Académique Documents
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macro
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint Slides by Ron Cronovich
2003 Worth Publishers, all rights reserved
how total income is distributed what determines the demand for goods
and services
National Income
slide 2
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
CHAPTER 3
National Income
slide 3
Factors of production
K = capital, tools, machines, and structures used in production
CHAPTER 3
National Income
slide 4
CHAPTER 3
National Income
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If constant returns to scale, Y2 = zY1 If increasing returns to scale, Y2 > zY1 If decreasing returns to scale, Y2 < zY1
CHAPTER 3
National Income
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(a) F (K ,L) =
KL
K2 (b) F (K ,L) = L
CHAPTER 3
National Income
slide 7
K =K
and
L =L
CHAPTER 3
National Income
slide 8
Determining GDP
Output is determined by the fixed factor supplies and the fixed state of technology:
Y = F (K , L)
CHAPTER 3
National Income
slide 9
CHAPTER 3
National Income
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Notation
W W R R = nominal wage = nominal wage = nominal rental rate = nominal rental rate
P = price of output P = price of output W /P = real wage W /P = real wage (measured in units of output) (measured in units of output) R /P = real rental rate R /P = real rental rate
CHAPTER 3
National Income
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CHAPTER 3
National Income
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Basic idea:
A firm hires each unit of labor if the cost does not exceed the benefit. cost = real wage benefit labor = marginal product of
CHAPTER 3
National Income
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CHAPTER 3
National Income
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each value of L
b. Graph the production
function
c. Graph the MPL curve
L 0 1 2 3 4 5 6 7 8 9 10
Y MPL 0 n.a. 10 ? 19 ? 27 8 34 ? 40 ? 45 ? 49 ? 52 ? 54 ? 55 ?
slide 15
National Income
answers:
MPL (units of output)
Labor (L)
Labor (L)
CHAPTER 3
National Income
slide 16
CHAPTER 3
National Income
L labo r
slide 17
Intuition:
L while holding K fixed
CHAPTER 3
National Income
slide 18
a) F (K , L) = 2K + 15L
b) F (K , L) = KL
c) F (K , L) = 2 K + 15 L
CHAPTER 3
National Income
slide 19
Exercise (part 2)
Suppose W/P = 6.
d. If L = 3, should firm hire
L 0 1 2 3 4 5 6 7 8 9 10
Y MPL 0 n.a. 10 10 19 9 27 8 34 7 40 6 45 5 49 4 52 3 54 2 55 1
slide 20
CHAPTER 3
National Income
Real wag e
Each firm hires Each firm hires labor labor up to the point up to the point where MPL = W/P where MPL = W/P
National Income
slide 21
CHAPTER 3
The real wage adjusts to The real wage adjusts to equate equate labor demand with supply. labor demand with supply.
National Income
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diminishing returns to capital: MPK as K The MPK curve is the firms demand curve for renting capital. Firms maximize profits by choosing K such that MPK = R/P .
CHAPTER 3
National Income
slide 23
The real rental The real rental rate adjusts to rate adjusts to equate equate demand for demand for capital with capital with supply. supply.
MPK, demand for capital Units of capital, K
equilibriu m R/P
K
CHAPTER 3
National Income
slide 24
CHAPTER 3
National Income
slide 25
W L P
= MPL L = MPK K
Y = MPL L + MPK K
national income
CHAPTER 3
labor income
National Income
capital income
slide 26
Outline of model
A closed economy, market-clearing model Supply side DONE factor markets (supply, demand, price) DONE determination of output/income Demand side determinants of C, I, and G Next Equilibrium goods market loanable funds market
CHAPTER 3
National Income
slide 27
CHAPTER 3
National Income
slide 28
Consumption, C
def: disposable income is total
income minus total taxes: Shows that (Y T ) C YT
CHAPTER 3
National Income
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MPC 1
CHAPTER 3
National Income
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Investment, I
The investment function is I = I (r ),
where r denotes the real interest rate, the nominal interest rate corrected for inflation. The real interest rate is the cost of borrowing the opportunity cost of using ones own funds to finance investment spending. So, r I
CHAPTER 3
National Income
slide 31
CHAPTER 3
National Income
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Government spending, G
G includes government spending on
goods and services.
