Endogenous Growth Models

Size: px
Start display at page:

Download "Endogenous Growth Models"

Transcription

1 Endogenous Growth Models Lorenza Rossi Goethe University

2 Endogenous Growth Theory Neoclassical Exogenous Growth Models technological progress is the engine of growth technological improvements are automatic and unmodeled (exogenous) Endogenous Growth Models Try to explain the engine of growth It is important to understand the economic forces underlying technological progress

3 Endogenous Growth and Learning IDEA: Capital accumulation embeds technological improvements (Arrow 1962 =)Romer 1982) Firms production function Y (i) = AK (i) α L (i) 1 α where A is the Total Factor Productivity (TFP). Technology A depends on Capital Stock. The higher the capital stock the more the economy is able to use new technologies A = BK 1 α where K is the aggregate level of capital stock and B is the learning factor (positive externality). Imposing symmetry across rms and substituting in the production function, we get the aggregate production function Y = BKL 1 α

4 Endogenous Growth and Learning Assuming that population L is constant and equal to 1. Then, the aggregate production function becomes, Y = BK This production function is characterized by constant return to scale. The marginal productivity of capital is constant and equal to the average productivity of capital and is B. The low of motion of capital is K = sy hence the growth rate of capital is K K = s Y K given that Y K = B =constant, K is positive. K = Ẏ Y dk d = sb d. If sb > d =) the growth rate

5 Endogenous Growth and Learning NOTICE!!!! IMPORTANT!! The rate of growth of A is Ȧ A = (1 K α) K = (1 α) (sb d) Contrary to the Solow model, the rate of growth of technology depends on the rate of growth of capital. At the same time technology a ects capital. Growth is an endogenous process. No transitional dynamics An increase in savings means that the growth rate increases permanently.

6 Endogenous Growth and Learning How to introduce a transitional dynamics Suppose that A = B 0 + B 1 K 1 α then Y = B 0 K α + B 1 K and the rate of growth of capital K K = sb 0K α 1 + sb 1 d the rate of growth of K is decreasing in K and converges to sb 1 d.

7 Endogenous Growth and Learning Endogenous growth plus transitional dynamics

8 Endogenous Growth and Learning Human capital and Endogenous Growth (Lucas 1988). The production function Y = K α (AL) 1 α where A = H human capital increases labor productivity, with L = 1 Y = K α H 1 α

9 Endogenous Growth and Learning De ne s K as the amount of GDP spend for capital accumulation. For simplicity and without loss of generality, we now assume that the capital depreciation rate is d = 0. Hence, K = s K Y = s K K α H 1 α De ne s H as the amount of GDP spent for human capital accumulation. Ḣ = s H Y = s H K α H 1 α

10 Endogenous Growth and Learning De ne γ = H K. substituting in the low of motion of capital and dividing by K K K = s K γ 1 α Similarly Consider that Ḣ H = s H γ α γ γ = Ḣ H Ḣ If H > K K =) γ K γ > 0 and γ increases. If γ increases K increases, while Ḣ H reduces, so that γ γ decreases. On the contrary if Ḣ H < K K =) γ γ while Ḣ K K < 0 and γ decreases. If γ decreases K K H increases, so that γ γ Ḣ H = K K and γ γ = 0. decreases, increases. The process stops only when

11 Endogenous Growth and Learning If γ γ = 0, then γ is equal to its steady state value, which is obtained taking Ḣ/H K /K = s H γ α s K γ 1 α = 1 solving for γ γ = s H s K Substituting this value in the low of motion of physical and human capital K = s α K K s1 H α = Ḣ H

12 Endogenous Growth and Learning The GDP growth rate is hence in the steady state of γ Ẏ Y = α K K + (1 Ẏ = s α Y α) Ḣ H K s1 H α

13 Barro s model of Endogenous Growth with Government Spending and Taxation Barro (1990) suggests a simple endogenous growth model with government. In the Barro model public spending goes for public investment (infrastructures, schools, sanitation etc.). Public investments, which are nanced through income taxes, complement private investments. Since public investments raise the productivity of private investments, higher taxes can be associated with an increase or a decrease in overall growth.

14 Barro s model of Endogenous Growth with Government Spending and Taxation The model. Barro (1990) adds public spending to the Romer AK model. Y = BK 1 α G α where G = τy substituting into the production function Y = K 1 α (τy ) α solving for Y where B (τ) = B 1 1 α Y = B 1 1 α τ 1 α α τ α 1 α K = B (τ) K

15 Barro s model of Endogenous Growth with Government Spending and Taxation The low of motion of capital Then, K = s (1 τ) Y dk K K = s (1 τ) B (τ) d = s (1 τ) B 1 1 α τ 1 α α thus if s (1 τ) B (τ) > d =) K K > 0 Which is the e ect of taxation on growth? The economy faces a La er Curve Which is the optimal tax rate, i.e. the tax rate maximizing growth? We consider two models. 1) a model with exogenous savings; 2) A model with endogenous savings (Ramsey approach) d

16 Barro s model and the La er curve Optimal taxation in a model with exogenous savings It is su cient to take the derivative of solving for K K wrt τ and set equal to zero. K K τ = 0 : sb 1 1 α α 1 1+2α α τ 1 α + s (1 τ) B 1 α τ 1 α = 0 1 α τ = α which is the optimal tax rate, i.e. the tax rate that maximizes growth.

17 Optimal taxation in a model with exogenous savings

18 The Barro model with endogenous savings Optimal taxation in a model with endogenous savings For simplicity, and without loss of generality, we assume that population is constant and equal to L = 1, and that capital depreciation rate is d = 0. Given that L = 1 and constant, this means that per capita variables are identical to variables in level, C = c, Y = y, K = k. Then, the decentralized Ramsey problem is max fc,k g C 1 θ 1 θ e ρt s.t. K = (1 τ) Y C Y = BK 1 α G α

19 The Barro model with endogenous savings The present value Hamiltonian associated is H = C 1 θ 1 θ e ρt µ (1 τ) BK 1 α G α C FOCs wrt. consumption, capital and the costate variable are: H C = 0 : C θ e ρt µ = 0 H K = µ : µ (1 τ) (1 α) BK α G α µ = 0 H µ = K : (1 τ) BK 1 α G α C = K notice that G α = B α 1 α τ α 1 α K α.

