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Lecture7-saving - Tracking Growth Econ 2 Principles of...

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Peter Rupert UCSB Winter, 2010 1 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Tracking the Economy 2 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Tracking the Economy 3 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Home Sales and the Stock Market (1) Yesterday, the stock market (a.) fell (b.) rose 4 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Home Sales and the Stock Market (1) Yesterday, the stock market (a.) fell (b.) rose X 4 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Trying to Forecast the Market Extremely, extremely difficult–ok, pretty much impossible! Click: Home sales 5 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Tracking the Economy 6 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Tracking the Economy 7 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Tracking the Economy 8 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Production Function Constant returns to scale (CRS) What matters for increasing ouput per worker is increasing capital per worker K / L is the capital to labor ratio If they grow at the same rate, no change in K / L And no change in Y / L 9 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Perfect Competition Firms maximize profits Perfect competition in factor markets Real Wage = marginal product of labor Real Interest Rate = marginal product of capital 10 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Utility Maximization Choose how much to consume today vs. tomorrow Choose how much leisure vs. work 11 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Today vs. Tomorrow How do you decide how much to consume today vs. tomorrow? Think of a “good today” and a “good tomorrow” as two different goods What is the price of consuming a good today? As per usual, it is what you give up, i.e., the opportunity cost In other words, how much you could have consumed in the future 12 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Today vs. Tomorrow In real terms, if you save (invest) one more dollar today what do you get back in the future? The $1 plus $1( r ) = $1(1 + r ) (1 + r ) is the real return 13 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Today vs. Tomorrow (2) So, (1 + r ) is the (a.) Nominal interest rate (b.) Price of goods today vs. tomorrow (c.) Rate of inflation (d.) Expected inflation (e.) Real growth rate of the economy 14 / 46 Econ 2: Principles of Macroeconomics
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Tracking Growth Today vs. Tomorrow
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