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Unformatted text preview: January 26, 2012 Slide Set 3 (Chapter 3) Real variables: Y (output) Nominal variables: PY (price x output) Y = F (K, L) = C + I + G + NX = Total Income- Labor income- Capital income- Profit National Income: Where it Comes From and Where it Goes Basic Classical Model 1. Classical Theory- First Introduction to a simple classical theory- Classical models are used for long run analysis- Two assumptions: o Flexible prices Markets clear instantaneously o Perfect competition: no market power by any individual firm (or house-hold) 2. This chapter: a basic classical model- Closed economy o NX is dropped (no international trades)- Only concerned about real variables o Why not consider nominal and real variables simultaneously? 3. What do we want to know? a. What determines the total output/income (i.e. level of real GDP) b. How the prices of factors of production are determined c. How total income is distributed (to labor and owners of capital) d. What determines how GDP is allocated to C, I and G e. What determines the demand for goods and services f. How the equilibrium of goods, factors, and financial markets are achieved...
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