Econ+102+lecture+4%2C+1-17-12+-+Macro+Choice+1 copy

Econ+102+lecture+4%2C+1-17-12+-+Macro+Choice+1 copy -...

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Lecture 4: Macroeconomic choice 1: the  social planner Econ 102, Winter 2012 1/17/2012 1 Suggested reading : Krugman and Wells Micro Chs 10-11 (if you are not familiar with utility analysis)
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Outline 1. Growth: intertemporal choice and utility 2. Macroeconomic choice a. Three methods of choice b. Tradeoffs in utility: community indifference  curves 1/17/2012 2
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Growth: intertemporal choice We’ve seen that the speed at which an economy  grows is in part a function of the speed at which its  resource stock grows We illustrated this in terms of the quantity of labor We also saw that we can model the PPF to describe  the production of two types of goods: consumption  and capital Capital is “goods we’ve produced that are used to  produce other goods” 1/17/2012 3
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Growth: intertemporal choice Let’s model that choice directly: how does an  economy choose how much capital to produce And therefore, how much growth it will experience Compared to last class, let’s use some more realistic  assumptions 1. Production uses an increasing opportunity cost  technology Means we can’t use simple straight-line PPFs Suppose only one input (labor) is used.  The PPF  equation is something like 100 = (G1)2 + (G2)2  1/17/2012 4
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Growth: intertemporal choice More realistic assumptions 2. Production of all goods uses both labor and  capital as inputs We’ll discuss two-input production functions  (for a single good) in chapter 9; for now, don’t  worry about the equation for this type of PPF To model how an economy can choose its level of  growth, we assume every good produced can be  classified as either “capital” or “consumption” . Consumption goods  are those that we get  “pleasure” from 1/17/2012 5
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Growth: intertemporal choice The essential choice in this framework: do we give  up “pleasure” today, in the form of consumption, in  order to get more production capacity tomorrow? By forgoing consumption today, we “buy” the  possibility of more of  everything  in the future The more we give up now, the more we can have  later Why not give up all consumption now?  The “common sense” answer: we need to eat! For the “economic” answer, it helps to remember  a microeconomic concept: the utility function 1/17/2012 6
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Growth: intertemporal choice Utility function :  the relationship between  consumption and “happiness”, “pleasure”, “value”.   Conceptually measured in fictional units called  utils . Where 
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This note was uploaded on 02/10/2012 for the course ECON 102 taught by Professor Rossana during the Winter '08 term at University of Michigan.

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Econ+102+lecture+4%2C+1-17-12+-+Macro+Choice+1 copy -...

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