Lecture 1 9 3 Monday September 9 2013 4 13 AM Lecture 1 Int Macro 1 Course Overview 2 Homework a Much more analytical complex than principles a b c d Uploaded onto NYU Classes Probs Sunday or Monday before that week Then need to turn in on Thursday lecture Components i ii 2 recitation questions 2 review questions write yourself 3 Exams a b 2 3 questions from each chapter Non cumulative Chapter 2 Real vs Nominal Variables Price Index 1 Nom Variable Measures value using current market prices Scale of measure Examples i Interest rate 2 Real Variables In relation to a base year Measures value using prices of base year Examples i Real interest rate Most Important Variables In Macro 3 Output Prices Interest Rate a b c Interest a b 4 R i pi Real i i c Inflation d P sub t i ii Calculate inflation i Compensation for delayed gratification Should be able to buy as much as before Price level in year t Inflation is rate of change of price level Inflation 100 x Psub 2012 Psub 2011 Psub 2011 5 Graphical analysis of interest rates Nominal i i b Real r Usually on top i Usually on bottom Difference between two is inflation c GDP 6 a b c a b c e a Int Macro lecture notes Page 1 6 GDP a Nominal GDP i ii Sum of all final output Current price x quantity produced today p price q quantity P price level Y Real GDP Output produced but base year price x quantity produced today iii iv v vi vii Real GDP i ii iii b a b c 7 Price indexes Like a real variable Want to see how prices change over time Examples i CPI i ii Fix basket quantity Change prices for each year ii GDP Deflator Nom GDP Real GDP Fix prices Update quantities i ii iii PCE i ii iii Personal consumption expenditure Updates basket every month Int Macro lecture notes Page 2 Recitation 9 9 Monday September 9 2013 4 13 AM 1 Math Review a Y F K N K alpha N 1 alpha i Fix one the variables to do a partial derivation 2 GDP Calculation Quantity x price a b Nominal i Real i c Growth rate Price from the base year x quantity i Current GDP Base GDP 1 x 100 3 CPI Calculation a b Change price for year keep basket constant Current over base x 100 4 GDP Deflator Calculation a Nom GDP current real GDP current x 100 Int Macro lecture notes Page 3 9 5 ch 3 Production Function C D Saturday September 7 2013 6 13 AM 1 Productivity Output and Employment Outline for lecture a b c d Production Function Demand of Labor Supply of Labor Labour Market Equilibrium 1 a General Assumptions 3 agents i ii iii Individuals Firms Government b 3 markets i ii iii Factors of production GOODS AND SERVICES Assets c Closed markets in Macro econ 2 Production Function All same things in Macro Output Supply Income GDP real vs nominal a b c i Default is real 3 4 The transformation between inputs and outputs Factors a Level of capital K i Primary factor in today s economy b Labor or of workers N Simplifying assume that all adults are in labor force c i Other Z i ii iii Raw materials Land energy 5 Productivity of Factors a Focus on Capital and Labor 6 Functional Form a Y A F K N i A total factor productivity 1 Z disappears into A 7 Production Function for the US Economy a General Form i Y A K alpha N beta Represents production in economy Cobb Douglas C D Production Function b c i Y A x K 3 x N 7 a Ex oil if less reduces productivity of labor and capital 2 Is productivity of both K and N together Int Macro lecture notes Page 4 i ii If all inputs are incremented by certain fraction alpha what happens to output Ex double factory double output i Slope w respect to N Number of workers 1 How much more output can be produced with more labor b Slope w respect to K capital i ii How much more output can be produced with more labor 1st derivative i ii Y A x K 3 x N 7 Version that works for US data 8 Properties of Production Functions a b c Slope Concavity convexity linearity Returns to scale 9 Slope aka MPN or MPK a Marginal Product of Labor c d MPN dy dN Conclusions i ii iii Concavity 10 MPN is 0 then as N up Y up then as N up Y down a b c d Take 2nd derivative d MPN d K d MPN d N What info can we get i ii Diminishing returns If concave up more The Production Function Returns to scale 11 a b c i If both K and N are changed by some factor Results i Constant returns to scale 1 Output will change by lambda if a Alpha beta 1 ii Increasing returns to scale 1 More than lambda a 1 Decreasing returns to scale Less than lambda 1 iii a 1 d e Very often in Macro assume constant returns to scale CRS Constant Returns to Scale Algebraically i F xK XN x F K N f Diminishing returns i ii Curve is a concave function MPN is negative 12 Supply Shocks Shift in production Function Understand shift vs movement a Int Macro lecture notes Page 5 b Int Macro lecture notes Page 6 Ch3 3 9 10 Profit Maximization Tuesday September 10 2013 12 17 PM 1 Qualities of Firms a b c Firms exist to maximize profits Inputs firm output Givens i ii Total factor productivity technology Production Function d Decisions to make i Level of inputs Capital Labor Raw Materials 1 2 3 e Why not produce and sell infinite amount As production increases incur greater costs Diminishing returns set in so profits fall There is a maximum point to the concave function i ii iii Notations 2 3 a b c d e f Profits a b P price level W nominal wage w real wage W P Y real GDP real production real income UC nominal user cost of capital uc real user cost of capital UC P Profit revenue cost Expressed in the macro sense P Y W N UC K Y w N uc K Keep everything in real or nominal terms i ii iii c Wage must be structured and defined i ii Profit maximization for the choice of N For any given K choose N How many worker should a firm hire 1 4 Mathematical Model for profit maximization i ii iii iv Hourly Salary Daily Etc The Question d a 1 ii iii i ii iii Firms are constrained by the production function Constrained optimization Problem Plug in the Y b Use Demand for labor market assumptions i K and A are fixed c First Order Condition foc i ii Basically taking 1st derivative 1st …