National Income: Determination and Distribution, Study notes of Physical Education and Motor Learning

Download National Income: Determination and Distribution and more Study notes Physical Education and Motor Learning in PDF only on Docsity! 1 C H A P T E R National Income: Where it Comes  From and Where it Goes 3 3‐1 Total Production of Goods & Services 3‐2 Distribution of National Income Across Factors 3‐3 Demand for Goods & Services 3‐4 Equilibrium: Supply/Demand for Goods &  Services In this chapter, you will learn… what determines the economy’s total output/income how the prices of the factors of production are  determined how total income is distributed slide 1CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory         what determines the demand for goods and services how equilibrium in the goods market is achieved Outline of model A closed economy, market‐clearing model Supply side factor markets (supply, demand, price) determination of output/income slide 2CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Demand side determinants of C, I, and G Equilibrium goods market loanable funds market Factors of production K =  capital:  tools, machines, and structures used in  production l b slide 3CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory L =  a or:  the physical and mental efforts of workers The production function denoted  Y = F(K,L) shows how much output (Y ) the economy can  produce from K units of capital and L units of labor slide 4CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory               reflects the economy’s level of technology   exhibits constant returns to scale Returns to scale:  A review Initially   Y1 = F (K1 ,L1 )   Scale all inputs by the same factor z: K2  = zK1    and  L2  = zL1   ( if 1 25 th ll i t i d b 25%) slide 5CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory e.g.,   z =  . ,  en a   npu s are  ncrease   y  What happens to output, Y2 = F (K2,L2 )?   If constant returns to scale, Y2 = zY1 If increasing returns to scale, Y2 > zY1 If decreasing returns to scale, Y2 < zY1 2 Example 1 ( , )F K L KL= ( , ) ( )( )F zK zL zK zL= z KL= 2 slide 6CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory z KL= 2 z KL= ( , )z F K L= constant returns to scale for any z > 0 Example 2 ( , )F K L K L= + ( , )F zK zL zK zL= + z K z L= + slide 7CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory ( , )z F K L= decreasing returns to scale for any z > 1 ( )z K L= + Example 3 ( , )F K L K L= +2 2 ( , ) ( ) ( )F zK zL zK zL= +2 2 slide 8CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory ( , )z F K L= 2 increasing returns to scale for any z > 1 ( )z K L= +2 2 2 Now you try… Determine whether constant, decreasing, or  increasing returns to scale for each of these  production functions: ( ) K 2 slide 9CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory a (b) ( , )F K L K L= + ( , )F K L L = Answer to part (a) ( , ) KF K L L = 2 ( )( , ) zKF zK zL zL = 2 slide 10CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory z K zL = 2 2 Kz L = 2 ( , )z F K L= constant returns to scale for any z > 0 Answer to part (b) ( , )F K L K L= + ( , )F zK zL zK zL= + ( )z K L+ slide 11CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory = ( , )z F K L= constant returns to scale for any z > 0 5 Exercise (part 2) Suppose W/P = 6.   d. If L = 3, should firm hire more or  less labor?  Why?   e If L 7 should firm hire more or L Y MPL 0 0 n.a. 1 10 10 2 19 9 3 27 8 4 34 7 slide 24CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory .   =  ,            less labor?  Why?   5 40 6 6 45 5 7 49 4 8 52 3 9 54 2 10 55 1 MPL and the demand for labor Each firm hires labor up to the point where MPL = W/P. Units of output Real wage slide 25CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Units of labor, L MPL, Labor demand Quantity of labor demanded The equilibrium real wage The real wage adjusts to equate labor demand with supply. Units of output Labor supply slide 26CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Units of labor, L MPL, Labor demand equilibrium real wage L Determining the rental rate We have just seen that  MPL = W/P. The same logic shows that  MPK = R/P : diminishing returns to capital:  MPK↓ as K ↑ TheMPK curve is the firm’s demand curve slide 27CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory               for renting capital.   Firms maximize profits by choosing K such that MPK = R/P .   The equilibrium real rental rate The real rental rate adjusts to equate demand for capital with supply. Units of output Supply of capital slide 28CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Units of capital, K MPK, demand for capital equilibrium R/P K The Neoclassical Theory  of Distribution states that each factor input is paid its marginal  product is accepted by most economists slide 29CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory 6 How income is distributed: total labor income  = If production function has constant returns to total capital income = W L P MPL L= × R K P MPK K= × slide 30CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory scale, then Y MPL L MPK K= × + × labor income capital income national income The ratio of labor income to total income in  the U.S. 0.6 0.8 1Labor’s share of total income slide 31CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory 0 0.2 0.4 1960 1970 1980 1990 2000 Labor’s share of income is approximately constant over time. (Hence, capital’s share is, too.) The Cobb‐Douglas Production Function The Cobb‐Douglas production function has constant  factor shares: α = capital’s share of total income: capital income = MPK x K = α Y slide 32CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory              labor income  =  MPL x L =  (1 – α )Y The Cobb‐Douglas production function is: where A represents the level of technology. 