Lecture_6

Lecture_6 - Lecture 6 Principles of Macroeconomics Econ 2...

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Lecture 6 Principles of Macroeconomics Econ 2 Winter, 2009
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Tracking the Economy Initial Claims
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Tracking the Economy
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Tracking the Economy
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Economic Growth Neoclassical Model of Growth Same basic elements as the Malthusian model: Diminishing marginal products of labor and capital
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Short Digression The production function tells us how much output we get for given inputs: Y = f ( K , L , A )
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Production Function II Another property that is commonly assumed is Constant Returns to Scale
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Production Function II Another property that is commonly assumed: Constant Returns to Scale If double all inputs, double the output
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Production Function II CRS is important because what matters for increasing output per worker is increasing capital per worker
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Production Function II CRS is important because what matters for increasing output per worker is increasing capital per worker (capital to labor ratio) That is, if labor and capital grow at the same rate, there is no change in the capital to labor ratio
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Economic Growth Production function: Y = f ( K , L , A ) The “A” stands for A) All other inputs B) The current state of technology C) Net exports D) Savings and investment E) Inventories
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Economic Growth Production function assumptions: Y = f ( K , L , A ) The “A” stands for A) All other inputs B) The current state of technology C) Net exports D) Savings and investment E) Inventories
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Economic Growth Assumptions: Perfect competition in output and factor markets Firms maximize profits
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Economic Growth Perfect competition in output and factor markets Labor market Real Wage = marginal product of labor: P W = MPL
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Economic Growth Perfect competition in output and factor markets Capital market Real interest rate = MPK R = MPK
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Memory Recall The real interest rate = Nominal interest rate minus expected inflation
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Economic Growth Individuals maximize utility By choosing how much to consume today vs. tomorrow And, by choosing how much leisure to consume
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Today and Tomorrow How do you decide how much to consume today vs. tomorrow?
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Today and Tomorrow How do you decide how much to consume today vs. tomorrow? Think of a “good” today and a “good” tomorrow as two different goods
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Today and Tomorrow Suppose income today is Y If you consume C today: Y – C is not consumed
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Today and Tomorrow Suppose income today is Y If you consume C today: Y – C is not consumed Y – C is savings, S S = Y – C
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Today and Tomorrow What is the opportunity cost (price) of consuming one more good today?
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What is the opportunity cost (price) of consuming one more good today ?
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This note was uploaded on 01/29/2010 for the course ECON 3A taught by Professor Loster during the Summer '07 term at UCSB.

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Lecture_6 - Lecture 6 Principles of Macroeconomics Econ 2...

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