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Ec4004 Lecture17
1.
Markets, Prices, Supply &
Demand 1 EC4004 Lecture 17 Dr S. Kinsella
2.
3.
National Income Accounting
Y=C+I+G+X-M
4.
National Income Accounting
Y=C+I+G+X-M Solow k* = k*[ s, A, n, δ, L(0) ] (+) (+) (−) (−)(0)
5.
National Income Accounting
Y=C+I+G+X-M Solow k* = k*[ s, A, n, δ, L(0) ] (+) (+) (−) (−)(0) Barro Model
6.
The Macroeconomy is the
sum of Supply and Demand in Individual Markets
7.
Today 1. Recap 2. Equilibrium
in the Markets 1. Goods 2. Rental 3. Bonds 4. Money 3. Consumption, Saving, and Investment
8.
Household Behaviour
9.
10.
Markets in the Macroeconomy
7
11.
Markets in the Macroeconomy Assuming that households perform all of the func7ons in the economy.
7
12.
Markets in the Macroeconomy Assuming that households perform all of the func7ons in the economy. Each household runs a family business and uses labour, L, and capital, K, to produce goods, Y, through the produc7on func7on.
7
13.
Markets in the Macroeconomy Assuming that households perform all of the func7ons in the economy. Each household runs a family business and uses labour, L, and capital, K, to produce goods, Y, through the produc7on func7on.
7
14.
Markets in the Macroeconomy Assuming that households perform all of the func7ons in the economy. Each household runs a family business and uses labour, L, and capital, K, to produce goods, Y, through the produc7on func7on.
Y= A· F( K, L) 7
15.
Markets in the Macroeconomy
8
16.
Markets in the Macroeconomy The Goods Market
8
17.
Markets in the Macroeconomy The Goods Market Households sell all the goods they produce on a goods market. Then households buy back from this market the goods that they want.
8
18.
Markets in the Macroeconomy The Goods Market Households sell all the goods they produce on a goods market. Then households buy back from this market the goods that they want. Household buys goods for
8
19.
Markets in the Macroeconomy The Goods Market Households sell all the goods they produce on a goods market. Then households buy back from this market the goods that they want. Household buys goods for
• consumption. 8
20.
Markets in the Macroeconomy The Goods Market Households sell all the goods they produce on a goods market. Then households buy back from this market the goods that they want. Household buys goods for
• consumption. to increase the stock of goods in the form of capital used for produc7on, called investment. 8
21.
Consumption
22.
Markets in the Macroeconomy
10
23.
Markets in the Macroeconomy Labour Market
10
24.
Markets in the Macroeconomy Labour Market Households supply labour on a labour market.
10
25.
Markets in the Macroeconomy Labour Market Households supply labour on a labour market. Assume quan7ty supplied, Ls, is a constant, L.
10
26.
Markets in the Macroeconomy
11
27.
Markets in the Macroeconomy The Rental Market
11
28.
Markets in the Macroeconomy The Rental Market Each household rents out all of the capital it owns on a rental market.
11
29.
Markets in the Macroeconomy The Rental Market Each household rents out all of the capital it owns on a rental market. Capital offered on the rental market is the supply of capital services, Ks.
11
30.
Markets in the Macroeconomy The Rental Market Each household rents out all of the capital it owns on a rental market. Capital offered on the rental market is the supply of capital services, Ks. Assume have Ks = K.
11
31.
Markets in the Macroeconomy
12
32.
Markets in the Macroeconomy The Bond Market
12
33.
Markets in the Macroeconomy The Bond Market A borrowing household receives a loan from another household. A lending household provides a loan to another household.
12
34.
Markets in the Macroeconomy The Bond Market A borrowing household receives a loan from another household. A lending household provides a loan to another household. A household making loan gets a piece of paper called a bond.
12
35.
Markets in the Macroeconomy The Bond Market A borrowing household receives a loan from another household. A lending household provides a loan to another household. A household making loan gets a piece of paper called a bond. Call the market on which households borrow or lend the bond market.
12
36.
Markets in the Macroeconomy The Bond Market A borrowing household receives a loan from another household. A lending household provides a loan to another household. A household making loan gets a piece of paper called a bond. Call the market on which households borrow or lend the bond market.
12
37.
Markets in the Macroeconomy The Bond Market A borrowing household receives a loan from another household. A lending household provides a loan to another household. A household making loan gets a piece of paper called a bond. Call the market on which households borrow or lend the bond market. The holder of a bond, the lender, has a claim to the amount owed by the borrower.
12
38.
Money as a Medium of Exchange
13
39.
Money as a Medium of Exchange Assume exchanges in markets use a single medium of exchange.
13
40.
Money as a Medium of Exchange Assume exchanges in markets use a single medium of exchange.
MONEY 13
41.
Money as a Medium of Exchange Assume exchanges in markets use a single medium of exchange.
MONEY 13
42.
Markets in the Macroeconomy
14
43.
Markets in the Macroeconomy Sum of individual holdings of money equals the aggregate quan7ty of money in the economy.
14
44.
Markets in the Macroeconomy Sum of individual holdings of money equals the aggregate quan7ty of money in the economy.
14
45.
Markets in the Macroeconomy Sum of individual holdings of money equals the aggregate quan7ty of money in the economy. The total money held by all households must end up equaling this constant.
14
46.
Markets and Prices
15
47.