20 The Barro model with endogenous savings Combining FOCs 1. and 2. 2 Ċ C = 1 4(1 τ) (1 α) BK α G α θ {z } MPK 2 = 1 θ 4(1 τ) (1 α) B 1 1 α α τ 1 α {z } MPK 3 ρ5 3 ρ5 where MPK states for Marginal Product of Capital.

21 The Barro model with endogenous savings Notice that the MPK is MPK = (1 τ) {z } negative e ect of taxation (1 α) BK α {z} G α positive e ect of public investment Growth in consumption depends on: i) the gap between the MPK and the rate of time preference ρ; ii) the intertemporal elasticity of substitution θ. Thus, Government a ects the MPK through two channels: i) increase in G raises the MPK to a point; ii) taxes always reduces the private return of capital. The main objective of a good Government is to balance these two e ects.

22 The Barro model with endogenous savings The tax rate maximizing consumption is obtained by di erentiating Ċ C w.r.t. τ. (Ċ /C) 0 τ = 1 θ (1 τ) α 1 α 1 2α 1 1 α (1 α) B 1 α τ 1 α 1 θ (1 α) B 1 α τ 1 α = simplifying and solving for τ the same value we found for K K τ τ GR = α

23 The Barro model with endogenous savings Is the Decentralized solution also the rst best solution? It is important to compare the decentralized solution with the Social Planner one. Which is the Social Planner solution? The Social Planner internalizes the e ect of G and thus the optimal problem becomes C 1 θ max fc,k,g g 1 θ e ρt s.t. Resource Constraint i.e. : Y = C + I + G or : K = Y C G = BK 1 α G α C G

24 The Barro model with endogenous savings The present value Hamiltonian of the Social Planner is H = C 1 θ 1 θ e ρt µ BK 1 α G α C G The Social Planner FOCs wrt. consumption, capital and the costate variable are: 1s. 2s. 3s. 4s. H C = 0 : C θ e ρt µ = 0 H G = 0 : αbk 1 α G α 1 = 1 =) Y G = 1 H K = µ : µ (1 α) K α G α µ = 0 H µ = K : BK 1 α G α C G = K

25 The Barro model with endogenous savings Combining FOCs 1s. and 2s. Ċ C = 1 i h(1 α) B 1 1 α α τ 1 α ρ θ Notice that (1 α) B 1 1 α 1 α α τ 1 α > (1 τ) (1 α) B 1 α τ 1 α, hence the MPK in the decentralized solution is (1 τ) Y K, which is smaller than what we get from the Social Planner solution, i.e. the social marginal product Y K, because of the tax rate. This gap between social and private returns leads to a lower growth rate in the decentralized solution.

26 Endogenous Growth and R&D Sector The Romer model try to explain why and how advanced countries of the world exhibit sustained growth. Technological progress is driven by R&D sector in advanced world. Romer endogenizes technological progress by introducing an R&D sector, i.e. search of new ideas by researcher interested in pro ting from their invention. The aggregate production function in the Romer model is Y = K α (AL Y ) 1 α Capital accumulation is K = s K Y dk population growth is L L = n.

27 Endogenous Growth and R&D Sector The key equation of the Romer model is the one describing the R&D sector. According to Romer A is the number of ideas, or the stock of knowledge accumulated up until time t. The number of new ideas Ȧ is equal to the number of people devoting their time in discovering new ideas L A, multiplied by the rate at which they discover new ideas, i.e. δ. Thus, Ȧ = δl A Labor is used either to produce good, L Y, or to produce new ideas L A. So the economy faces the following resource constraint: L = L Y + L A

28 Endogenous Growth and R&D Sector The rate at which new ideas are discovered, δ, might be constant, or an increasing function of A where δ and φ are constants. δ = δa φ Notice that with φ > 0 the productivity of research increases with the stock of ideas that have already been discovered. On the contrary with φ < 0, discovering new ideas becomes harder over time. With φ = 0 the discovery rate is independent from the stock of knowledge.

29 Endogenous Growth and R&D Sector It is possible that new ideas are more likely when there are more persons engaged in research. Thus, the e ect of L A is not proportional. Hence, it can be assumed that it is LA λ that enter in the production function of new ideas, with 0 < λ < 1. The general production function of new ideas is Ȧ = δl λ A Aφ Assuming that 0 < φ < 1. Dividing by A Ȧ A = δ Lλ A A 1 which is the rate of growth along the BGP? φ

30 Endogenous Growth and R&D Sector Along the BGP Ȧ A = g A = constant. Thus, the numerator and the denominator should growth at the same rate, which means along the BGP L A L A λ L A L A (1 φ) Ȧ A = 0 = n and thus Ȧ A = g A = nλ 1 φ In this model, as in the Neoclassical model, even if growth is an endogenous process, policy maker cannot do nothing to increase the long-run growth rate. Indeed bot λ and φ are parameters independent on policies, such as subsidies to R&D

31 Endogenous Growth and R&D Sector Introducing Microfoundation. Romer (1990 JPE) Romer (1990) explains how to construct an economy of pro ts-maximizing agents that endogenize technological progress. The economy consists of three sectors: 1 A nal good-producing sector 2 An intermediate good-producing sector: producing capital goods 3 A research sector The research sector sells the exclusive right to produce a speci c capital good to an intermediate-good rm. The intermediate-good rm, is monopolist, manufactures the capital good and sells it to the nal good sector which produces output.

32 Endogenous Growth and R&D Sector The nal-good sector is composed by a large number of perfectly competitive rms that combine labor and capital to produce the nal good, Y. There is more than one type of capital in the production function, thus it is speci ed as follows Y = L 1 Y α N j=1 x α j where the capital goods x j, come from the intermediate good-producing sector. Inventions, or new ideas correspond to the creation of new capital that can be used by the nal-good sector to produce the nal output.