G =G
and
T =T
CHAPTER 3
National Income
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Y = F (K ,L ) Y = C ( T ) + I (r ) +G Y
The real interest rate adjusts The real interest rate adjusts to equate demand with supply. to equate demand with supply.
CHAPTER 3
National Income
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CHAPTER 3
National Income
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Firms borrow to finance spending on plant & equipment, new office buildings, etc. Consumers borrow to buy new houses.
depends negatively on r , the price
National Income
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The investment curve is also the demand curve for loanable funds.
I (r ) I
CHAPTER 3
National Income
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bank deposits, purchase bonds and other assets. These funds become available to firms to borrow to finance investment spending.
The government may also contribute to
National Income
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Types of saving
private saving = (Y T ) C public saving
= T G
national saving, S
= private saving + public saving = (Y T ) C + = Y C G TG
CHAPTER 3
National Income
slide 39
Examples:
If L = 1 and K = 0, then Y =
MPL. More generally, if K = 0, then (Y ) = Y T , so T C
CHAPTER 3
Y MPL = . L
MPC ( Y T )
slide 40
= MPC Y MPC T
National Income
EXERCISE:
= 10
CHAPTER 3
National Income
slide 41
Answers
S = Y C G = Y 0.8(Y T ) G = 0.2 Y + 0.8 T G
a. S = 100
b. S = 0.8 100 = 80
c. S = 0.2 100 = 20
d. Y = MPL L = 20 10 = 20 , 0
S = 0.2 Y = 0.2 200 = 40.
CHAPTER 3
National Income
slide 42
digression:
When T < G ,
budget deficit = (G T ) and public saving is negative.
When T = G ,
budget is balanced and public saving = 0.
CHAPTER 3
National Income
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percent of GDP
0%
-5%
-10%
CHAPTER 3
National Income
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Fact: In the early 1990s, Fact: In the early 1990s, about 18 cents of every tax about 18 cents of every tax dollar went to pay interest on dollar went to pay interest on the debt. the debt. (Today its about 9 cents.) (Today its about 9 cents.)
CHAPTER 3
National Income
CHAPTER 3
National Income
slide 46
I (r )
Equilibrium level of investment
CHAPTER 3
S, I
National Income
slide 47
CHAPTER 3
National Income
slide 48
curve
3. Use the model to analyze the effects of
each item in 2c .
CHAPTER 3
National Income
slide 49
CHAPTER 3
CASE STUDY
G S
CHAPTER 3
T C S
slide 51
National Income
S2
S1
r2 r1 I (r )
I2 I1
S, I
slide 52
National Income
TG, S, and I are expressed as a percent of GDP All figures are averages over the decade shown.
CHAPTER 3
National Income
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CHAPTER 3
National Income
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CHAPTER 3
National Income
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r2 r1
But the equilibrium level of investment cannot increase because the supply of loanable funds is fixed.
CHAPTER 3
I1
I2
S, I
National Income
slide 56
CHAPTER 3
National Income
slide 57
B A
Investment, Saving, I, S
CHAPTER 3
National Income
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Chapter summary
1. Total output is determined by how much capital and labor the economy has the level of technology 1. Competitive firms hire each factor until its
scale, then labor income plus capital income equals total income (output).
CHAPTER 3
National Income
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Chapter summary
4. The economys output is used for consumption
(which depends on disposable income) investment (depends on the real interest rate) government spending (exogenous)
4. The real interest rate adjusts to equate
the demand for and supply of goods and services loanable funds
CHAPTER 3
National Income
slide 60
Chapter summary
6. A decrease in national saving causes the interest rate
interest rate to rise, but does not affect the equilibrium level of investment if the supply of loanable funds is fixed.
CHAPTER 3
National Income
slide 61
CHAPTER 3
National Income
slide 62