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Intermediate Macroeconomics

by: Pink Rath IV

Intermediate Macroeconomics ECON 3820

Marketplace > Tennessee Tech University > Economcs > ECON 3820 > Intermediate Macroeconomics
Pink Rath IV
GPA 3.54


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This 3 page Class Notes was uploaded by Pink Rath IV on Wednesday October 21, 2015. The Class Notes belongs to ECON 3820 at Tennessee Tech University taught by Staff in Fall. Since its upload, it has received 63 views. For similar materials see /class/225705/econ-3820-tennessee-tech-university in Economcs at Tennessee Tech University.


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Date Created: 10/21/15
20150122 Wednesday January 28 2015 525 PM Chapter 3 National income and GDP 1 What Determines DGP Q What is GDP A GDP is the expenditures on FINAL goods and services over a given period of time Based on circular flow diagram sometimes spending income GDP can represent total income In this chapter we are using the classical theory of economics LR not SR Q what determines GDP in the LR longrun A Factors of production and the production function The factors of production are Capital K and Labor L Capital refers to things that are used to make other things not money Assumptions a Labor Capital and technology are fixed When a factor is fixed it is shown with the letter with a bar on top I can39t figure out how to do this for typing so I will use this symbol next to the letter instead K K L L b Resources are fully utilized and there is no slack in the economy B The Production Function Y fKL when Y GDP GDP is a function of Capital and Labor G DP income ZY fzK ZL Which means That if z is equal to an increase of equal of all factors of production then GDP as well as income are increased by that amount as well 2 How is Income Distributed to the Factors of Production How much do workers and owners receive 1 Factor prices are amounts paid to factors or production Some important symbols to remember P Prices firms sell output for W Nominal wage of workers R Nominal rental rate for capital So what determines the price of a product Supply and Demand Important formula to remember Profit PY W X L R X K Or in simpler terms Profit Revenue Expenses PY is revenue W X L is expenses for workers R X K is owner39s salaries Firms will use specific amounts of L and K to maximize profits Marginal Product of Labor When we study economics we often speak in terms of the marginal this marginal that etc It simply means speaking in terms of the next unit of whatever you are working with With MPL we are speaking about an extra additional output some firm gets from one extra unit of labor assumption K P X MPL revenue brought by the next unit of labor W cost brought by the next unit of labor Firms will continue hiring until MPL WP Or in English as long as the revenues meet or exceed the cost of hiring an additional worker the firm will continue to hire Marginal Product of Capital MPK The same idea for MPL applies to capital So MPK X P Revenue generated from utilizing an additional unit of Capital assumption L Efficient Capital usage is when MPK RP Where RP is the real rental rate 3 The CobbDouglass Production Function Labor and Capital39s share in income is approximately 7030 This is fairly consistent with some fluctuation I can39t figure out how to do greek letters so I39ll put those in parentheses The function Y HK L A Kaphal LHalphal Where A is some constant that measures productivity of technology This class uses partial derivatives to solve the equation MPL K DydI 1alpha A K H39Pha39 Lla39Pha39 This is where I got lost MPL K 1alpha YL MPL x L 1alpha YGDP For MPK L Dydk alpha A WWquot1 Lila39Pha MPK alpha YK MPKX K alpha YGDP Alpha is aproximately 03 Marginal product of Capital is aproximately 30 of GDP 4 What Determines Demand The four components of GDP Consumption C Investment I Government Purchases G Net Exports NX Right now we are focusing on a closed economy so we will not deal with NX So in this model Y C I G Disposable income YTaxes Consumption cYT where c MPC Marginal propensity to consume Remember that MPC MP5 1 Investment Is Private spending on capital goods Investment function I Ir Where r to the real interest rate


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