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Unformatted text preview: 1 F IRMS IN THE T WO P ERIOD F RAMEWORK J UNE 28, 2010 June 28, 2010 2 B ASICS Introduction ¡ Embed firms in twoperiod (multiperiod) economy ¡ In each period t , representative firm produces according to a production technology A t f ( k t , n t ) ¡ n t : labor used for production ¡ k t : capital (“machines and equipment”) used for production ¡ A t : total factor productivity ¡ A catchall measure for level of sophistication of technology ¡ Real Business Cycle (RBC) view: the driving force behind the periodic ups and downs of macroeconomic activity (Chapter 13) ¡ For now, suppose A t = 1 always (i.e., in both period 1 and 2) ¡ Broad macro view of the factors of production ¡ Labor – all types ¡ Capital ¡ Machines and equipment ¡ Trucks ¡ Factories ¡ A stock (not a flow…) variable ¡ Takes time to build capital (simple starting assumption: takes one period) The function f ( k , n ) describes how capital and labor combine with each other to yield output (goods) Can also think of education and other intangibles (i.e., experience, brand name) as “capital” 2 June 28, 2010 3 P RODUCTION F UNCTION Model Structure ¡ Production function f ( k t , n t ) with all the “usual properties” of production functions ¡ Strictly increasing in k t and n t ¡ Diminishing marginal product in k t and n t ¡ When allow timevarying A t (Chapter 9 and Chapter 13), changes in A cause shifts in production function ¡ Source of business cycle fluctuations in RBC theory k t n t A t f(k t ,n t ) A t f(k t ,n t ) for any t Recall from intro micro rise in A fall in A rise in A fall in A total output (i.e., GDP) total output (i.e., GDP) The extra output that results from using one additional unit of input June 28, 2010 4 P RODUCTION F UNCTION Model Structure ¡ Production function f ( k t , n t ) with all the “usual properties” of production functions ¡ Strictly increasing in k t and n t ¡ Diminishing marginal product in k t and n t ¡ When allow timevarying A t (Chapter 9 and Chapter 13), changes in A cause shifts in production function ¡ Source of business cycle fluctuations in RBC theory ¡ For now suppose A t = 1 in each period k t n t f(k t ,n t ) f(k t ,n t ) for any t Recall from intro micro The extra output that results from using one additional unit of input total output (i.e., GDP) 3 June 28, 2010 5 C APITAL AND I NVESTMENT Macro Fundamentals ¡ Capital takes time to build ¡ Firms must decide in period t how much capital they want to use in the production process in t+1 ¡ Investment ¡ The change in a firm’s capital stock between two consecutive periods ¡ A technical term ¡ Does not refer to consumers’ purchase of stocks, bonds, etc “I’ve got $1000 invested in Microsoft stock.” June 28, 2010 6 C APITAL AND I NVESTMENT Macro Fundamentals ¡ Capital takes time to build ¡ Firms must decide in period t how much capital they want to use in the production process in t+1 ¡ Investment ¡ The change in a firm’s capital stock between two consecutive periods...
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 Spring '11
 chugh
 Economics, Inflation, Supply And Demand, representative, capital demand function

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