1Y AK L −= α α The Cobb‐Douglas Production Function Each factor’s marginal product is proportional to its  average product: 1 1 YMPK AK L K − −= =α α αα slide 33CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory (1 )(1 ) YMPL AK L L − −= − =α α αα Outline of model A closed economy, market‐clearing model Supply side factor markets (supply, demand, price) determination of output/income DONE DONE slide 34CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Demand side determinants of C, I, and G Equilibrium goods market loanable funds market Next Demand for goods & services Components of aggregate demand: C =  consumer demand for g & s I =  demand for investment goods slide 35CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory G =  government demand for g & s (closed economy: no NX ) 7 Consumption, C def:  Disposable income is total income minus total  taxes:    Y – T. Consumption function:  C = C (Y – T ) Shows that ↑(Y – T ) ⇒↑C slide 36CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory def:  Marginal propensity to consume (MPC) is the  increase in C caused by a one‐unit increase in  disposable income. The consumption function C C (Y –T ) slide 37CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Y – T 1 MPC The slope of the consumption function is the MPC. 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 slide 38CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory the cost of borrowing  the opportunity cost of using one’s own funds  to finance investment spending. So,  ↑r ⇒↓I The investment function r Spending on investment goods depends negatively on the real interest rate. slide 39CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory I I (r ) Government spending, G G = govt spending on goods and services.   G excludes transfer payments  (e.g., social security benefits,  unemployment insurance benefits) slide 40CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory     . Assume government spending and total taxes are  exogenous: and G G T T= = The market for goods & services Aggregate demand: Aggregate supply: − + +( ) ( )C Y T I r G = ( , )Y F K L slide 41CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Equilibrium: The real interest rate adjusts  to equate demand with supply. − + + = ( ) ( )Y C Y T I r G 10 Loanable funds market equilibrium r ( )S Y C Y T G= − − − Equilibrium real slide 54CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory S, I I (r ) interest rate Equilibrium level of investment The special role of r r adjusts to equilibrate the goods market and the  loanable funds market simultaneously:   If L.F. market in equilibrium, then Y – C – G = I slide 55CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Add (C +G ) to both sides to get Y = C + I + G (goods market eq’m) Thus,  Eq’m in L.F. market Eq’m in goods market⇔ Digression: Mastering models To master a model, be sure to know: 1. Which of its variables are endogenous and which  are exogenous. 2 For each curve in the diagram know slide 56CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory .           ,  a. definition b. intuition for slope c. all the things that can shift the curve 3. Use the model to analyze the effects of each item in  2c. Mastering the loanable funds model Things that shift the saving curve public saving   fiscal policy:  changes in G or T private saving slide 57CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory   preferences tax laws that affect saving –401(k) – IRA – replace income tax with consumption tax CASE STUDY:   The Reagan deficits Reagan policies during early 1980s: increases in defense spending:  ΔG > 0 big tax cuts:  ΔT < 0 B th li i d ti l i slide 58CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory o  po c es re uce na ona  sav ng: ( )S Y C Y T G= − − − G S↑ ⇒ ↓ T C S↓ ⇒ ↑ ⇒ ↓ CASE STUDY:   The Reagan deficits r 1S r2 2 which causes 1. The increase in the deficit reduces saving… 2S slide 59CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory S, I I (r ) r1 I1 . … the real interest rate to rise… I2 3. …which reduces the level of investment. 11 Are the data consistent with these results? variable 1970s 1980s T – G –2.2 –3.9 S 19.6 17.4 slide 60CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory r 1.1 6.3 I 19.9 19.4 T–G, S, and I are expressed as a percent of GDP All figures are averages over the decade shown. Now you try… Draw the diagram for the loanable funds model.   Suppose the tax laws are altered to provide more  incentives for private saving.  (Assume that total tax revenue T does not change) slide 61CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory What happens to the interest rate and investment?   Mastering the loanable funds model,  continued Things that shift the investment curve some technological innovations  to take advantage of the innovation,  firms must buy new investment goods slide 62CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory           tax laws that affect investment investment tax credit An increase in investment demand An increase  in desired  investment… r S r r2 …raises the interest rate. slide 63CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory S, I I1 I2 1 But the equilibrium level of investment cannot increase because the supply of loanable funds is fixed. Saving and the interest rate Why might saving depend on r ? How would the results of an increase in investment  demand be different? slide 64CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Would r rise as much? Would the equilibrium value of I change? An increase in investment demand when  saving depends on r r ( )S r r An increase in investment demand raises r, which induces an slide 65CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory S, I I(r) I(r)2 r1 2increase in the quantity of saving, which allows I to increase. I1 I2 12 Chapter Summary Total output is determined by the economy’s quantities of capital and labor the level of technology C titi fi hi h f t til it i lompe ve  rms  re eac   ac or un   s marg na   product equals its price.   If the production function has constant returns to  scale, then labor income plus capital income equals  total income (output). slide 66 CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Chapter Summary A closed economy’s output is used for consumption investment government spending  The real interest rate adjusts to equate  the demand for and supply of goods and services loanable funds slide 67 CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory Chapter Summary A decrease in national saving causes the interest rate  to rise and investment to fall.   An increase in investment demand causes the  interest rate to rise but does not affect the      ,            equilibrium level of investment  if the supply of loanable funds is fixed.  slide 68 CHAPTER 3   National Income         ECON 100A: Intermediate Macro Theory