lecture2 - Lecture 2 National Income where it comes from...

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CHAPTER 3 CHAPTER 3 National Income National Income slide 1 Lecture 2 National Income – where it comes from and where it goes
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CHAPTER 3 CHAPTER 3 National Income National Income slide 2 In this chapter you will learn: In this chapter you will learn: what determines the economy’s total  output/income how the prices of the factors of production  are determined how total income is distributed what determines the demand for goods and  services how equilibrium in the goods market is  achieved
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CHAPTER 3 CHAPTER 3 National Income National Income slide 3 Adding the Government Sector Adding the Government Sector Goods Market Factor Market Financial Market Consumption Investment Output Income Saving Borrowing Households Firms Governments (Federal, State, Local) Taxes Transfers Bud Deficit Govt.
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CHAPTER 3 CHAPTER 3 National Income National Income slide 4 Outline of model Outline of model A closed economy, market-clearing model Supply side factor markets (supply, demand, price) determination of output/income Demand side determinants of  C I , and  G Equilibrium goods market loanable funds market
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CHAPTER 3 CHAPTER 3 National Income National Income slide 5 Factors of production Factors of production K   =  capital,  tools, machines, and structures  used in production L   =  labor,  the physical and mental efforts of  workers
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CHAPTER 3 CHAPTER 3 National Income National Income slide 6 The production function The production function denoted   Y  =  ( K ,   L ) 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.   exhibits  constant returns to scale .
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CHAPTER 3 CHAPTER 3 National Income National Income slide 7 Returns to scale: a review Returns to scale: a review Initially    Y 1     ( K 1   ,   L 1   )   Scale all inputs by the same factor  z :    K 2   zK 1     and   L 2   zL 1   (If  z  = 1.25, then all inputs are increased by 25%) What happens to output,  Y 2  =  ( K 2   ,   L 2   ) ?   If  constant returns to scale Y 2  =  zY 1   If  increasing returns to scale Y 2  >  zY 1   If  decreasing returns to scale Y 2  <  zY 1  
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CHAPTER 3 CHAPTER 3 National Income National Income slide 8 Exercise: Exercise: determine returns to scale determine returns to scale Determine whether each of the following  production functions has constant,  increasing, or decreasing returns to scale: a)    2 15 F K L K L = + ( , ) b)    F K L KL = ( , ) c)    2 15 F K L K L = + ( , )
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CHAPTER 3 CHAPTER 3 National Income National Income slide 9 Assumptions of the model Assumptions of the model
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This note was uploaded on 04/14/2010 for the course ECON 3353 taught by Professor Prodan during the Spring '05 term at University of Alabama - Huntsville.

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lecture2 - Lecture 2 National Income where it comes from...

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