33 Endogenous Growth and R&D Sector The nal-good sector If A is the number of capital goods. Then N = A and the production can be rewritten as Y = L 1 if the number of goods is continuos Y = L 1 Y α A j=1 Z A Y α 0 x α j x α j dj For simplicity we will use the second de nition. Notice that, whether we use a discrete number of goods or a continuos number, results remain unchanged.

34 Endogenous Growth and R&D Sector Final good price P is normalized to 1. Firms in the nal-good sector, choose labor and capital to maximize pro ts, Z A max fl Y,x J g L1 Y α 0 x α j dj wl Y Z A 0 p j x j dj where p j is the rental price for capital-goods and w the wage paid for labor. The FOCs imply: w = (1 α) Y L Y p j = αl 1 Y α x j α 1 for each j As usual prices of inputs equate their marginal product.

35 Endogenous Growth and R&D Sector The intermediate good sector consists of monopolists who produce the capital goods to sell to the nal sector. Firms gain their monopoly power by purchasing the design for a speci c capital good from the R&D sector. Because of patent protection only one rm manufactures each capital good. Each rm uses a very simple production function. One unit of raw capital (purchased in the R&D sector) translates into one unit of manufactured capital. The pro t maximization problem of the representative intermediate-good rm is max x j p j (x j ) x j rx j where p j (x j ) is the demand function of the capital good, corresponding to p j = αl 1 Y α x j α 1 and r is the interest rate, or the rental rate of capital.

36 Endogenous Growth and R&D Sector The FOC of the intermediate-good rm is. pj 0 (x j ) x j + p j (x j ) r = 0 α 2 L 1 Y α j α 1 {z } r = 0 αp j Imposing symmetry and solving for p p = p0 (x )x p r = 1 α r. which is the optimal price set in the intermediate-good sector.

37 Endogenous Growth and R&D Sector Equilibrium and Aggregation The total demand for capital from the intermediate good sector must equal the total capital stock in the economy. Thus, Z A x j dj = K 0 Since the capital goods are each used in the same amount, x, the previous equation can be used to determine x x = K A The nal good production function can be rewritten as Y = L 1 Z A Y α 0 x α dj = L 1 Y α Ax α substituting for x = K A Y = K α (AL Y ) 1 α

38 Endogenous Growth and R&D Sector In the Research Sector new design are discovered according to Ȧ = δl λ A Aφ When a design is discovered, the inventor receives a patent from the Government for the exclusive right to produce the new capital good. The patent last forever. The inventor sells the patent to an intermediate good rm and uses the proceeds to consume and save. What is the price of a new patent? Anyone can bid for a patent. The potential bidder will be willing to pay the discounted value of the pro ts earned by an intermediate-good rm. Let the discounted value of pro ts earned by an intermediate-good rm be P A, where pro ts are: π = α (1 α) Y A

39 Endogenous Growth and R&D Sector The research sector How does P A change over time? Firms can put money (an amount equivalent to the value of a patent, P A ), in a bank, earning the interest rate r. Alternatively, they can purchase patent for one period, manufacture capital, earn pro ts and then sell the patent. In equilibrium the return of these two alternatives must be the same. Thus, rp A = π + Ṗ A Which gives r = π + ṖA P A P A Along the BGP r is constant and thus π and P A must grow at the same rate, which is the population growth rate n (when λ = 1 and φ = 0). Thus, along the BGP P A = π r n

40 Endogenous Growth and R&D Sector Share of population working in the R&D and good producing sector Once again we can use the arbitrage concept. It must be the case that at the margin, individual are indi erent between working in the nal-good sector or the R&D sector. We know that in the nal-good sector w Y = (1 α) Y L Y in the R&D sector, real wages are equal to the marginal product of labor δ, multiplied by the value of new ideas created, i.e. P A, thus w R = δp A

41 Endogenous Growth and R&D Sector Because there is free entry in the two labor markets it must be that w Y = w R, then then (1 α) Y = δp A = δπ L Y r n = δα (1 α) Y A r n 1 = δα (1 α) Y (1 α) = α δ L Y r n A Y r n A Rearranging and considering that Ȧ = δl A =) Ȧ the BGP, then 1 = α g A L Y r n L A L A L Y = αg A r n = s R 1 s R and s R = L A L s R = is r n. αg A A = δl A A = g A along

42 Endogenous Growth and R&D Sector OPTIMAL R&D. Is the share of population involved in R&D sector optimal? The answer is no. Why? The economy is characterized by three distortions 1 The market does not endogenize the fact that new research may a ect the productivity of future research. φ > 0, implies that productivity of research increases with the stock of ideas. Researcher are not compensated for their contribution toward improving the productivity of future researcher. Thus, with φ > 0 the market provides too little research and the fraction of population hired by R&S is too low. This e ect is called spillover e ect or "standing on the shoulders e ect". 2 With λ < 1 research productivity is lower because of duplications. Thus, too many people are hired by the research sector. This e ect is called "stepping on toes e ect". 3 Consumer surplus e ect. The monopoly pro ts are less than the consumer surplus. This e ect tends to generate too little innovations.

43 Endogenous Growth and R&D Sector OPTIMAL R&D Classical economic theory: imperfect competition and monopoly are bad for welfare and e ciency because they generate a deathweight-loss in the economy. This happens because prices are higher than marginal costs. However, the literature on the economic of ideas suggests that it is the possibility to make pro ts, and thus to set a markup over marginal costs, that incentives rms, or the R&D sector, to produce more ideas. This means, that there is a trade-o between short-run losses and long-run gains. Concluding. In deciding antitrust policies, the regulator has to weight the deathweight losses against the incentive to innovate.

