Tutorial_CHAP03_revised

Tutorial_CHAP03_revised - CHAPTER 3 National Income: Where...

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1 Chapter Three ® CHAPTER 3 National Income: Where It Comes From and Where It Goes A PowerPoint Tutorial To Accompany MACROECONOMICS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian
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2 Chapter Three Copyright 1997 Dead Economists Society It is a quite simple but powerful analytical model built around buyers and sellers pursuing their own self-interest (within rules set by government). It’s emphasis is on the consequences of competition and flexible wages/prices for total employment and real output. Its roots go back to 1776—to Adam Smith’s Wealth of Nations . The Wealth of Nations suggested that the economy was controlled by the “invisible hand” whereby the market system, instead of government would be the best mechanism for a healthy economy.
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3 Chapter Three The heart of the market system lies in the “market clearing” process and the consequences of individuals pursuing self-interest. In this module, we will develop a basic classical model to explain various economic interactions.
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4 Chapter Three neoclassical theory of distribution We are going to examine carefully the modern theory of how national income is distributed among the factors of production. It is based on the classical (eighteenth-century) idea that prices adjust to balance supply and demand, applied here to the markets for the factors of production, together with the more recent (nineteenth-century) idea that the demand for each factor of production depends on the marginal productivity of that factor. Proceed to the next slide to the “CLASSICAL FACTORY” to learn how to construct the classical model.
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5 Chapter Three P Q P* Q* S D The place where Classical-model mechanics are made easy! Welcome to. .. Welcome to. ..
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6 Chapter Three We begin with firms and see what determines their level of production (and thus, the level of national income). Then, we examine how the markets for the factors of production distribute this income to households. Next, we consider how much of this income households consume and how much they save. We will also discuss the demand arising from investment and government purchases. Finally, we discuss how the demand and supply for goods and services are brought into balance. Let’s begin!
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7 Chapter Three An economy’s output of goods and services (GDP) depends on: (1) quantity of inputs (1) ability to turn inputs into output Let’s go over both now.
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8 L K The factors of production are the inputs used to produce goods and services. The two most important factors of production are capital and labor. In this module, we will take these factors as given (hence the overbar depicting that these values are fixed). K (capital) = K L (labor) = L In this module, we’ll also assume that all resources are fully utilized, meaning no resources are wasted.
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9 Chapter Three The available production technology determines how much output is produced from given amounts of capital (K) and labor (L).
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This note was uploaded on 10/15/2010 for the course ECON Econ 104B taught by Professor Cannotremeberban? during the Summer '10 term at UC Riverside.

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Tutorial_CHAP03_revised - CHAPTER 3 National Income: Where...

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