National Income: Where it Comes From and Where it Goes - - PDF document

1

CHAPTER 3 CHAPTER 3

National Income National Income

Topic 3:

National Income: Where it Comes From and Where it Goes

• Introduction

Introduction

• The Neoclassical model

The Neoclassical model

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Neoclassical model Neoclassical model

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Financial Market Goods Market Labor Market Households Government Firms

saving borrowing borrowing consumption government spending investment production work hiring

Three Markets Three Markets – Three agents Three agents Neoclassical model Neoclassical model

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Neoclassical model Neoclassical model

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• Neoclassical model

Neoclassical model

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Part 1: Supply in goods market: Part 1: Supply in goods market: Production Production

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The production function The production function

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• Returns to scale

Returns to scale

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Exercise: Exercise: determine returns to scale determine returns to scale

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Assumptions of the model Assumptions of the model

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Determining GDP Determining GDP

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Part 2: Equilibrium in the factors market Part 2: Equilibrium in the factors market <

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Demand in factors market Demand in factors market

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Demand in factors market Demand in factors market

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• Demand in factors market

Demand in factors market

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Demand in the factors market Demand in the factors market

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Marginal product of labor ( Marginal product of labor (MPL MPL)

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Diminishing marginal returns Diminishing marginal returns

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MPL with calculus MPL with calculus

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MPL as a derivative MPL as a derivative

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Derivative as marginal product Derivative as marginal product

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• Return to firm problem: hiring L

Return to firm problem: hiring L

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Firm problem continued Firm problem continued

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Real wage Real wage

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• Example: deriving labor demand

Example: deriving labor demand

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Labor demand continued Labor demand continued

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E 7

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− − −

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E 7

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→ +

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• Labor market equilibrium

Labor market equilibrium

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• MPL

MPL and the demand for labor and the demand for labor

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Determining the rental rate Determining the rental rate

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How income is distributed: How income is distributed:

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• Euler’s theorem:

Euler’s theorem:

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Mathematical example Mathematical example

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1 + 3 !3"&3 013"α

α α α 3#2α α α α

013α

α α α "α α α α 32α α α α #2α α α α

013α

α α α 32α α α α "α α α α #2α α α α

03x 1"α

α α α #2α α α α

03x !"&#

Mathematical example continued Mathematical example continued

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Outline of model Outline of model

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Demand for goods & services Demand for goods & services

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Consumption, Consumption, 5

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The consumption function The consumption function

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Consumption function cont. Consumption function cont.

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Investment, Investment, 6

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The investment function The investment function

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Government spending, Government spending, 7 7

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The market for goods & services The market for goods & services

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• The loanable funds market

The loanable funds market

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JK

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Demand for funds: Investment Demand for funds: Investment

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Loanable funds demand curve Loanable funds demand curve

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• Supply of funds: Saving

Supply of funds: Saving

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Types of saving Types of saving

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B) C 7 4

EXERCISE: EXERCISE:

Calculate Calculate the change in saving the change in saving

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∆ ∆ ∆7 4#EE

∆

∆ ∆ ∆) 4#EE

Answers Answers

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∆ = ∆ = = ∆ − ∆ − ∆ = ,,, 5 7

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digression: digression:

Budget surpluses and deficits Budget surpluses and deficits

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• > 0)47

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Loanable funds supply curve Loanable funds supply curve

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• Loanable funds market equilibrium

Loanable funds market equilibrium

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6.* . *

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) 7 = − − − Equilibrium real interest rate Equilibrium level

• f investment

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The special role of The special role of r

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CHAPTER 3 CHAPTER 3

National Income National Income

slide 58

Algebra example Algebra example

+2

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C 4 C 4

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C 50.4,-. 2) C 60; . C 70&)0

Algebra example continued Algebra example continued

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.0.4,-..24 2.4 .0..; . 0///// &60 ; .<,.0////// 50 .4,-..2 0//////

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Mastering the loanable funds model Mastering the loanable funds model

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CASE STUDY CASE STUDY

The Reagan Deficits The Reagan Deficits

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CHAPTER 3 CHAPTER 3

National Income National Income

slide 62

• 1. The Reagan deficits
• 1. The Reagan deficits, cont.

, cont.

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• 2. …which causes

the real interest rate to rise…

• 3. …which reduces

the level of investment.

• 1. The increase in

the deficit reduces saving…

22

Chapter summary Chapter summary

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Chapter summary Chapter summary

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• Chapter summary

Chapter summary

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