EXOGENOUS GROWTH MODELS

EXOGENOUS GROWTH MODELS EXOGENOUS GROWTH MODELS Lorenza Rossi Goethe University 2011-2012 Course Outline FIRST PART - GROWTH THEORIES Exogenous Growth The Solow Model The Ramsey model and the Golden Rule Introduction to Endogenous

More information

Endogenous Growth Theory

Endogenous Growth Theory Chapter 3 Endogenous Growth Theory 3.1 One-Sector Endogenous Growth Models 3.2 Two-sector Endogenous Growth Model 3.3 Technological Change: Horizontal Innovations References: Aghion, P./ Howitt, P. (1992),

More information

The Real Business Cycle Model

The Real Business Cycle Model The Real Business Cycle Model Ester Faia Goethe University Frankfurt Nov 2015 Ester Faia (Goethe University Frankfurt) RBC Nov 2015 1 / 27 Introduction The RBC model explains the co-movements in the uctuations

More information

ECON 5010 Class Notes Endogenous Growth Theory

ECON 5010 Class Notes Endogenous Growth Theory ECON 5010 Class Notes Endogenous Growth Theory 1 Introduction One drawbac of the Solow model is that long-run growth in per capita income is entirely exogenous. In the absence of exogenous technological

More information

ECON 5110 Class Notes Overview of New Keynesian Economics

ECON 5110 Class Notes Overview of New Keynesian Economics ECON 5110 Class Notes Overview of New Keynesian Economics 1 Introduction The primary distinction between Keynesian and classical macroeconomics is the flexibility of prices and wages. In classical models

More information

Growth Theory and Convergence Endogenous growth

Growth Theory and Convergence Endogenous growth Growth Theory and Convergence Endogenous growth Joanna Tyrowicz University of Warsaw, Faculty of Economics 02-09/03/2011 Joanna Tyrowicz (WNE UW) L2. Endogenous growth 02-09/03/2011 1 / 26 Exogenous growth

More information

ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE

ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE YUAN TIAN This synopsis is designed merely for keep a record of the materials covered in lectures. Please refer to your own lecture notes for all proofs.

More information

Endogenous Growth Theory

Endogenous Growth Theory Endogenous Growth Theory Motivation The Solow and Ramsey models o er valuable insights but have important limitations: Di erences in capital accummulation cannot satisfactorily account for the prevailing

More information

University of Saskatchewan Department of Economics Economics 414.3 Homework #1

University of Saskatchewan Department of Economics Economics 414.3 Homework #1 Homework #1 1. In 1900 GDP per capita in Japan (measured in 2000 dollars) was $1,433. In 2000 it was $26,375. (a) Calculate the growth rate of income per capita in Japan over this century. (b) Now suppose

More information

14.452 Economic Growth: Lecture 11, Technology Diffusion, Trade and World Growth

14.452 Economic Growth: Lecture 11, Technology Diffusion, Trade and World Growth 14.452 Economic Growth: Lecture 11, Technology Diffusion, Trade and World Growth Daron Acemoglu MIT December 2, 2014. Daron Acemoglu (MIT) Economic Growth Lecture 11 December 2, 2014. 1 / 43 Introduction

More information

The Real Business Cycle model

The Real Business Cycle model The Real Business Cycle model Spring 2013 1 Historical introduction Modern business cycle theory really got started with Great Depression Keynes: The General Theory of Employment, Interest and Money Keynesian

More information

Real Business Cycle Theory. Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35

Real Business Cycle Theory. Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35 Real Business Cycle Theory Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35 Introduction to DSGE models Dynamic Stochastic General Equilibrium (DSGE) models have become the main tool for

More information

Macroeconomics 2. In ation, unemployment and aggregate supply. Mirko Wiederholt. Goethe University Frankfurt. Lecture 10

Macroeconomics 2. In ation, unemployment and aggregate supply. Mirko Wiederholt. Goethe University Frankfurt. Lecture 10 Macroeconomics 2 In ation, unemployment and aggregate supply Mirko Wiederholt Goethe University Frankfurt Lecture 10 irko Wiederholt (Goethe University Frankfurt) Macroeconomics 2 Lecture 10 1 / 22 1.

More information

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS Exam: ECON4310 Intertemporal macroeconomics Date of exam: Thursday, November 27, 2008 Grades are given: December 19, 2008 Time for exam: 09:00 a.m. 12:00 noon

More information

Universidad de Montevideo Macroeconomia II. The Ramsey-Cass-Koopmans Model

Universidad de Montevideo Macroeconomia II. The Ramsey-Cass-Koopmans Model Universidad de Montevideo Macroeconomia II Danilo R. Trupkin Class Notes (very preliminar) The Ramsey-Cass-Koopmans Model 1 Introduction One shortcoming of the Solow model is that the saving rate is exogenous

More information

14.452 Economic Growth: Lectures 6 and 7, Neoclassical Growth

14.452 Economic Growth: Lectures 6 and 7, Neoclassical Growth 14.452 Economic Growth: Lectures 6 and 7, Neoclassical Growth Daron Acemoglu MIT November 15 and 17, 211. Daron Acemoglu (MIT) Economic Growth Lectures 6 and 7 November 15 and 17, 211. 1 / 71 Introduction

More information

6.2 The Economics of Ideas. 6.1 Introduction. Growth and Ideas. Ideas. The Romer model divides the world into objects and ideas: Chapter 6

6.2 The Economics of Ideas. 6.1 Introduction. Growth and Ideas. Ideas. The Romer model divides the world into objects and ideas: Chapter 6 The Romer model divides the world into objects and ideas: Chapter 6 and Ideas By Charles I. Jones Objects capital and labor from the Solow model Ideas items used in making objects Media Slides Created

More information

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed.

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed. Name: Date: 1 A measure of how fast prices are rising is called the: A growth rate of real GDP B inflation rate C unemployment rate D market-clearing rate 2 Compared with a recession, real GDP during a

More information

Lecture 14 More on Real Business Cycles. Noah Williams

Lecture 14 More on Real Business Cycles. Noah Williams Lecture 14 More on Real Business Cycles Noah Williams University of Wisconsin - Madison Economics 312 Optimality Conditions Euler equation under uncertainty: u C (C t, 1 N t) = βe t [u C (C t+1, 1 N t+1)

More information

Lecture 9: Keynesian Models

Lecture 9: Keynesian Models Lecture 9: Keynesian Models Professor Eric Sims University of Notre Dame Fall 2009 Sims (Notre Dame) Keynesian Fall 2009 1 / 23 Keynesian Models The de ning features of RBC models are: Markets clear Money

More information

I d ( r; MPK f, τ) Y < C d +I d +G

I d ( r; MPK f, τ) Y < C d +I d +G 1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

