Ch_3 - Lecture Notes Chapter 3 National Income: Where It...

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Lecture Notes – Chapter 3 National Income: Where It comes From And Where It Goes University of Waterloo Department of Economics Spring 2010 1 CHAPTER 3 National Income
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Introduction Chapter 3 is the first chapter in a three chapter sequence that explains how the economy behaves in the long run. The performance of the economy in the long run is explained by the classical theory. This chapter presents the classical model of the real side of the economy. CHAPTER 3 National Income 2
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Introduction The key assumption in the classical model is that prices are flexible and all the markets in the economy are in equilibrium. The model of the chapter provides a complete description of how the real side of the economy works, in the sense that it explains all the markets and transactions illustrated in the circular flow diagram (Figure 3-1). CHAPTER 3 National Income 3
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The Circular Flow Diagram CHAPTER 3 National Income 4
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The model is set up as follows. ... Production: Capital and labour stocks are fixed and, together with the production function, determine GDP. Distribution: GDP is paid to factors of production according to their marginal products. Euler’s theorem ensures that these factor payments exactly exhaust GDP. CHAPTER 3 National Income 5
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The model is set up as follows: Allocation: GDP is allocated to consumption, investment, and government purchases according to a consumption function [C = C(Y – T)]), an investment function [I = I(r)], and fiscal policy. The real interest rate adjusts to ensure equilibrium in the goods (equivalently the loans) market. CHAPTER 3 National Income 6
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The model is set up as follows: The model is long run in the sense that it assumes that prices are flexible and that markets clear. At the same time, however, it presents only a snapshot of the economy at a point in time because it assumes a fixed capital stock, labour force, and technology. CHAPTER 3 National Income 7
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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. 8 CHAPTER 3 National Income
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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 9 CHAPTER 3 National Income
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The economy has certain resources, most notably   its labour and its stock of machines and factories (its capital stock). Firms in the economy use labour and capital as inputs in order to produce goods and services (GDP). CHAPTER 3
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This note was uploaded on 11/25/2010 for the course ECON 202 taught by Professor Angelatrimarchi during the Spring '10 term at Waterloo.

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Ch_3 - Lecture Notes Chapter 3 National Income: Where It...

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