Nation's Income 23 - Topic 3 National Income Where it Comes...

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CHAPTER 3 CHAPTER 3 National Income National Income Topic 3: National Income: Where it Comes From and Where it Goes (chapter 3)
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Introduction Introduction In the last lecture we defined and  measured some key macroeconomic  variables. Now we start building theories about what  determines these key variables. In the next couple lectures we will build  up theories that we think hold in the long  run , when______________________.   Called ___________________ theory.  
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The Neoclassical model The Neoclassical model Is a general equilibrium model Involves multiple _____. each with own supply and demand ____ in each market adjusts to make quantity  demanded equal quantity supplied.
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Neoclassical model Neoclassical model The macroeconomy involves three types of markets : 1.    2.    3.    Are also three types of agents  in an economy: 1.    2.    3.   
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Financial Market Goods Market Labor Market Households Governmen t Firms saving borrowing borrowing consumption government spending investment production work hiring Three Markets – Three agents Three Markets – Three agents
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Neoclassical model Neoclassical model Agents interact in markets, where they  may be demander in one market and  supplier in another  1) Goods market Supply : Demand :
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Neoclassical model Neoclassical model 2) Labor market  (factors of production)  Supply : Demand : 3) Financial market Supply : Demand :
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Neoclassical model Neoclassical model We will develop a set of equations to charac- terize supply and demand in these markets Then use algebra to solve these equations  together, and see how they interact to establish  a general equilibrium.   Start with production…
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Part 1: Supply in goods market: Part 1: Supply in goods market: Production Production Supply in the goods market depends on a  production function: denoted   Y  =  ( K ,   L ) Where  K   =   L   = 
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The production function The production function shows how much output ( Y  ) the  economy can produce from K     units of capital and  L     units of labor.  reflects the economy’s level of  technology.   Generally, we will assume it exhibits  constant returns to scale .
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Returns to scale Returns to scale Initially    Y 1     ( K 1   ,   L 1   )   Scale all inputs by the same factor  z :    K 2   zK 1     and   L 2   zL 1       for z>1 (If  z  = 1.25, then all inputs increase by 25%) What happens to output,  Y 2  =  ( K 2   ,   L 2   ) ?   If  ______ returns to scale Y 2  =  zY 1   If  ______ returns to scale Y 2  >  zY 1   If  ______ returns to scale Y 2  <  zY 1  
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Exercise: Exercise: determine returns to scale determine returns to scale Determine whether each of the following 
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This note was uploaded on 11/17/2009 for the course ECONOMICS ECON101 taught by Professor No during the Spring '08 term at Yonsei University.

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Nation's Income 23 - Topic 3 National Income Where it Comes...

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