06 Consumption, Saving, and Investment, Part 2-1

06 Consumption, Saving, and Investment, Part 2-1 - 1 6-1...

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Unformatted text preview: 1 6-1 Consumption, Saving, and Investment, Part 2 6-2 Agenda • Investment • Goods Market Equilibrium 6-3 Investment • From the desired capital stock to investment: ¾ The capital stock changes from 2 sources. • Net investment , which adds to the capital stock. • Depreciation , which reduces the capital stock. ¾ Gross investment = net investment + depreciation. 6-4 Investment • From the desired capital stock to investment: ¾ Net investment = gross investment – depreciation: K t +1 – K t = I t – dK t • where net investment = the change in the capital stock. 2 6-5 Gross and net investment, 1929-2005 6-6 Investment • From the desired capital stock to investment: ¾ Rewrite K t +1 – K t = I t – dK t ¾ as I t = K t+1 – K t + dK t 6-7 Investment • From the desired capital stock to investment: ¾ If firms can change their capital stocks in one period, then: K* = K t+1 • where K* is the desired capital stock. ¾ Then I t = K* – K t + dK t 6-8 Investment • From the desired capital stock to investment: ¾ Now investment has two parts: I t = K* – K t + dK t • K* – K t , the desired net increase in the capital stock over the year, and • dK t , the investment needed to replace depreciated capital. 3 6-9 Investment • From the desired capital stock to investment: ¾ Lags and investment. • Some capital can be constructed easily, but other capital may take years to put in place. • So investment needed to reach the desired capital stock may be spread out over several years. 6-10 Investment • Investment in inventories and housing: ¾ The marginal product of capital and user cost of capital also apply to housing and inventories as well as to equipment and structures....
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This note was uploaded on 07/29/2010 for the course UGBA 100b taught by Professor Wood during the Summer '10 term at Berkeley.

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06 Consumption, Saving, and Investment, Part 2-1 - 1 6-1...

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