Ch 5 Urban Economic Growth Wednesday October 16 2013 3 25 PM 1 2 Economic growth w in a cluster Income or GDP of a town a b i GDP P Q Local Production Function q q k l r t Capital Labor Natural resources Technology 1 2 3 4 c i ii Suppose change in one city s utility curve Utility will equalize 1 Conclusion a b Cannot reap full benefits of gains Other towns will gain as well 3 Multiplier process Export goods a Steel cars wine b Local goods Consumed locally c Exogenous growth i i i All growth caused by increase in exports Increase in Round 1 Round 2 Round 3 Total after 3 rounds After infinite rounds Local income 600 360 1 960 2 500 1 000 initial impulse 600 360 216 1176 d Local Consumption assume 60 Imports consumed 400 240 144 784 1500 1000 e f M marginal propensity to consume locally Income change formula Urban Econ lecture notes Page 1 f Income change formula g Income multiplier i i 4 Urban Labor Market Labor Demand a i ii Labor Demand slopes down Picture 1 Output effect a W up cost up market reach down Q down Ldown 2 Substitution effect a Marginal rate of substitution i ii iii iv v Positive slope of Q curve Falls as you substitute x for y Values of x expressed in terms of y Mux Muy y x Budget Constraint Like PPF C x px y px y c py px py x i ii iii iii Slope is flat if 1 Easy to substitute K for L a Opposite of substitutes are complements 2 Output effect is strong a Labor cost to total cost i If labor has large share flat slope b Price elasticity of demand i If price elasticity is high slope is flat iv Suppose two inputs capital and labor 1 If K L are partial substitutes Downward sloping labor demand Picture 2 If K L are perfect complements Vertical sloping labor demand Observe SE effect Picture 3 If K L are perfect substitutes None or all one thing picture Shift in Labor Demand Curves a b 1 Demand for exports changes v a More workers for more production b a b a b c 2 Labor Supply Curve MPN changes b i Suppose the supply curve slopes up 1 2 High Opportunity cost for leisure if wage is higher For a spouse a b Is w down then they stay at home If W up then work to employ a baby sitter two jobs are created Implies that at low wage they will work less which is counter intuitive to reality 3 Urban Econ lecture notes Page 2 3 Implies that at low wage they will work less which is counter intuitive to reality ii iii The supply curve may be vertical Assumptions 1 2 The supply curves of a single group slopes up The L R aggregate supply in one country is vertical a Example to show i ii Factory produces Real Beer and Light Beer Employs 40 workers each has MPN 4 beers day Case 1 Price Workers Output iii Case 2 change in price Price Workers Output RB LB RB LB 2 2 5 2 5 20 20 2 38 80 80 160 8 152 160 iv Causality between wage and Ls Output doesn t change iv 1 W up Ls up a What causes what More Ls means more people N v 1 Higher cost of housing rent e H N 35 as H responds to N a b If N rises by 30 H rises by 30x 35 10 5 i ii Higher cost of living a e CPI N Shifts in labor supply 2 vi 1 2 3 Environmental quality climate nature Taxes fees Public services infrastructure c Equilibrium S D i ii Markets clear Elasticity 1 Inelastic a b Elastic a b 2 iii Taxes 1 2 Does not respond to change in variable Vertical How much it responds to change in variable Horizontal The vertical distance or wage Resulting deadweight loss can be insignificant if S D are very inelastic Urban Econ lecture notes Page 3 2 Resulting deadweight loss can be insignificant if S D are very inelastic 3 Two iii 4 Example a Land Tax i ii S curve is vertical very inelastic there is a set amount of land Buyer pays same amount One P Pt taxes amount to the government b Inelastic Labor Demand i ii Sellers workers still have same pay Buyers pay wt differential to government Urban Econ lecture notes Page 4 ii Buyers pay wt differential to government iv Under what circumstances can Ld be vertical One Two If Labor and capital are perfect substitutes or complements no deadweight loss iv Labor Equilibrium a Employment Multiplier i ii y x 1 1 n Assumes fixed ratio between y and jobs iii iii 1 2 Assumes all prices stay the same Implies the Ls curve is horizontal iv y x 200 000 50 000 4 1 But this fails to recognize that is there is growth prices change Urban Econ lecture notes Page 5 2 One v Limitations to the multiplier 1 2 The larger the region the larger the multiplier Assumes constant input prices One And therefore constant input coefficients First Unrealistic because firms substitute all the time in response to price changes 3 Assumes that all growth is export driven but there is also endogenous growth b Shifts in Labor Supply i ii iii iv Environmental qualities climate nature Taxes fees Public services infrastructure Examples 1 Pollution Tax Two Three Four Ld shifts left as firm must pay taxes on top of the wage Ls shifts right as more people will work for a lower wage Wage falls due to increase in number of people as they move to city due to tax Urban Econ lecture notes Page 6 to city due to tax 5 a b c Urban Growth in Input Output Tables Shows inter industrial relations Shows who buys from who Columns i Rows i Inputs money spent The buying industry d e c 6 Input coefficient Tables a b Converted from Input output Tables Percentage of industry specific input spending for a producer as a percentage of the firm s total spending Urban Econ lecture notes Page 7 Ch6 Land Rents and Prices Saturday November 2 2013 12 16 AM 1 Market Value of Land a Net Present Value NPV i Land value is the sum of all discounted future income streams iii Draw out time line For land t is basically infinite i NPV R i 1 if t is infinite and R is constant NPV R Can find interest rate If less than or equal to 20 should buy the property according to the NY times d Real world data i ii iii iv Housing prices constant Rents change Ratio has fallen but interest rates down NPV R 1 i Is i and R stay constant why is NVP different Expected rent in the future 1 2 1 2 v R expected rent If R R NPV R Up If …