Lecture_7_spring_2009

Lecture_7_spring_2009 - Lecture 7 Principles of...

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Lecture 7 Principles of Macroeconomics Econ 2 Spring, 2009
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How much is a trillion? Suppose job pays $1 per second You work 52 weeks, 24 hours per day How much would you earn per year? $31,536,000 How many years would it take you to earn $1 trillion?
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How much is a trillion? How many years would it take you to earn $1 trillion? A) 150 years B) 1,000 years C) 10,000 years D) 31,000 years E) 75,000 years
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How much is a trillion? How many years would it take you to earn $1 trillion? D) 31,000 years
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Tracking the Economy
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Tracking the Economy
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Tracking the Economy
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Tracking the Economy
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Today and Tomorrow What is R and where does it come from? When you save one more dollar it goes to a firm to invest in one more dollar of capital The firm adds one more dollar of capital to its fixed labor
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Today and Tomorrow When you invest one more dollar it goes to a firm to invest in one more dollar of capital The firm adds one more dollar of capital to its fixed labor The additional output it gets is the MPK
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Today and Tomorrow The supply of loans (by consumers) is upward sloping in R The demand for loans (by firms) is downward sloping in R
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Today and Tomorrow The supply of loans (by consumers) is upward sloping in R The demand for loans (by firms) is downward sloping in R The intersection of the supply and demand curve gives us the equilibrium R
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1+R Loans Savings Investment (1+R)*
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Quick Summary ( 1 + R ) is the price of consumption today vs. tomorrow The real interest rate, R, is determined by the demand and supply for loans by firms and consumers
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Saving and Investment Savings: S = Y – C Recall the expenditure approach with no government and foreign sectors: Y = C + I
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Saving and Investment Rewrite S = Y – C as Y = S + C Substitute this into our expenditure equation S + C = C + I S = I Saving = Investment
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Back to Growth So, what does this tell us about growth?
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Back to Growth So, what does this tell us about growth? We saw before that increasing output per worker was key
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Production Function II Adding more capital increases output per worker
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APL and Capital Y / N K / N
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Back to Growth Given that an increase in the capital / labor ratio raises output per worker —and likely the average standard of living How can we increase the capital / labor ratio?
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Back to Growth How can we increase the capital/labor ratio? Make the capital stock grow faster than the rate of growth of population
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Back to Growth How can we increase the capital/labor ratio? Make the capital stock grow faster than the rate of growth of the population DUH!
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Back to Growth Example: K = 100 N = 100 k = K / N = 100 / 100 = 1 t t t t t
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Back to Growth Suppose population grows by 5% N = N ( 1.05 ) = 100 ( 1.05 ) = 105 t+1 t
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Back to Growth Now, if K did not grow, K = K k = K / N = 100 / 105 = .9524 The capital/labor ratio has fallen t+1 t+1 t+1 t+1 t
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Back to Growth To keep K / N the same, K must grow K needs to grow by 5%
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Back to Growth K = 105 N = 105 k = K / N = 105 / 105 = 1 t+1 t+1 t+1 t+1 t+1
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Growth To increase K: Need more investment, I But, to increase I , we have to increase savings, S
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This note was uploaded on 11/01/2009 for the course ECON ECON2 taught by Professor Rupert during the Spring '09 term at UCSB.

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Lecture_7_spring_2009 - Lecture 7 Principles of...

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