sch3_2 - EconomicProfit Total income = the returns to labor...

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1 CHAPTER 3 National Income Economic Profit Total income = the returns to labor, the returns to capital and economic profit
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2 CHAPTER 3 National Income Economic profit Accounting Profit
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3 CHAPTER 3 National Income How income is distributed to L and K total labor income = If production function has constant returns to scale, then total capital income =
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4 CHAPTER 3 National Income What production function describes  how actual economies turn capital and  labor into GDP? The division of national income between capital and labor had been roughly constant over a long period.
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The ratio of labor income to total income in  the U.S.,  1960-2007 Labor’s share of total income Labor’s share of income is approximately constant over time. (Thus, capital’s share is, too.) Labor’s share of income is approximately constant over time. (Thus, capital’s share is, too.)
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6 CHAPTER 3 National Income The Cobb-Douglas Production Function The Cobb-Douglas production function has constant factor shares: The Cobb-Douglas production function is:
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7 CHAPTER 3 National Income The Cobb-Douglas Production  Function
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8 CHAPTER 3 National Income The Cobb-Douglas Production Function Each factor’s marginal product is proportional to its average product:
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9 CHAPTER 3 National Income Labor productivity and wages Theory: wages depend on labor productivity U.S. data: period productivity growth real wage growth 1959-2007 2.1% 2.0% 1959-1973 2.8% 2.8% 1973-1995 1.4% 1.2% 1995-2009 2.6% 2.3%
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10 CHAPTER 3 National Income 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 loanable funds market DONE DONE   Next
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11 CHAPTER 3 National Income Components of aggregate demand: = = demand for investment goods = ( economy: no )
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12 CHAPTER 3 National Income Consumption,  C def: is total income minus total taxes: Y T. Consumption function: C = C ( Y T ) Shows that ( Y T ) C def: is the change in C when disposable income increases by one dollar.
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13 CHAPTER 3 National Income The consumption function C Y – T C ( Y T ) 1 is the MPC .
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sch3_2 - EconomicProfit Total income = the returns to labor...

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