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Economics, Ch. 35: Financial Economics

Read pages 778-780, 783-797 of Economics.

Consider the following as you read:

• What is the time value of money and how can compound interest be used to calculate the present value of any future amount of money?

• How is the word "risk" used in financial economics and what is the difference between diversifiable and non-diversifiable risk?
Economics, Ch. 38: International Trade

Read pages 854-857 of Economics.

Consider the following as you read:

• What is the validity of the most frequently presented arguments for protectionism?
• What are the economic effects of tariffs and quotas?

Economics, Ch. 39: The Balance of Payments, Exchange Rates, and Trade Deficits

Read pages 880-888 of Economics.

Consider the following as you read:

• What are the causes and consequences of recent U.S. trade deficits?

• What is the balance sheet the United States uses to account for international payments made/paid and for international payments received?

• Taking off on the learning objective for the Chapter that begins "LO35.2 Explain the time value of money ..."

Assume you are currently employed making $40,000 per year. Assume that your earnings will grow at 2.5% per year until you retire at age 65. Ignore the distinct possibility that over the course of your work life you will be promoted or change jobs or both so your income would likely grow more than just the 2.5% per year I proposed. Please show the earnings stream from now (at your current age) to your retirement date. Then calculate the present value of that stream of income, choosing a "risk-free" rate of interest.

Hint: You might want to take the yield on a Treasury security reflecting an age as close to the period over which you're calculating -- 30 year Treasuries are the longest so if you're going to be working for more than 30 years, use the 30 year rate (it's actually a yield, not an interest rate). Government Treasuries are undoubtedly (still) the most risk free rates on the planet. Find data in the Fed's H-14 weekly release?

Have a great time with the time value of money

• First, clearly and fully differentiate among specialization, absolute advantage, and comparative advantage. Then, please clearly explain why these concepts are important in the U.S. and in ROW (rest of world) economies.

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