More information

Economic Growth. (c) Copyright 1999 by Douglas H. Joines 1

Economic Growth. (c) Copyright 1999 by Douglas H. Joines 1 Economic Growth (c) Copyright 1999 by Douglas H. Joines 1 Module Objectives Know what determines the growth rates of aggregate and per capita GDP Distinguish factors that affect the economy s growth rate

More information

Chapter 3 A Classical Economic Model

Chapter 3 A Classical Economic Model Chapter 3 A Classical Economic Model what determines the economy s total output/income how the prices of the factors of production are determined how total income is distributed what determines the demand

More information

Chapter 3 Product Variety

Chapter 3 Product Variety Chapter 3 Product Variety April 2, 2008 1 Introduction The inability of the AK paradigm to produce a convincing model of long-run growth and convergence motivated a second wave of endogenous growth theory,

More information

Great Depressions from a Neoclassical Perspective. Advanced Macroeconomic Theory

Great Depressions from a Neoclassical Perspective. Advanced Macroeconomic Theory Great Depressions from a Neoclassical Perspective Advanced Macroeconomic Theory 1 Review of Last Class Model with indivisible labor, either working for xed hours or not. allow social planner to choose

More information

Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti)

Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti) Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti) Kjetil Storesletten September 10, 2013 Kjetil Storesletten () Lecture 3 September 10, 2013 1 / 44 Growth

More information

Prep. Course Macroeconomics

Prep. Course Macroeconomics Prep. Course Macroeconomics Intertemporal consumption and saving decision; Ramsey model Tom-Reiel Heggedal tom-reiel.heggedal@bi.no BI 2014 Heggedal (BI) Savings & Ramsey 2014 1 / 30 Overview this lecture

More information

Lecture 4: Monopoly. Daniel Zhiyun LI. September Durham University Business School (DUBS)

Lecture 4: Monopoly. Daniel Zhiyun LI. September Durham University Business School (DUBS) Lecture 4: Monopoly Daniel Zhiyun LI Durham University Business School (DUBS) September 2014 Plan of the Lecture Introduction The Problem of Monopoly Price Discriminations Introduction the other extreme

More information

Economic Growth: Lecture 9, Neoclassical Endogenous Growth

Economic Growth: Lecture 9, Neoclassical Endogenous Growth 14.452 Economic Growth: Lecture 9, Neoclassical Endogenous Growth Daron Acemoglu MIT November 29, 2011. Daron Acemoglu (MIT) Economic Growth Lecture 9 November 29, 2011. 1 / 41 First-Generation Models

More information

14.452 Economic Growth: Lectures 2 and 3: The Solow Growth Model

14.452 Economic Growth: Lectures 2 and 3: The Solow Growth Model 14.452 Economic Growth: Lectures 2 and 3: The Solow Growth Model Daron Acemoglu MIT November 1 and 3, 2011. Daron Acemoglu (MIT) Economic Growth Lectures 2 and 3 November 1 and 3, 2011. 1 / 96 Solow Growth

More information

c 2009 Je rey A. Miron

c 2009 Je rey A. Miron Lecture 22: Factor Markets c 2009 Je rey A. Miron Outline 1. Introduction 2. Monopoly in the Output Market 3. Monopsony 4. Upstream and Downstream Monopolies 1 Introduction The analysis in earlier lectures

More information

6. Budget Deficits and Fiscal Policy

6. Budget Deficits and Fiscal Policy Prof. Dr. Thomas Steger Advanced Macroeconomics II Lecture SS 2012 6. Budget Deficits and Fiscal Policy Introduction Ricardian equivalence Distorting taxes Debt crises Introduction (1) Ricardian equivalence

More information

Lecture 2 Dynamic Equilibrium Models : Finite Periods

Lecture 2 Dynamic Equilibrium Models : Finite Periods Lecture 2 Dynamic Equilibrium Models : Finite Periods 1. Introduction In macroeconomics, we study the behavior of economy-wide aggregates e.g. GDP, savings, investment, employment and so on - and their

More information

INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY. Susanto Basu and Miles S. Kimball. University of Michigan and NBER

INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY. Susanto Basu and Miles S. Kimball. University of Michigan and NBER INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY Susanto Basu and Miles S. Kimball University of Michigan and NBER MAIN RESULTS. Show that a model with capital accumulation and sticky

More information

Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey

Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey MURAT ÜNGÖR Central Bank of the Republic of Turkey http://www.muratungor.com/ April 2012 We live in the age of

More information

The Theory of Investment

The Theory of Investment CHAPTER 17 Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: leading theories to explain each type of investment why investment is negatively

More information

4. Only one asset that can be used for production, and is available in xed supply in the aggregate (call it land).

4. Only one asset that can be used for production, and is available in xed supply in the aggregate (call it land). Chapter 3 Credit and Business Cycles Here I present a model of the interaction between credit and business cycles. In representative agent models, remember, no lending takes place! The literature on the

More information

5. R&D based Economic Growth: Romer (1990)

5. R&D based Economic Growth: Romer (1990) Prof. Dr. Thomas Steger Advanced Macroeconomics I Lecture SS 13 5. R&D based Economic Growth: Romer (1990) Introduction The challenge of modeling technological change The structure of the model The long

More information

Problem 1. Steady state values for two countries with different savings rates and population growth rates.

Problem 1. Steady state values for two countries with different savings rates and population growth rates. Mankiw, Chapter 8. Economic Growth II: Technology, Empirics and Policy Problem 1. Steady state values for two countries with different savings rates and population growth rates. To make the problem more

More information

Oligopoly. Chapter 10. 10.1 Overview

Oligopoly. Chapter 10. 10.1 Overview Chapter 10 Oligopoly 10.1 Overview Oligopoly is the study of interactions between multiple rms. Because the actions of any one rm may depend on the actions of others, oligopoly is the rst topic which requires

More information

Quality Ladders, Competition and Endogenous Growth Michele Boldrin and David K. Levine

Quality Ladders, Competition and Endogenous Growth Michele Boldrin and David K. Levine Quality Ladders, Competition and Endogenous Growth Michele Boldrin and David K. Levine 1 The Standard Schumpeterian Competition Monopolistic Competition innovation modeled as endogenous rate of movement

More information

Optimal Investment. Government policy is typically targeted heavily on investment; most tax codes favor it.

