Economics

1. Explain the relationship among savings, investment, and net capital outflow.

Saving is the portion of income which is not used and is invested into markets. Investments are putting money somewhere with the expectancy for gains. Capital outflow is where the moving around of assets in a certain country. They all have a relationship together which is that Savings equals domestic investment plus net capital outflow. This means when U.S. citizens save a dollar of their income for the future that means the dollar can be used to finance buildup of domestic capital. It can also be used to finance the purchase of capital around the world.

2. Inflation distorts relative prices. What does this mean and how does it affect consumer spending and disposable income? Give some examples of how inflation has affected your buying power.

A relative price is the price of an item in terms of each other also known as the ratio of two prices which is the opportunity cost. Inflation is the result of an increase to money supply at a faster rate than the underlying economic growth. The Price inflation decreases people's ability to pay for goods. If employee's wages remain the same, but the cost of goods increases. This then leaves the employee unable to buy the same amount of goods. As wage inflation happens then the people will be able to buy more products. This all means that when inflation happens on a good or service and wages stay the same it hurts the customer. If the wages have inflation then the customer has more disposable income to spend on more goods.

3. Describe the economic logic behind the theory of purchasing-power parity (“PPP”). What factors might prevent PPP from holding true?

Purchasing Power Parity (PPP) is goods that have more or less the same price in different countries. PPP is based on the idea that price of the same goods should be equal among countries. PPP exchange rate is only a way to convert currencies. In the US a Taco. Is $2 and in...