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CHAPTE
R
National Income:
Where it Comes From
and Where it Goes
K = capital:
tools, machines, and structures used in
production
L = labor:
the physical and mental efforts of
workers
denoted Y = F(K, L)
shows how much output (Y ) the economy can
produce from
K units of capital and L units of labor
reflects the economys level of technology
exhibits constant returns to scale
F (K , L) KL
F (zK , zL) (zK )(zL)
z 2KL
z 2 KL
z KL
constant returns to
z F (K , L)
scale for any z > 0
CHAPTER 3 National Income slide 7
Example 2
F (K , L) K L
F (zK , zL) zK zL
z K z L
z K L
decreasing
z F (K , L) returns to scale
for any z > 1
F (K , L) K 2 L2
z 2 K 2 L2
increasing returns
z F (K , L)
2
to scale for any
z>1
F (K , L) K L
F (zK , zL) zK zL
z (K L)
z F (K , L) constant returns to
scale for any z > 0
K K and LL
Y F (K , L)
WW ==nominal
nominalwage
wage
RR ==nominal
nominalrental
rentalrate
rate
PP ==price
priceofofoutput
output
W
W/P/P ==real
realwage
wage
(measured
(measuredininunits
unitsofofoutput)
output)
RR/P
/P ==real
realrental
rentalrate
rate
10
50
8
40
6
30
20 4
10 2
0 0
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Labor (L) Labor (L)
Slope of the
MP
L production function
equals MPL
1
L
labo
CHAPTER 3 National Income r slide 22
Diminishing marginal returns
a) F (K , L) 2K 15L
b) F (K , L) KL
c) F (K , L) 2 K 15 L
MPL,
Labor
demand
Units of labor, L
Quantity of labor
demanded
equilibrium
real wage MPL,
Labor
demand
L Units of labor, L
equilibrium
R/P MPK,
demand for
capital
K Units of capital, K
Y MPL L MPK K
Labors
Labors share
share of
of income
income
is
is approximately
approximately constant
constant over
over time.
time.
(Hence,
(Hence, capitals
capitals share
share is,
is, too.)
too.)
C (Y T )
YT
I
(r )
I
Aggregate supply: Y F (K , L)
Equilibrium: Y = C (Y T ) I (r ) G
I
(r )
I
private saving = (Y T ) C
public saving = T G
national saving, S
= private saving + public saving
= (Y T ) C + TG
= Y C G
S Y C G Y 0.8(Y T ) G
0.2 Y 0.8 T G
a. S 100
b. S 0.8 100 80
c. S 0.2 100 20
d. Y MPL L 20 10 200,
S 0.2 Y 0.2 200 40.
CHAPTER 3 National Income slide 50
digression:
Budget surpluses and deficits
If T > G, budget surplus = (T G )
= public saving.
If T < G, budget deficit = (G T )
and public saving is negative.
If T = G , balanced budget, public saving = 0.
The U.S. government finances its deficit by
issuing Treasury bonds i.e., borrowing.
National
National saving
saving
does
does not
not
depend
depend on on r,
r,
so
so the
the supply
supply
curve
curve is
is vertical.
vertical.
S, I
Equilibrium real
interest rate
I (r )
Equilibrium level S, I
of investment
G S T C S
3.
3. which
which reduces
reduces I (r )
the
the level
level of
of I2 I1 S, I
investment.
investment.
CHAPTER 3 National Income slide 60
Are the data consistent with these
results?