Lecture - 18 WK 11

EC4004 Lecture 18
Markets & The Macroeconomy
Dr Stephen Kinsella
Today
Households
Recap
Constructing the BC
SULIS Test:
Opens Friday 2pm
Closes Friday 2pm
SULIS Test:
Opens Friday 2pm
Closes Friday 2pm
Exam:
Friday 12 Dec 4pm
PE HALL/GYM
SULIS Test:
Opens Friday 2pm
Closes Friday 2pm
Exam:
Friday 12 Dec 4pm
PE HALL/GYM
Extra Lecture Wk 13
Thursday 12-1
Concert Hall
086 399 83 06
Labour: L (w)
Households
Capital: K (r)
Products
Profit=
PY-(wL+rK)
Products
Bonds
Profit=
iB
PY-(wL+rK)
Products
Bonds
Profit=
iB
PY-(wL+rK)
Labour
w/P*Ls
Products
Bonds
Profit=
iB
PY-(wL+rK)
Capital Labour
r/P - δ w/P*Ls
Constructing the Budget Constraint
Quantities and prices determined on four

markets will determine household income.


Total sources of funds must equal the total uses

of funds.


of funds.


of funds.
This equality is the household budget

constraint.
Income
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Income
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Income
Profits
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Income
Profits
Households earn profit—an excess of revenue over costs—
from their business activities.
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Income
Profits
• Y= A· F( Kd, Ld )
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Income
Profits
• Y= A· F( Kd, Ld )
π = PY − (wLd+ RKd)
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Income
Profits
• Y= A· F( Kd, Ld )
π = PY − (wLd+ RKd)
π = P A· F( Kd, Ld ) − ( wLd+ RKd)
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Income
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Income
Wage income
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Income
Wage income
If households supply the quantity of labour Ls to the labour
market, they receive the nominal wage income of wLs per year.
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Income
Wage income
If households supply the quantity of labour Ls to the labour
market, they receive the nominal wage income of wLs per year.
Quantity of labour supplied is the fixed amount L, so nominal
wage income is wL.
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Income
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Income
Rental income
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Income
Rental income
If households supply the quantity of capital Ks to the rental
market they receive the nominal rental income of RKs per year.
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Income
Rental income
If households supply the quantity of capital Ks to the rental
market they receive the nominal rental income of RKs per year.
Since households supply all of their available capital, K, to the
rental market, so that Ks = K, the nominal rental income is RK.
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Income
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Income
Rental income
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Income
Rental income
The quantity δK of capital disappears each year.
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Income
Rental income
The euro value of this lost capital is P· δK.
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Income
Rental income
• net nominal rental income= nominal rental income−
value of depreciation
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Income
Rental income
• net nominal rental income = RK − δ P K
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Income
Rental income
• net nominal rental income = (R/ P)·P K − δ P K
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Income
Rental income
• net nominal rental income = (R/ P)·P K − δ P K
• net nominal rental income= ( R/ P − δ) · P K
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Income
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Income
Rental income
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Income
Rental income
• rate of return on owning capital= R/ P − δ
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Income
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Income
Interest Income
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Income
Interest Income
If a household’s nominal bond holdings are B, the flow of
nominal interest income received is iB per year.
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Income
Interest Income
If a household’s nominal bond holdings are B, the flow of
nominal interest income received is iB per year.
Since B equals zero for the whole economy, we have that the
total of interest income equals zero.
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18
• Total income
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• Total income
–Household nominal income= nominal profit +
nominal wage income + nominal net rental income
+ nominal interest income
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• Total income
–Household nominal income= nominal profit +
nominal wage income + nominal net rental income
+ nominal interest income
–Household nominal income = π + wL + (R/P − δ) ·
PK + iB
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Consumption
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Consumption
Households consume goods in the quantity C per year at
price= P
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Consumption
Households consume goods in the quantity C per year at
price= P
–Household nominal consumption= P C
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Assets
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Assets
Households hold assets in three forms:
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Assets
money, M;
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Assets
money, M;
bonds, B;
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Assets
money, M;
bonds, B;
ownership of capital, K.
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Assets
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Assets
Assume households hold a fixed amount of money in
euro terms.
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Assets
euro terms.
We assume that the change over time of a household’s
nominal money holdings is zero
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Assets
euro terms.
We assume that the change over time of a household’s
nominal money holdings is zero
∆M=0
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Assets
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Assets
In considering whether to hold assets as bonds or
capital, households would compare the rate of return on
bonds, the interest rate, I, with the rate of return on
ownership of capital, R/P − δ.
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Assets
Rate of return on bonds= rate of return on ownership
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Assets
Rate of return on bonds= rate of return on ownership
i = R/ P − δ
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• Household nominal income=
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• Household nominal income=
π + wL + i · ( B+ P K )
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Household Budget Constraint
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–nominal value of assets= M+ B+ P K
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–nominal saving to be the change over time in the
nominal value of assets.
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– nominal saving= (∆nominal assets)
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– nominal saving= (∆nominal assets)
= ∆M + ∆B + P·∆K
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25
25
–nominal saving= nominal income− nominal
consumption
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consumption
– nominal saving= π + wL + i · ( B+ P K ) − P C
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consumption
– nominal saving= π + wL + i · ( B+ P K ) − P C
∆B + P ·∆K = π + wL + i·( B+ PK ) − P C
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Household Budget Constraint in Nominal Terms
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– PC + ∆B + P·∆K = π + wL + i·( B+ P K )
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– PC + ∆B + P·∆K = π + wL + i·( B+ P K )
nominal consumption + nominal saving = nominal income
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Household Budget Constraint real terms
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– C + ( 1/ P)·∆B+ ∆K = π/ P + ( w/P)·L + i·(B/P+K)
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– C + ( 1/ P)·∆B+ ∆K = π/ P + ( w/P)·L + i·(B/P+K)
consumption + real saving = real income
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28
Clearing of the Markets for Labour and
Capital Services
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Capital Services
Profit Maximization
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Capital Services
Profit Maximization
Real Profit
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Capital Services
Profit Maximization
Real Profit
π/P = A·F(Kd,Ld) − (w/P) · Ld − (R/P) · Kd
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Capital Services
Profit Maximization
Real Profit
• real profit= output
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Capital Services
Profit Maximization
Real Profit
• real profit= output
−real wage payments−real rental payments
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Capital Services
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Capital Services
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Capital Services
The Labour Market
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Capital Services
The Labour Market
Demand for labour
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Capital Services
The Labour Market
Demand for labour
∆(π/P) = ∆[ A·F( Kd, Ld) ] − w/ P
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Capital Services
The Labour Market
Demand for labour
∆(π/P) = ∆[ A·F( Kd, Ld) ] − w/ P
= MPL − w/P
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Capital Services
The Labour Market
Demand for labour
∆(π/P) = ∆[ A·F( Kd, Ld) ] − w/ P
= MPL − w/P
• change in real profit= marginal product of labour− real
wage rate
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Capital Services
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Capital Services
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Capital Services
Supply of labour
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Capital Services
Supply of labour
We are assuming that each household supplies a fixed
quantity of labour to the labour market.
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Capital Services
Supply of labour
We are assuming that each household supplies a fixed
quantity of labour to the labour market.
Therefore, the aggregate or market supply of labour, Ls,
is the given amount L.
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Capital Services
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Capital Services
Clearing of the labour market
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Capital Services
–w/P is determined to equate the aggregate quantity of
labour demanded, Ld, to the aggregate quantity
supplied, L.
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Capital Services
supplied, L.
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Capital Services
supplied, L.
( w/ P)* = MPL ( evaluated at L)
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Capital Services
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Capital Services
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Capital Services
The Market for Capital Services
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Capital Services
Demand for capital services
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Capital Services
∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P
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Capital Services
∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P
= MPK − R/P
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Capital Services
∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P
= MPK − R/P
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Capital Services
∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P
= MPK − R/P
• change in real profit=
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Capital Services
∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P
= MPK − R/P
• change in real profit=

