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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 firms capital stock between two consecutive periods A technical term Does not refer to consumers purchase of stocks, bonds, etc Ive 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 firms capital stock between two consecutive periods...
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 Spring '11
 chugh

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