- HW #4 due on April 9th- don’t graph by hand, use excel- Read chapter 10 for WednesdayLong run economic growth (continued) Remember from last lecture: if the quantity of labor or capital rises, so will real GDP; as real GDP rises, labor productivity falls and capital productivity rises Supply of labor: ideas for shifting SL to the right- Change tax rates: lowering income tax rates shifts SL to the right (because getting a greater percentage of the money you earn encourages you to work)- Change in government transfer programs: lowering unemployment compensation, welfare, etc. will encourage people to enter the labor market (because these programs deter people from working)- Change in population: increasing immigration shifts SL to the righto Rightward shift in DL curveSL Wage ratesDL’DLL2L1Q of labor Labor productivity falls (because with fixed K and technology, more workers share K) DL shifts due to:- Change in incentives for hiring and training workers (greater incentives make people want to hire more workers)- Change in incentives to hire certain workers (such as disabled people, veterans, etc.) U.S. experience since WWII: - W/P has increased (the real wage rate) and so has labor- Economic growth due to change in capital stock: K increases (see next page)Real GDP, or YAggregate productionfunction BY2AY1L2L1Q of laboro Labor productivity rises (because there is a greater output/worker; this leads to a rise in the standard of living)o Capital productivity as K increases: Capital productivity falls (there are less workers per machine as K increases)- Increase in capital stock, considering investment and depreciationReal GDP, or YAggregate production function 2 (K2 and tech are constant)Y2BAggregate production function 1 (K1 and tech are constant)AY1K1 < K2L1Q of LReal GDP, or YAggregate productionfunction (L and tech. are constant)BY2AY1K2K1Q of Ko Investment: spending on productive physical capital or on inventories (e.g. new dorms, new rec facilities, Wisconsin Institute for Discovery, etc.)o Depreciation: the wearing out of capital over time (e.g. desks wear out over time)o For an increase in capital, investment > depreciationo How do we increase investment?- To analyze investment spending, we can look at the loanable funds frameworko This is the market for funds that can be lent outo There are borrowers (spenders, people making investments) and lenders (savers)o To increase I1, shift S or D to the rightInterest rateSLF (lenders)i1DLF (borrowers)Q of loanable fundsI1 = S1 =
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