and the business cycle; j. distinguish between the following types of macroeconomic equilibria: long-run full employment, short-run recessionary gap, short-run inflationary gap, and short-run stagflation; k. explain how a short-run macroeconomic equilibrium may occur at a level above or below full employment; l. analyze the effect of combined changes in aggregate supply and demand on the economy; m. describe sources, measurement, and sustainability of economic growth; n. describe the production function approach to analyzing the sources of economic growth; o. distinguish between input growth and growth of total factor productivity as components of economic growth.
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Introduction
LOS A: Aggregate Output and Income
LOS B to E: Gross Domestic Product
LOS F to L: Aggregate Demand, Aggregate Supply & Equilibrium
LOS M, N, and O: Economic Growth and Sustainability
UNDERSTANDING BUSINESS CYCLES
This chapter is covered in reading 15 of study session 4 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. describe the business cycle and its phases; b. describe how resource use, housing sector activity, and external trade sector activity vary as an economy moves through the business cycle; c. describe theories of the business cycle; d. describe types of unemployment and compare measures of unemployment; e. explain inflation, hyperinflation, disinflation, and deflation; f. explain the construction of indexes used to measure inflation; g. compare inflation measures, including their uses and limitations; h. distinguish between cost-push and demand-pull inflation; i. interpret a set of economic indicators and describe their uses and limitations.
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LOS A and B: Overview of Business Cycle
LOS C: Theories of Business Cycle
LOS D: Unemployement
LOS E: Inflation
LOS I: Economic Indicators
MONETARY AND FISCAL POLICY
This chapter is covered in reading 16 of study session 5 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. compare monetary and fiscal policy; b. describe functions and definitions of money; c. explain the money creation process; d. describe theories of the demand for and supply of money; e. describe the Fisher effect; f. describe roles and objectives of central banks; g. contrast the costs of expected and unexpected inflation; h. describe tools used to implement monetary policy; i. describe the monetary transmission mechanism; j. describe qualities of effective central banks; k. explain the relationships between monetary policy and economic growth, inflation, interest, and exchange rates; l. contrast the use of inflation, interest rate, and exchange rate targeting by central banks; m. determine whether a monetary policy is expansionary or contractionary; n. describe limitations of monetary policy; o. describe roles and objectives of fiscal policy; p. describe tools of fiscal policy, including their advantages and disadvantages; q. describe the arguments about whether the size of a national debt relative to GDP matters; r. explain the implementation of fiscal policy and difficulties of implementation; s. determine whether a fiscal policy is expansionary or contractionary; t. explain the interaction of monetary and fiscal policy.
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LOS A: Monetary Vs. Fiscal Policies
LOS B: Money
LOS C: Money Creation Process
LOS D: The Demand and Supply of Money
LOS E: Fisher Effect
LOS F: Role of Central Bank
LOS G: Cost of Inflation
LOS H: Policy Tools
LOS I, J, K, L, M, and N: Policies of The Central Bank
LOS O to S: Fiscal Policies
LOS T: Interaction of Fiscal and Monetary Policy
INTERNATIONAL TRADE AND CAPITAL FLOWS
This topic is covered under Reading 17 of the study session 5 provided by the institute. The candidate should be able to: a compare gross domestic product and gross national product; b describe benefits and costs of international trade; c distinguish between comparative advantage and absolute advantage; d compare the Ricardian and Heckscher–Ohlin models of trade and the source(s) of comparative advantage in each model; e compare types of trade and capital restrictions and their economic implications; f explain motivations for and advantages of trading blocs, common markets, and economic unions; g describe common objectives of capital restrictions imposed by governments; h describe the balance of payments accounts including their components; i explain how decisions by consumers, firms, and governments affect the balance of payments; j describe functions and objectives of the international organizations that facilitate trade, including the World Bank, the International Monetary Fund, and the World Trade Organization.
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Introduction
LOS A: Some Basic Terminologies for International Trade and GDP, GNP
LOS B: Cost and Benefits of International Trade
LOS C: Comparative and Absolute Advantage
LOS D: Ricardian and Heckscher–Ohlin models
LOS E, F, and G: Trade and Capital Flow
LOS H and I: Balance of Payment
LOS J: Trade Organizations
CURRENCY EXCHANGE RATES
This chapter is covered in Reading 18 of the study material provided by the institute. After reading this chapter, the student should be able to: a. define an exchange rate and distinguish between nominal and real exchange rates and spot and forward exchange rates; b. describe functions of and participants in the foreign exchange market; c. calculate and interpret the percentage change in a currency relative to another currency; d. calculate and interpret currency cross-rates; e. convert forward quotations expressed on a points basis or in percentage terms into an outright forward quotation; f. explain the arbitrage relationship between spot rates, forward rates, and interest rates; g. calculate and interpret a forward discount or premium; h. calculate and interpret the forward rate consistent with the spot rate and the interest rate in each currency; i. describe exchange rate regimes; j. explain the effects of exchange rates on countries’ international trade and capital flows.
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Introduction
LOS A: Real Exchange Rate Vs. Nominal Exchange Rate
LOS B: The Foriegn Exchange Market
LOS C: Appreciating or Depreciating Currency
LOS D: Currency Cross-Rates
LOS E to G: Forward Rate Quotations
LOS H: Exchange Rate Regimes
LOS J: Exchange Rate, International Trade, and Capital Flows
Economics
About Lesson

Sources of Comparative Advantage

There are two models that discuss the sources of comparative advantage. The Ricardian model of comparative advantage focuses on labor as the source of comparative advantage, whereas the Heckscher–Ohlin model focuses on both labor and capital as sources of comparative advantage.

1.1.     The Ricardian Model

a.   This model is a refinement over the traditional model given by Adam Smith, which says that for a self-sufficient economy there is no need for international trade. This model goes further and discusses the benefits of comparative advantage for international trade.

b.  According to this model, the countries specialize in the goods and services for which they have a comparative advantage.

c.  The source of comparative advantage is labor productivity. Labor productivity is attributed to differences in technological advancements in different countries.

d.  Countries trade because of differences in labor productivity gives them a comparative advantage over others.

e.  The basic assumptions of this model are:

     i.  Labor is the only variable factor input.

    ii.  Technology varies across the countries.

f.  Thus for countries A and B, producing two products X and Y:

     i.  If labor hours required to make product X by country A is more than the labor hours required by country B, then B will make product X.
That is, if ALX > BLX, then B makes X.
And, if ALY > BLY, then A makes Y.

1.2.     Heckscher-Ohlin Model

a.  According to this model, comparative advantages arise from different endowments of capital and labor.

b.  Capital and labor are the two variable factors of productivity.

c.  Countries trade because of different relative amounts of capital and labor. It is the efficiency of production that matters and a decisive factor as to which country will produce which product.

d.  This model allows for income redistribution between owners and capital and labor through trade.

e.  According to this model, if the capital to labor ratio in one country is more than the other country, it is the capital-abundant country. That is:
If,
Heckscher-Ohlin Model CFA Level 1 Economics Study Notes

Then, A is the capital-abundant country and B is the labor-abundant country. Thus if there is a product X, which is a capital-intensive product, then country A will produce it. And if there is a product Y, which is more labor-intensive than country B will produce it.

f.  Two of the major assumptions of this model are:

     i.  There are identical technologies within industries across the countries.

    ii.  Both labor and capital are variable factor inputs.

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