302-03 - CHAPTER NationalIncome: WhereitComesFrom...

Info iconThis preview shows pages 1–15. Sign up to view the full content.

View Full Document Right Arrow Icon
C H A P T E R National Income: Where it Comes From  and Where it Goes University of Wisconsin Charles Engel 3
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Ch 3.02 slide 2 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
Background image of page 2
Ch 3.02 slide 3 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
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Ch 3.02 slide 4 Factors of production K = capital: tools, machines, and structures used in production L = labor: the physical and mental efforts of workers
Background image of page 4
Ch 3.02 slide 5 The production function denoted Y = F ( 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
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Ch 3.02 slide 6 Returns to scale:  A review Initially Y 1 = F ( K 1 , L 1 ) Scale all inputs by the same factor z : K 2 = zK 1 and L 2 = zL 1 ( e.g. , if z = 1.25, then all inputs are increased by 25%) What happens to output, Y 2 = F ( 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
Background image of page 6
Ch 3.02 slide 7 Example 1 ( , ) F K L KL = ( , ) ( )( ) F zK zL zK zL = z KL = 2 z KL = 2 z KL = ( , ) zF K L = constant returns to scale for any z > 0
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Ch 3.02 slide 8 Example 2 ( , ) F K L K L = + ( , ) F zK zL zK zL = + z K z L = + ( , ) z F K L = decreasing returns to scale for any z > 1 ( 29 z K L = +
Background image of page 8
Ch 3.02 slide 9 Example 3 ( , ) F K L K L = + 2 2 ( , ) ( ) ( ) F zK zL zK zL = + 2 2 ( , ) z F K L = 2 increasing returns to scale for any z > 1 ( 29 z K L = + 2 2 2
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Ch 3.02 slide 10 Assumptions of the model 1. Technology is exogenous. 2. The economy’s supplies of capital and labor are exogenous at and K K L L = =
Background image of page 10
Ch 3.02 slide 11 Determining GDP Output is determined by the exogenous factor supplies and the exogenous state of technology: , = ( ) Y F K L
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Ch 3.02 slide 12 The distribution of national income determined by factor prices , the prices per unit that firms pay for the factors of production wage = price of L ren tal rate = price of K
Background image of page 12
Ch 3.02 slide 13 Notation W = nominal wage R = nominal rental rate P = price of output W / P = real wage (measured in units of output) R / P = real rental rate
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
slide 14 How factor prices are determined Factor prices are determined by supply and demand in factor markets. Recall:
Background image of page 14
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/28/2010 for the course ECON 302 taught by Professor Gold during the Spring '07 term at Wisconsin.

Page1 / 66

302-03 - CHAPTER NationalIncome: WhereitComesFrom...

This preview shows document pages 1 - 15. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online