marginal product of capital− real rental price
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Capital Services
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Capital Services
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Capital Services
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Capital Services
Supply of capital services
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Capital Services
For the economy as a whole, the aggregate quantity of capital, K,
is given from past flows of investment.
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Capital Services
For the economy as a whole, the aggregate quantity of capital, K,
is given from past flows of investment.
In the short run, the aggregate or market quantity of capital
services supplied, Ks, equals K.
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Capital Services
39
Capital Services
39
Capital Services
Clearing of the market for capital services
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Capital Services
• R/P will be determined to clear the market—that is, so
that the aggregate quantity of capital services supplied, K,
equals the aggregate quantity demanded, Kd
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Capital Services
• R/P will be determined to clear the market—that is, so
that the aggregate quantity of capital services supplied, K,
equals the aggregate quantity demanded, Kd
(R/P)* = MPK( evaluated at K)
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Capital Services
40
Capital Services
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Capital Services
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Capital Services
The interest rate
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Capital Services
The interest rate
• i = R/P − δ
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Capital Services
The interest rate
• i = R/P − δ
• rate of return on bonds=
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Capital Services
The interest rate
• i = R/P − δ
rate of return on ownership of capital
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Capital Services
The interest rate
• i = R/P − δ
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Capital Services
The interest rate
• i = R/P − δ
• i = MPK ( evaluated at K) − δ
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Capital Services
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Capital Services
Profit in Equilibrium
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Capital Services
π/P = A· F(K,L) − (w/P)·L − ( R/P)· K
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Capital Services
π/P = A· F(K,L) − (w/P)·L − ( R/P)· K
• w/P = MPL
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Capital Services
π/P = A· F(K,L) − (w/P)·L − ( R/P)· K
• w/P = MPL
• R/P = MPK
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Capital Services
π/P = A· F(K,L) − (w/P)·L − ( R/P)· K
• w/P = MPL
• R/P = MPK
π/P = A· F(K, L) − MPL· L − MPK· K
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Next Time: Business
Cycles
Read Barro, Cht 8

EC4004 Lecture 18
Markets & The Macroeconomy
Dr Stephen Kinsella

Lecture - 18 WK 11

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Lecture - 18 WK 11

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Copyright:

Verfügbare Formate

EC4004 Lecture 18

Markets & The Macroeconomy

Quantities and prices determined on four

Quantities and prices determined on four

Quantities and prices determined on four

Total sources of funds must equal the total uses

Quantities and prices determined on four

Total sources of funds must equal the total uses

Quantities and prices determined on four

Total sources of funds must equal the total uses

This equality is the household budget

( w/ P)* = MPL ( evaluated at L)

• change in real profit=

• change in real profit=

Read Barro, Cht 8

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