Week 4 notes: factor prices and savings and investment
Week 4 notes: factor prices and savings and investment Econ3020
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This 5 page Class Notes was uploaded by Emmaroseglaser on Sunday September 20, 2015. The Class Notes belongs to Econ3020 at Tulane University taught by Antonio Bojanic in Fall 2015. Since its upload, it has received 67 views. For similar materials see Intermediate Macroeconomics in Economcs at Tulane University.
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Date Created: 09/20/15
Week 4 Determining Factor prices wage rate price at which one rents machinery 1 Assume perfect competition We can do this because while income has risen in the US over the past 6 decades shares of the income have remained 7O 30 Firms don t in uence prices Firms are price takers use set wages Labor unions don t in uence wages Work in long run all people are employed and all factors utilized 9962 2 What is economic profit Profit revenue costs rental wage Revenue PYF K L Capital rental RK Labor wage WL 1 Nominal profit PYF K L RK WL 2 Real Profit n PYFK39LP RK WL or FKL EK gL TC real rental price Nominal rental price Price level or g w real wage rate Nominal wage rate Price level or g 3 Determining how much to purchase hire When the wage is equal to the marginal product of labor or capital Graphically o The slope of the marginal product increases then decreases 0 We want to hire rent at the time where it is at its peak 0 At this point the slope is zero I Calculate derivative and set slope zero Derivative o DnDL DYDL w I Or MPL w 0 MPL w When marginal productivity equals the wage o SAME FOR CAPITAL BUT WITH rc instead of wage 4 Deriving a market for factors of production The price is set because of perfect competition Supply is vertical because in the long run all fo the capital and labor is used up 000 Week 4 39 i fc Si x quot quot quot Lxmb V f 521 1C S a 6 r i x a a E Z q s eutmkwr MW ma wumwawmww m4 ue A M gt3 L i E L l a N e a H mwl swmww a a Excess supply will lead to lower wages or rental costs pushing to equilibrium Excess demand will lead to higher rental prices or wages pushing to equilibrium 5 How do we distribute income real labor income I o MPL w to maximize profits o MPL 7 L equation for marginal product labor in US 0 I 70 of national income goes towards labor real capital income I 0 rc MPK to maximize profits 0 MP 3 K equation for marginal product capital in US 0 I 30 of national income goes towards labor National income real labor income real capital income 0 labor income share wLy 39 7yy I 7 0 Capital income share rCKy 39 3yy I 3 o This makes sense because capital is 30 of national income and labor is 70 Week 4 TEST LIKE QUESTIONS 1 and 2 1 Period Growth rate of real Growth rate labor wages productivity 19591973 23 29 19731995 7 14 19952009 16 31 Explain why the growth rate of labor happens Real wages are equal to marginal productivity of labor when maximizing profit Therefore as growth rate labor productivity goes up or down real wages will do the same 2 The US has an oil crisis During this time real wages and stock market decline Explain these events LOOK AT GRAPHS IN NOTES Real wages As prices for oil goes up this produces a negative productivity shock The production function decreases so the marginal productivity of labor will decrease as well This will result in the demand for labor to decrease As demand for labor decreases so do real wages Stock Market Similarly as the production function decreases due to higher oil prices the marginal productivity of capital will decrease This decreases the demand for capital and therefore the price of shares in a company will decrease All of the reduced prices of shares result in a decline in the stock market Savings and Investment Background When we discuss a country we focus on the GDP However this does not show enough For example if you have a person with a huge amount of student debt but is earning a salary they will add positively to the GDP On the other hand you have an unemployed person whose parents developed a large savings account for them they do not account for GDP Based on GDP alone the person with debt looks better However they are not actually better off US private savings 10 and US budget public savings have been declining for a long time 0 There s a direct connection between savings and wealth 0 Income 9 savings 9 investment 9 wealth Private Savings Sp disposable income Yd Consumption c Yd GDP y net taxes T o Yd YT Private savings rate Amount of disposable income is put in savings Week 4 Government Savings 5g Net taxes T government expenditures G o G consumption expenditures short term investments long term 0 GCGQ I Issue it is too hard to classify government spending as long term or short term so we combine them as one G When government spending is greater than taxes we run a deficit National Savings S Sp Sg National savings rate How government tries to increase savings 1 Tax consumption if we tax what you spend you will spend less a Issue this only happens on a state wide level so other country s value addedquot tax is more beneficial i Value added tax we tax the money created when we take the difference of the price the producer sells for and the cost it takes him to produce 2 1974 Individual Retirement Account IRA incometax free savings on retirement The taxless investment encourages people to use it a Issue if people are going to save their money they re probably rich and don t need this taxbreak 3 2003 Capital gains tax lowered if we reduce this investment on things like housing will go up a Capital gains if someone buy something for 50 then sells it for 100 they are taxed on the 50 gain i Issue the only people able to make gains are rich or large banks 4 Balance the budget to fix deficit we need to either raise taxes or cut spending a Issue democrats won t cut spending and republicans won t raise taxes How will savings be utilized SY C G YCIGNX 0 Uses of savings identity I Identity both sides of equation must be equal 0 Net capital out ow identity o 81 net capital out ow o NX trade balance Uses of savings identity S I NX Week 4 How savings are allocated 1 Investment 2 Net exports if we have extra savings we will obtain foreign assets If we save in these two ways wealth will rise Net Capital Out ow Identity S I NX If S is greater than I we will use the savings to buy foreign assets money will ow out of the US 0 Net capital out ow If I is greater than S we have to borrow money from other countries to fun excess investment 0 Net capital in ow
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