SIUE ECON 302 - Building Blocks of the Flexible-Price Model

Unformatted text preview:

CHAPTER 6QuestionsSlide 3Full-Employment AnalysisFlexible-Price ModelThe Production FunctionFigure 6.1 - The Production FunctionSlide 8Slide 9Table 6.1 - Classical Flexible-Price versus Keynesian Sticky-Price AnalysesThe Labor MarketSlide 12Slide 13Slide 14Slide 15Figure 6.2 - The Firm’s Output as a Function of the Firm’s EmploymentSlide 17Slide 18Slide 19Figure 6.3 - The Typical Firm’s Hiring PolicySlide 21Slide 22Slide 23Figure 6.4 - Equilibrium in the Labor MarketSlide 25Slide 26Slide 27Figure 6.5 - In a Full-Employment Economy, Real GDP Equals Potential OutputDomestic SpendingFigure 6.6 - The Four Components of Spending Add Up to Real GDPConsumption SpendingFigure 6.7 - From National Income to Consumption SpendingSlide 33Slide 34Figure 6.8 - Other Determinants of Consumption SpendingSlide 36Figure 6.9 - The Consumption FunctionSlide 38Investment SpendingSlide 40Slide 41Figure 6.10 - The Investment FunctionSlide 43Slide 44Government PurchasesFigure 6.11 - Government Purchases, Transfer Payments, and TaxesInternational TradeFigure 6.12 - Gross Exports, Imports, and Net ExportsGross ExportsFigure 6.13 - Gross U.S. Exports and the Real Exchange Rate, 1980-1990Slide 51Figure 6.14 - The J-Curve in the 1980sGross ImportsNet ExportsThe Exchange RateFigure 6.15 - Greed and Fear in Foreign Exchange MarketsSlide 57Slide 58Chapter SummarySlide 60Slide 61Slide 62Slide 63Slide 64Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-1CHAPTER 6Building Blocks of the Flexible-Price ModelCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-2Questions•What is a full-employment analysis?•What keeps the economy at full employment when wages and prices are flexible?•What determines the level of consumption spending?•What determines the level of investment spending?Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-3Questions•What determines the level of net exports?•What determines the level of the exchange rate?Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-4Full-Employment Analysis•We will now look at the economy over the short-run–a period in which its productive resources are fixed•We will assume that wages and prices are flexible so that all markets clear–supply equals demand in the labor market–full-employment analysisCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-5Flexible-Price Model•Two sets of factors determine the levels of potential output and real wages–the production function–the balance of supply and demand in the labor marketCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-6The Production Function•Potential output (Y*) is determined by–the size of the labor force (L)–the economy’s capital stock (K)–the efficiency of labor (E)–a parameter indicating how quickly returns to investment diminish ()1(LE)(K)Y*Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-7Figure 6.1 - The Production FunctionCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-8Flexible-Price Model•The assumption that wages and prices are flexible was commonly made by “classical” economists•Thus, this assumption is often called the classical assumption–guarantees that markets work–guarantees full employment–guarantees that actual output is equal to potential outputCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-9Flexible-Price Model•The flexible-price assumption is not always a good one–a market economy does not always produce full employment•The “Keynesian” model assumes that wages and prices are sticky–this will be covered in Section III of text•The Classical assumption simplifies the analysis of the economyCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-10Table 6.1 - Classical Flexible-Price versus Keynesian Sticky-Price AnalysesCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-11The Labor Market•Assume there are K identical firms–each firm owns one unit of the economy’s capital stock–each firm hires L workers and pays them the same wage W–each firm sells Y units of output at a per-unit price of P–no firm has control over the price it receives or the wage it pays•these are determined by the marketCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-12The Labor Market•To determine how many workers to hire, the firm follows two rules–hire workers to boost output–stop hiring when the extra revenue from the output hired by the last worker just equals his or her wageCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-13The Labor Market•The value of the output produced by the last worker hired is the product price (P) multiplied by the marginal product of labor (MPL)•The cost of hiring the last worker is his or her wage (W)•The firm will keep hiring until0W-MPLP Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-14The Labor Market•The marginal product of labor is the difference between what the firm can produce with its current labor force (Lfirm) and what it could produce if it hired one more worker•At its current labor force, the output of the firm will be)LF(1,YfirmfirmCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-15The Labor Market•Therefore, the marginal product of labor (MPL) must be equal to)LF(1,1)LF(1,MPLfirmfirmCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-16Figure 6.2 - The Firm’s Output as a Function of the Firm’s EmploymentCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-17The Labor Market•Using the Cobb-Douglas form of the production function1111)(LE)(K1)(LE)(KMPLfirmfirmfirmfirm•Since Kfirm=11111)(LE(1)1)(LE(1)MPLfirmfirm])L(1)[(LEMPL111firmfirmCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.6-18The Labor Market•The term in the brackets is a growth rate of a variable raised to a power])L(1)[(LEMPL111firmfirm)(L1)(1])L(1)[(Lfirmfirmfirm11)(L)E(1MPLfirm1Copyright © 2002 by The McGraw-Hill Companies, Inc.


View Full Document

SIUE ECON 302 - Building Blocks of the Flexible-Price Model

Download Building Blocks of the Flexible-Price Model
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Building Blocks of the Flexible-Price Model and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Building Blocks of the Flexible-Price Model 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?