Optimal Investment. Government policy is typically targeted heavily on investment; most tax codes favor it. Douglas Hibbs L, L3: AAU Macro Theory 0-0-9/4 Optimal Investment Why Care About Investment? Investment drives capital formation, and the stock of capital is a key determinant of output and consequently

More information

CLASSICAL THEORY THE ECONOMY IN THE LONG RUN Main reference: N. Gregory Mankiw, Macroeconomics 5/e, Worth Publishers,

CLASSICAL THEORY THE ECONOMY IN THE LONG RUN Main reference: N. Gregory Mankiw, Macroeconomics 5/e, Worth Publishers, University of East London ELBS Economics EC201 MACROECONOMICS CLASSICAL THEORY THE ECONOMY IN THE LONG RUN Main reference: N. Gregory Mankiw, Macroeconomics 5/e, Worth Publishers, Chapter 3, National Income:

More information

( ) = ( ) = ( + ) which means that both capital and output grow permanently at a constant rate

( ) = ( ) = ( + ) which means that both capital and output grow permanently at a constant rate 1 Endogenous Growth We present two models that are very popular in the, so-called, new growth theory literature. They represent economies where, notwithstanding the absence of exogenous technical progress,

More information

Research Policy and U.S. Economic Growth

Research Policy and U.S. Economic Growth Research Policy and U.S. Economic Growth Richard M. H. Suen August 4, 203. Abstract This paper examines quantitatively the e ects of R&D subsidy and government- nanced basic research on U.S. economic growth

More information

Relative prices and Balassa Samuleson e ect

Relative prices and Balassa Samuleson e ect Relative prices and Balassa Samuleson e ect Prof. Ester Faia, Ph.D. Johann Wolfgang Goethe Universität Frankfurt a.m. March 2009 rof. Ester Faia, Ph.D. (Johann Wolfgang Goethe Relative Universität prices

More information

Charles Jones: US Economic Growth in a World of Ideas and other Jones Papers. January 22, 2014

Charles Jones: US Economic Growth in a World of Ideas and other Jones Papers. January 22, 2014 Charles Jones: US Economic Growth in a World of Ideas and other Jones Papers January 22, 2014 U.S. GDP per capita, log scale Old view: therefore the US is in some kind of Solow steady state (i.e. Balanced

More information

Economic Growth II: Technology, Empirics, and Policy

Economic Growth II: Technology, Empirics, and Policy CHAPTER9 : Technology, Empirics, and Policy Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: how to incorporate technological progress in

More information

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class.

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. 1 Definition of some core variables Imports (flow): Q t Exports (flow): X t Net exports (or Trade balance)

More information

Chapters 7 and 8 Solow Growth Model Basics

Chapters 7 and 8 Solow Growth Model Basics Chapters 7 and 8 Solow Growth Model Basics The Solow growth model breaks the growth of economies down into basics. It starts with our production function Y = F (K, L) and puts in per-worker terms. Y L

More information

New Keynesian model. Marcin Kolasa. Warsaw School of Economics Department of Quantitative Economics. Marcin Kolasa (WSE) NK model 1 / 36

New Keynesian model. Marcin Kolasa. Warsaw School of Economics Department of Quantitative Economics. Marcin Kolasa (WSE) NK model 1 / 36 New Keynesian model Marcin Kolasa Warsaw School of Economics Department of Quantitative Economics Marcin Kolasa (WSE) NK model 1 / 36 Flexible vs. sticky prices Central assumption in the (neo)classical

More information

A Comparison of 2 popular models of monetary policy

A Comparison of 2 popular models of monetary policy A Comparison of 2 popular models of monetary policy Petros Varthalitis Athens University of Economics & Business June 2011 Varthalitis (AUEB) Calvo vs Rotemberg June 2011 1 / 45 Aim of this work Obviously,

More information

The Budget Deficit, Public Debt and Endogenous Growth

The Budget Deficit, Public Debt and Endogenous Growth The Budget Deficit, Public Debt and Endogenous Growth Michael Bräuninger October 2002 Abstract This paper analyzes the effects of public debt on endogenous growth in an overlapping generations model. The

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

Economics 326: Duality and the Slutsky Decomposition. Ethan Kaplan

Economics 326: Duality and the Slutsky Decomposition. Ethan Kaplan Economics 326: Duality and the Slutsky Decomposition Ethan Kaplan September 19, 2011 Outline 1. Convexity and Declining MRS 2. Duality and Hicksian Demand 3. Slutsky Decomposition 4. Net and Gross Substitutes

More information

Teaching modern general equilibrium macroeconomics to undergraduates: using the same t. advanced research. Gillman (Cardi Business School)

Teaching modern general equilibrium macroeconomics to undergraduates: using the same t. advanced research. Gillman (Cardi Business School) Teaching modern general equilibrium macroeconomics to undergraduates: using the same theory required for advanced research Max Gillman Cardi Business School pments in Economics Education (DEE) Conference

More information

2007/8. The problem of non-renewable energy resources in the production of physical capital. Agustin Pérez-Barahona

2007/8. The problem of non-renewable energy resources in the production of physical capital. Agustin Pérez-Barahona 2007/8 The problem of non-renewable energy resources in the production of physical capital Agustin Pérez-Barahona CORE DISCUSSION PAPER 2007/8 The problem of non-renewable energy resources in the production

More information

Graduate Macro Theory II: The Real Business Cycle Model

Graduate Macro Theory II: The Real Business Cycle Model Graduate Macro Theory II: The Real Business Cycle Model Eric Sims University of Notre Dame Spring 2011 1 Introduction This note describes the canonical real business cycle model. A couple of classic references

More information

k = sf(k) (δ + n + g)k = 0. sy (δ + n + g)y 2 = 0. Solving this, we find the steady-state value of y:

k = sf(k) (δ + n + g)k = 0. sy (δ + n + g)y 2 = 0. Solving this, we find the steady-state value of y: CHAPTER 8 Economic Growth II Questions for Review 1. In the Solow model, we find that only technological progress can affect the steady-state rate of growth in income per worker. Growth in the capital

