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Week 3: Interest rates, productivity

by: Emmaroseglaser

Week 3: Interest rates, productivity Econ3020

Marketplace > Tulane University > Economcs > Econ3020 > Week 3 Interest rates productivity
Intermediate Macroeconomics
Antonio Bojanic

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About this Document

These notes we go over the fisher equation, as well as an introduction to productivity and the Cobbs-Douglas function
Intermediate Macroeconomics
Antonio Bojanic
Class Notes
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This 3 page Class Notes was uploaded by Emmaroseglaser on Saturday September 19, 2015. The Class Notes belongs to Econ3020 at Tulane University taught by Antonio Bojanic in Fall 2015. Since its upload, it has received 96 views. For similar materials see Intermediate Macroeconomics in Economcs at Tulane University.


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Date Created: 09/19/15
Week 3 Interest Rates The price for lending money or the cost of borrowing money Real interest rate adjusted for in ation our focus Exante real interest rates real interest rate adjusted for expected changes in prices 0 The most commonly used form Expost real interest rate real interest rate adjusted for actual changes in price level Fisher Equation or i nominal interest rate r real interest rate can be less than zero e expected average in ation 0 Nominal can be high and real can be low in cases of hyperin ation ie 2 year loan 73 averages 6 between the 2 years and nominal interest rate is 4 2 4 6 negative interest rates are good for the borrower because he owes less so The returned amount has 2 less purchasing power of the money that was lent Productivity Why are some countries richer than others Factors of production Labor number of hours it takes one person to produce a given level of output 0 Assumes quantity of hours worked is constant Capital All structures equipment transportation used to produce goods 0 Measured in constant prices L quantity of labor K all capital used 0 K and L are fixed and being used to their full extent Production function CobbDouglas production function Y F K L AKxLx 1 A Total factor productivity x percent of national income 1 Developed countries can produce more with same amount of K and L because of A 2 The share of K in national income is stable b Because US capital is 30 and labor is 70 of economy A Solow residual how well does a country use K amp L Defining Income Per Capita Y AK3 L7 Ak3 k Y k L L L3 L y per capita income Example Country k k3 A y Ak3 income per capita USA 1 1 1 1 Japan 114 104 69 71 So Japan has 14 more capital per worked than the US 0 More access to technology or software 4 higher income per capita if we were equally productive Japan is 31 less productive than the US They have 71 as much income per worker than the US Therefore But So Cobb Douglas Production Function 1 Display constant returns to scale a If you increase input by an amount output will increase by same amount 2 Diminishing marginal product a Each additional factor of production contributes less and less to total production i Productivity increases at decreasing rate One of the factors of production must remained fix See graphs on notes to calculate slope through graph d Be able to calculate with derivatives 96 1 Labor is equal to 100 and productivity is equal to 2 ii Y 2K393100397 simplify iii Y 5K3 Take the derivative iv 3 x 5Kquot7 bring the negative exponent down 393 Multiply and divide by Y V K 7 3X5Y v1 5K3XK7 s1mp11fy vii 393 y K Productivity shocks K and L don t change but A does Can be positive or negative 1 Technological shocks new inventions positive 2 Environmental shocks natural disasters negative 3 Energy shocks increase energy prices negative a Less limitations on energy increase Negative shocks a output decreases b marginal productivity decreases c production function shifts downward Positive shocks a output increases b marginal productivity increases c production function shifts upward


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