Markets and Prices The Goods Market
15
48.
Markets and Prices The Goods Market The price in this market, denoted by P, expresses the number of euros that exchange for one unit of goods. We call P the price level.
15
49.
Markets and Prices
16
50.
Markets and Prices The Goods Market
16
51.
Markets and Prices The Goods Market –Y= A· F( K, L)
16
52.
Markets and Prices The Goods Market –Y= A· F( K, L) Since all of these goods are sold on the goods market, the variable Y
will also represent the 16
53.
Markets and Prices The Goods Market –Y= A· F( K, L) Since all of these goods are sold on the goods market, the variable Y
will also represent the Quan7ty of goods per year sold and bought on the goods market. 16
54.
Markets and Prices The Goods Market –Y= A· F( K, L) Since all of these goods are sold on the goods market, the variable Y
will also represent the Quan7ty of goods per year sold and bought on the goods market. The quan7ty PY is the euro value per year of the goods bought and sold on the goods market. 16
55.
Markets and Prices
17
56.
Markets and Prices The Goods Market
17
57.
Markets and Prices The Goods Market For sellers of goods, the price level, P, is the number of euros obtained for each unit of goods sold.
17
58.
Markets and Prices The Goods Market For sellers of goods, the price level, P, is the number of euros obtained for each unit of goods sold. For buyers, P is the number of euros paid per unit of goods.
17
59.
Markets and Prices The Goods Market For sellers of goods, the price level, P, is the number of euros obtained for each unit of goods sold. For buyers, P is the number of euros paid per unit of goods. Since P euros buy 1 unit of goods, €1 buys 1/P
units of goods. 17
60.
Markets and Prices
18
61.
Markets and Prices The Goods Market
18
62.
Markets and Prices The Goods Market The expression 1/P is the value of €1 in terms of the goods that it buys.
18
63.
Markets and Prices The Goods Market The expression 1/P is the value of €1 in terms of the goods that it buys. –M
euros exchange for 18
64.
Markets and Prices The Goods Market The expression 1/P is the value of €1 in terms of the goods that it buys. –M
euros exchange for ( M) · ( 1/ P) = M/ P 18
65.
Markets and Prices The Goods Market The expression 1/P is the value of €1 in terms of the goods that it buys. –M
euros exchange for ( M) · ( 1/ P) = M/ P An expression like M/P is in real terms, in units of goods, whereas a quan7ty like M is in euro or nominal terms. 18
66.
Markets and Prices
19
67.
Markets and Prices The Labour Market
19
68.
Markets and Prices The Labour Market Households buy and sell labour in the labour market at the euro or nominal wage rate, w.
19
69.
Markets and Prices The Labour Market Households buy and sell labour in the labour market at the euro or nominal wage rate, w. The real
wage rate is w/P. 19
70.
Markets and Prices
20
71.
Markets and Prices The Rental Market
20
72.
Markets and Prices The Rental Market Households rent out capital, K, for euros at the euro or nominal rental price, R
20
73.
Markets and Prices The Rental Market Households rent out capital, K, for euros at the euro or nominal rental price, R A household that rents the amount of capital Kd
pays the nominal amount RKd per year and then gets to use the capital as an input to produc7on. 20
74.
Markets and Prices The Rental Market Households rent out capital, K, for euros at the euro or nominal rental price, R A household that rents the amount of capital Kd
pays the nominal amount RKd per year and then gets to use the capital as an input to produc7on. The real rental price is R/P. 20
75.
Markets and Prices
21
76.
Markets and Prices The Labour Market
21
77.
Markets and Prices The Labour Market Households buy and sell labour in the labour market at the euro or nominal wage rate, w.
21
78.
Markets and Prices The Labour Market Households buy and sell labour in the labour market at the euro or nominal wage rate, w. The real
wage rate is w/P. 21
79.
Markets and Prices
22
80.
Markets and Prices The Bond Market
22
81.
Markets and Prices The Bond Market Each unit of bonds commits the borrower to repay €1 to the holder of the bond. This €1 is the principal of each bond.
22
82.
Markets and Prices The Bond Market Each unit of bonds commits the borrower to repay €1 to the holder of the bond. This €1 is the principal of each bond. The principal is the ini7al amount advanced on a loan.
22
83.
Markets and Prices The Bond Market Each unit of bonds commits the borrower to repay €1 to the holder of the bond. This €1 is the principal of each bond. The principal is the ini7al amount advanced on a loan. All bonds have very short maturity,
22
84.
Markets and Prices
23
85.
Markets and Prices The Bond Market
23
86.
Markets and Prices The Bond Market Each unit of bonds commits the borrower to pay the holder a flow of interest payments of €i per year.
23
87.
Markets and Prices The Bond Market Each unit of bonds commits the borrower to pay the holder a flow of interest payments of €i per year. The variable i is
the interest rate, which is the ra7o of the interest payment, €i, to the principal €1. 23
88.
Markets and Prices The Bond Market Each unit of bonds commits the borrower to pay the holder a flow of interest payments of €i per year. The variable i is
the interest rate, which is the ra7o of the interest payment, €i, to the principal €1. The interest rate, i, can vary over 7me. 23
89.
Next Time
90.
Next Time Construc7ng the Budget Constraint
91.
Next Time Construc7ng the Budget Constraint Inter‐temporal Consump7on
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