More information

Monetary Economic Growth Theory under Perfect and Monopolistic Competitions

Monetary Economic Growth Theory under Perfect and Monopolistic Competitions DBJ Discussion Paper Series, No.1302 Monetary Economic Growth Theory under Perfect and Monopolistic Competitions Masayuki Otaki (Institute of Social Science, University of Tokyo) Masaoki Tamura (Innovation

More information

Introduction. Agents have preferences over the two goods which are determined by a utility function. Speci cally, type 1 agents utility is given by

Introduction. Agents have preferences over the two goods which are determined by a utility function. Speci cally, type 1 agents utility is given by Introduction General equilibrium analysis looks at how multiple markets come into equilibrium simultaneously. With many markets, equilibrium analysis must take explicit account of the fact that changes

More information

Increasing Returns and Economic Geography

Increasing Returns and Economic Geography Increasing Returns and Economic Geography Paul Krugman JPE,1991 March 4, 2010 Paul Krugman (JPE,1991) Increasing Returns March 4, 2010 1 / 18 Introduction Krugman claims that the study of economic outcomes

More information

Development Economics Lecture 5: Productivity & Technology

Development Economics Lecture 5: Productivity & Technology Development Economics Lecture 5: Productivity & Technology Måns Söderbom University of Gothenburg mans.soderbom@economics.gu.se www.soderbom.net 1 Measuring Productivity Reference: Chapter 7 in Weil. Thus

More information

Macroeconomics Lecture 1: The Solow Growth Model

Macroeconomics Lecture 1: The Solow Growth Model Macroeconomics Lecture 1: The Solow Growth Model Richard G. Pierse 1 Introduction One of the most important long-run issues in macroeconomics is understanding growth. Why do economies grow and what determines

More information

Preparation course MSc Business&Econonomics: Economic Growth

Preparation course MSc Business&Econonomics: Economic Growth Preparation course MSc Business&Econonomics: Economic Growth Tom-Reiel Heggedal Economics Department 2014 TRH (Institute) Solow model 2014 1 / 27 Theory and models Objective of this lecture: learn Solow

More information

MACROECONOMICS SECTION

MACROECONOMICS SECTION MACROECONOMICS SECTION GENERAL TIPS Be sure every graph is carefully labeled and explained. Every answer must include a section that contains a response to WHY the result holds. Good resources include

More information

Generic Analysis of Endogenous Growth Models

Generic Analysis of Endogenous Growth Models c December 24, 2016, Christopher D. Carroll Endogenous Generic Analysis of Endogenous Growth Models The neoclassical theory of economic growth, as formulated by Solow (1956), and Cass (1965)-Koopmans (1965),

More information

Price Discrimination: Exercises Part 1

Price Discrimination: Exercises Part 1 Price Discrimination: Exercises Part 1 Sotiris Georganas Royal Holloway University of London January 2010 Problem 1 A monopolist sells in two markets. The inverse demand curve in market 1 is p 1 = 200

More information

6 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

6 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 6 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

Topic 5: Stochastic Growth and Real Business Cycles

Topic 5: Stochastic Growth and Real Business Cycles Topic 5: Stochastic Growth and Real Business Cycles Yulei Luo SEF of HKU October 1, 2015 Luo, Y. (SEF of HKU) Macro Theory October 1, 2015 1 / 45 Lag Operators The lag operator (L) is de ned as Similar

More information

Real Business Cycle Theory

Real Business Cycle Theory Real Business Cycle Theory Guido Ascari University of Pavia () Real Business Cycle Theory 1 / 50 Outline Introduction: Lucas methodological proposal The application to the analysis of business cycle uctuations:

More information

1 Present and Future Value

1 Present and Future Value Lecture 8: Asset Markets c 2009 Je rey A. Miron Outline:. Present and Future Value 2. Bonds 3. Taxes 4. Applications Present and Future Value In the discussion of the two-period model with borrowing and

More information

Outline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics

Outline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics ECON 3010 Intermediate Macroeconomics Chapter 3 National Income: Where It Comes From and Where It Goes Outline of model A closed economy, market-clearing model Supply side factors of production determination

More information

Econ 102 Aggregate Supply and Demand

Econ 102 Aggregate Supply and Demand Econ 102 ggregate Supply and Demand 1. s on previous homework assignments, turn in a news article together with your summary and explanation of why it is relevant to this week s topic, ggregate Supply

More information

E322_Summer_08_Intermediate Macroeconomics. Final Exam: Sample Questions

E322_Summer_08_Intermediate Macroeconomics. Final Exam: Sample Questions E322_Summer_08_Intermediate Macroeconomics Final Exam: Sample Questions Chapter_05 1. A competitive equilibrium is Pareto optimal if there is no way to rearrange or to reallocate goods so that (a) anyone

More information

Agenda. Long-Run Economic Growth, Part 2. The Solow Model. The Solow Model. Fundamental Determinants of Living Standards. Endogenous Growth Theory.

Agenda. Long-Run Economic Growth, Part 2. The Solow Model. The Solow Model. Fundamental Determinants of Living Standards. Endogenous Growth Theory. Agenda Fundamental Determinants of Living Standards. Long-Run Economic Growth, Part 2 Endogenous Growth Theory. Policies to Raise Long-Run Living Standards. 8-1 8-2 The saving rate. Increasing the saving

More information

Second-Degree Price Discrimination

Second-Degree Price Discrimination Second-Degree Price Discrimination Lecture 4 Goal: Separating buyers into di erent categories by o ering suitable deals: Screening. Monopolist knows that buyers come in di erent types. Maybe some buyers

More information

University of Toronto February 18, ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 3

University of Toronto February 18, ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 3 Department of Economics Prof. Gustavo Indart University of Toronto February 18, 2011 SOLUTIONS ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 3 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The

More information

2.4 Multiproduct Monopoly. 2.4 Multiproduct Monopoly

2.4 Multiproduct Monopoly. 2.4 Multiproduct Monopoly .4 Multiproduct Monopoly Matilde Machado Slides available from: http://www.eco.uc3m.es/oi-i-mei/.4 Multiproduct Monopoly The firm is a monopoly in all markets where it operates i=,.n goods sold by the

