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1
F
IRMS IN THE
T
WO
P
ERIOD
F
RAMEWORK
M
ARCH 14, 2011
March 14, 2011
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)
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March 14, 2011
3
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”
March 14, 2011
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
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
March 14, 2011
5
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
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.
 Spring '08
 chugh

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