eco202_note09 - Macroeconomics Theory and Policy Long Run Y...

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Macroeconomics Theory and Policy Masoud Anjomshoa 1 Masoud Anjomshoa 1 Long Run: . Quarters Y - In the long run, - Money, price level, and nominal variables are ignored. The focus will be only on the real side of the economy. - To check the outcomes of the long run models, we use international data. Given the different sizes of countries, we use per person variables. -Any growth model should be able to explain: 1)- Why/How countries grow over time in the long run. 2)- Why their growth patterns are different. Y Short/Medium Run Y Quarters Y Long Run Quarters Y Masoud Anjomshoa 2 Long Run: Personal income per person in 1982 The U.S. States OECD Countries 112 Countries Absolute Convergence Theory:
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Macroeconomics Theory and Policy Masoud Anjomshoa 2 Masoud Anjomshoa 3 Production Function: Y= F ( K , N Output Cobb-Douglas Production Function: Y = AK α N β Production function is a technological relation which relates levels of input factors to the maximum produced output. Technological progress is in form of a functional shift: Masoud Anjomshoa 4 Production Function: λ Y= F( λ K , λ N) Y= 2K 0.3 N 0.7 1- Constant Returns to Scale: 2- Diminishing Returns to Each Factor: K Y 1 2 3 4 Y = 2K 0.3 N 0.7 Î K = 0 Î K = 1 ÎÎ K = 2 K = 3 K = 4 0 Given fixed other factor, the extra output due to one more unit of any input increases, decreasingly.
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Macroeconomics Theory and Policy Masoud Anjomshoa 3 Masoud Anjomshoa 5 Production Function: λ Y= F( λ K , λ N) Î Constant Returns to Scale: k y = 2k 0.3 f(k) N Y y : output worker Per = N K k : capital worker Per = Masoud Anjomshoa 6 Long Run: . Demand side: Y = C + I + G Saving - Investment: Î I = S + (T – G) Income side: Y = C + S + T Suppose no government: Short run consumption function: Saving Function: Î So: Long run consumption function: Long run saving function: S =Y – C =Y – c 1 Y = (1– c 1 )Y
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Macroeconomics Theory and Policy Masoud Anjomshoa 4 Masoud Anjomshoa 7 Long Run: . Capital Accumulation: Labor Force: K t First assume that g N = 0 N t = N If I t > δ K t If I t < δ K t Î inflow < outflow Î Δ K t < 0 If I t = δ K t Î inflow = outflow Î Δ K t = 0 Depreciation Rate Î inflow > outflow Î Δ K t > 0 Masoud Anjomshoa 8 Long Run, Solow Model: .
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eco202_note09 - Macroeconomics Theory and Policy Long Run Y...

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