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CHAPTER THREE National Income: Where it Comes From and Where it Goes
In this chapter you will learn: ,[object Object],[object Object],[object Object],[object Object],[object Object]
Outline of model ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Factors of production ,[object Object],[object Object]
The production function ,[object Object],[object Object],[object Object],[object Object]
Returns to scale:  a review ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Exercise:  determine returns to scale ,[object Object]
Assumptions of the model ,[object Object],[object Object]
Determining GDP ,[object Object]
The distribution of national income ,[object Object],[object Object],[object Object]
Notation ,[object Object],[object Object],[object Object],[object Object],[object Object]
How factor prices are determined ,[object Object],[object Object],[object Object]
Demand for labor ,[object Object],[object Object],[object Object],[object Object]
Marginal product of labor ( MPL ) ,[object Object],[object Object]
Exercise:  compute & graph MPL ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
answers:
The MPL and the production function Y output L labor MPL 1 1 MPL 1 MPL As more labor is added,  MPL   Slope of the production function equals  MPL
Diminishing marginal returns ,[object Object],[object Object],[object Object],[object Object]
Check your understanding: ,[object Object]
Exercise (part 2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
MPL  and the demand for labor Each firm hires labor  up to the point where  MPL  =  W/P Units of output Units of labor,  L MPL, Labor demand Real wage Quantity of labor demanded
Determining the rental rate ,[object Object],[object Object],[object Object],[object Object],[object Object]
The Neoclassical Theory  of Distribution ,[object Object],[object Object]
How income is distributed: ,[object Object],If production function has constant returns to scale, then  total capital income  = labor income capital income national income
Outline of model ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],DONE    DONE   Next   
Demand for goods & services ,[object Object],[object Object],[object Object],[object Object],[object Object]
Consumption,  C ,[object Object],[object Object],[object Object],[object Object]
The consumption function C Y – T C   ( Y  – T  ) 1 MPC The slope of the consumption function is the MPC.
Investment,  I ,[object Object],[object Object],[object Object],[object Object]
The investment function r I I   ( r   ) Spending on investment goods  is a downward-sloping function of the real interest rate
Government spending,  G ,[object Object],[object Object],[object Object]
The market for goods & services ,[object Object]
The loanable funds market ,[object Object],[object Object],[object Object],[object Object],[object Object]
Demand for funds:  Investment ,[object Object],[object Object],[object Object]
Loanable funds demand curve The investment curve is also the demand curve for loanable funds. r I I   ( r   )
Supply of funds:  Saving ,[object Object],[object Object],[object Object]
Types of saving ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Notation:     =  change in a variable ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
EXERCISE:  Calculate the change in saving ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Answers
digression:  Budget surpluses and deficits ,[object Object],[object Object],[object Object]
The U.S. Federal Government Budget
The U.S. Federal Government Debt Fun fact:   In the early 1990s, nearly 18 cents of every tax dollar went to pay interest on the debt.    (Today it’s about 9 cents.)
Loanable funds supply curve National saving does not depend on  r ,  so the supply curve is vertical. r S, I
Loanable funds market equilibrium r S, I I   ( r   ) Equilibrium real interest rate Equilibrium level of investment
The special role of  r ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Eq’m in L.F. market Eq’m in goods market
Digression:  mastering models ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Mastering the loanable funds model ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
CASE STUDY The Reagan Deficits ,[object Object],[object Object],[object Object],[object Object]
1.  The Reagan deficits , cont. I 1 2. …which causes the real interest rate to rise… I 2 3. …which reduces the level of investment. 1. The increase in the deficit reduces saving… r S, I I   ( r   ) r 1 r 2
Are the data consistent with these results? ,[object Object],[object Object],[object Object],[object Object],[object Object],T – G ,  S , and  I  are expressed as a percent of GDP All figures are averages over the decade shown.
Now you try… ,[object Object],[object Object],[object Object],[object Object]
Mastering the loanable funds model ,[object Object],[object Object],[object Object],[object Object],[object Object]
An increase in investment demand ,[object Object],r 1 r S, I I 1 I 2 r 2 … raises the interest rate. But the equilibrium level of investment cannot increase because the supply of loanable  funds is fixed.
Saving and the interest rate ,[object Object],[object Object],[object Object],[object Object]
An increase in investment demand when saving depends on the interest rate
Chapter summary ,[object Object],[object Object],[object Object],[object Object],[object Object]
Chapter summary ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Chapter summary ,[object Object],[object Object]

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MACROECONOMICS-CH3

  • 1. CHAPTER THREE National Income: Where it Comes From and Where it Goes
  • 2.
  • 3.
  • 4.
  • 5.
  • 6.
  • 7.
  • 8.
  • 9.
  • 10.
  • 11.
  • 12.
  • 13.
  • 14.
  • 15.
  • 17. The MPL and the production function Y output L labor MPL 1 1 MPL 1 MPL As more labor is added, MPL  Slope of the production function equals MPL
  • 18.
  • 19.
  • 20.
  • 21. MPL and the demand for labor Each firm hires labor up to the point where MPL = W/P Units of output Units of labor, L MPL, Labor demand Real wage Quantity of labor demanded
  • 22.
  • 23.
  • 24.
  • 25.
  • 26.
  • 27.
  • 28. The consumption function C Y – T C ( Y – T ) 1 MPC The slope of the consumption function is the MPC.
  • 29.
  • 30. The investment function r I I ( r ) Spending on investment goods is a downward-sloping function of the real interest rate
  • 31.
  • 32.
  • 33.
  • 34.
  • 35. Loanable funds demand curve The investment curve is also the demand curve for loanable funds. r I I ( r )
  • 36.
  • 37.
  • 38.
  • 39.
  • 41.
  • 42. The U.S. Federal Government Budget
  • 43. The U.S. Federal Government Debt Fun fact: In the early 1990s, nearly 18 cents of every tax dollar went to pay interest on the debt. (Today it’s about 9 cents.)
  • 44. Loanable funds supply curve National saving does not depend on r , so the supply curve is vertical. r S, I
  • 45. Loanable funds market equilibrium r S, I I ( r ) Equilibrium real interest rate Equilibrium level of investment
  • 46.
  • 47.
  • 48.
  • 49.
  • 50. 1. The Reagan deficits , cont. I 1 2. …which causes the real interest rate to rise… I 2 3. …which reduces the level of investment. 1. The increase in the deficit reduces saving… r S, I I ( r ) r 1 r 2
  • 51.
  • 52.
  • 53.
  • 54.
  • 55.
  • 56. An increase in investment demand when saving depends on the interest rate
  • 57.
  • 58.
  • 59.

Notas do Editor

  1. To the instructor: This is a particularly important chapter for your students to master. Many subsequent chapters in this book develop models that incorporate the material in this chapter and build on it. Your students should know at the outset that the time they invest mastering this chapter will yield returns throughout the semester by making subsequent material much easier to learn. Also: This PowerPoint presentation introduces some notation that will be used throughout the remaining chapters. In particular, the use of  to denote the change in a variable, and the use of arrows as shorthand for increase, decrease, and causality. The slides that introduce this notation have accompanying notes for the instructor (in the same place as the notes you are reading now). I’ve included several in-class exercises to break up the lecture and to provide immediate reinforcement of the concepts. If you wish, you can “hide” them from your presentation, perhaps assigning them as homework exercises. Near the end of the chapter, there are two hidden slides showing how the loanable funds model is different when saving depends on the real interest rate.