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Lecture Notes on National Income and GDP - Intermediate Macroeconomics | ECON 3820, Study notes of Macroeconomics

Tennessee Technological University (TTU)Macroeconomics

Class Notes 1-22-2015 Material Type: Notes; Class: Intermediate Macroeconomics; Subject: ECON Economics; University: Tennessee Tech University; Term: Spring 2015;

Typology: Study notes

2014/2015

Uploaded on 01/31/2015

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bg1
2015-01-22
Wednesday, January 28, 2015
5:25 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 (long-run)?
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 can't 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 = f(K,L) when Y = GDP
GDP is a function of Capital and Labor
(GDP = income)
Also:
|Y = f(|K, |L)
Also:
zY = f(zK, 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
pf3
pf4

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Download Lecture Notes on National Income and GDP - Intermediate Macroeconomics | ECON 3820 and more Study notes Macroeconomics in PDF only on Docsity!

Wednesday, January 28, 2015 5:25 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 (long-run)? 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 can't 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 = f(K,L) when Y = GDP GDP is a function of Capital and Labor (GDP = income) Also: |Y = f(|K, |L) Also: zY = f(zK, 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 owner's 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 = W/P. 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 = R/P Where R/P is the real rental rate.

  1. The Cobb-Douglass Production Function Labor and Capital's share in income is approximately 70/30. This is fairly consistent, with some fluctuation. I can't figure out how to do greek letters so I'll put those in parentheses. The function: Y = F(K,L) = A * K(alpha)^ * L1-(alpha) Where A is some constant that measures productivity of technology. This class uses partial derivatives to solve the equation.

Businesses tend to borrow more when interest rates are low and vise versa, ceteris paribus (not sure on spelling of that). So there is a negative relationship between interest rates and borrowing. Government purchases: Wages of government workers as well as purchase of goods and services However, Transfer payments (such as food stamps), indirectly affect consumption, so they are not included in this category. If G>T, there is a budget deficit If G<T, there is a gudget surplus. For now, we will assume that G and T are fixed, so that is represented by |G and |T. End of lecture.