More information

WORKING PAPER SERIES 09-2013. Government Debt, the Real Interest Rate and External Balance in an Endogenous Growth Model of a Small Open Economy

WORKING PAPER SERIES 09-2013. Government Debt, the Real Interest Rate and External Balance in an Endogenous Growth Model of a Small Open Economy ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS DEPARTMENT OF ECONOMICS WORKING PAPER SERIES 09-2013 Government Debt, the Real Interest Rate and External Balance in an Endogenous Growth Model of a Small Open

More information

Schooling, Political Participation, and the Economy. (Online Supplementary Appendix: Not for Publication)

Schooling, Political Participation, and the Economy. (Online Supplementary Appendix: Not for Publication) Schooling, Political Participation, and the Economy Online Supplementary Appendix: Not for Publication) Filipe R. Campante Davin Chor July 200 Abstract In this online appendix, we present the proofs for

More information

Graduate Macro Theory II: Notes on Investment

Graduate Macro Theory II: Notes on Investment Graduate Macro Theory II: Notes on Investment Eric Sims University of Notre Dame Spring 2011 1 Introduction These notes introduce and discuss modern theories of firm investment. While much of this is done

More information

The Solow Model. Savings and Leakages from Per Capita Capital. (n+d)k. sk^alpha. k*: steady state 0 1 2.22 3 4. Per Capita Capital, k

The Solow Model. Savings and Leakages from Per Capita Capital. (n+d)k. sk^alpha. k*: steady state 0 1 2.22 3 4. Per Capita Capital, k Savings and Leakages from Per Capita Capital 0.1.2.3.4.5 The Solow Model (n+d)k sk^alpha k*: steady state 0 1 2.22 3 4 Per Capita Capital, k Pop. growth and depreciation Savings In the diagram... sy =

More information

Answer Key to the Sample Final Exam Principles of Macroeconomics Professor Adrian Peralta-Alva University of Miami

Answer Key to the Sample Final Exam Principles of Macroeconomics Professor Adrian Peralta-Alva University of Miami True/false and explain Answer Key to the Sample Final Exam Principles of Macroeconomics Professor Adrian Peralta-Alva University of Miami State whether the following statements are true or false and explain

More information

Questions. True/False and Explain

Questions. True/False and Explain 166 CHAPTER 11 (27) Questions True/False and Explain Aggregate Supply 11. At full employment, there is no unemployment. 12. Along the LAS curve, a rise in the price level and all resource prices increase

More information

Long-Run Average Cost. Econ 410: Micro Theory. Long-Run Average Cost. Long-Run Average Cost. Economies of Scale & Scope Minimizing Cost Mathematically

Long-Run Average Cost. Econ 410: Micro Theory. Long-Run Average Cost. Long-Run Average Cost. Economies of Scale & Scope Minimizing Cost Mathematically Slide 1 Slide 3 Econ 410: Micro Theory & Scope Minimizing Cost Mathematically Friday, November 9 th, 2007 Cost But, at some point, average costs for a firm will tend to increase. Why? Factory space and

More information

Introduction to Money

Introduction to Money Introduction to Money (3f)-P.1 How does money fit into modern macro models? - Money M = = nominal units issued by the government. Price level p. Purchasing power 1/p. - Consider discrete periods: Household

More information

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

More information

In ation Tax and In ation Subsidies: Working Capital in a Cash-in-advance model

In ation Tax and In ation Subsidies: Working Capital in a Cash-in-advance model In ation Tax and In ation Subsidies: Working Capital in a Cash-in-advance model George T. McCandless March 3, 006 Abstract This paper studies the nature of monetary policy with nancial intermediaries that

More information

Agenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor

Agenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor Agenda Productivity, Output, and Employment, Part 1 3-1 3-2 A production function shows how businesses transform factors of production into output of goods and services through the applications of technology.

More information

LECTURE #13: MICROECONOMICS CHAPTER 15

LECTURE #13: MICROECONOMICS CHAPTER 15 LECTURE #13: MICROECONOMICS CHAPTER 15 I. WHY MONOPOLIES ARISE A. Competitive firms are price takers; a Monopoly firm is a price maker B. Monopoly: a firm that is the sole seller of a product without close

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

Keynesian Macroeconomic Theory

Keynesian Macroeconomic Theory 2 Keynesian Macroeconomic Theory 2.1. The Keynesian Consumption Function 2.2. The Complete Keynesian Model 2.3. The Keynesian-Cross Model 2.4. The IS-LM Model 2.5. The Keynesian AD-AS Model 2.6. Conclusion

More information

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Sample Final Exam Name Id # Part B Instructions: Please answer in the space provided and circle your answer on the question paper as well.

More information

INVESTMENT DECISIONS and PROFIT MAXIMIZATION

INVESTMENT DECISIONS and PROFIT MAXIMIZATION Lecture 6 Investment Decisions The Digital Economist Investment is the act of acquiring income-producing assets, known as physical capital, either as additions to existing assets or to replace assets that

More information

Real Business Cycle Theory

Real Business Cycle Theory Chapter 4 Real Business Cycle Theory This section of the textbook focuses on explaining the behavior of the business cycle. The terms business cycle, short-run macroeconomics, and economic fluctuations

More information

DEPOSIT INSURANCE AND MONEY MARKET FREEZES. Max Bruche & Javier Suarez CEMFI. 10th Annual Bank of Finland/CEPR Conference Helsinki, 15-16 October 2009

DEPOSIT INSURANCE AND MONEY MARKET FREEZES. Max Bruche & Javier Suarez CEMFI. 10th Annual Bank of Finland/CEPR Conference Helsinki, 15-16 October 2009 DEPOSIT INSURANCE AND MONEY MARKET FREEZES Max Bruche & Javier Suarez CEMFI 10th Annual Bank of Finland/CEPR Conference Helsinki, 15-16 October 2009 1 Introduction We examine the causes & consequences

More information

2. Real Business Cycle Theory (June 25, 2013)

2. Real Business Cycle Theory (June 25, 2013) Prof. Dr. Thomas Steger Advanced Macroeconomics II Lecture SS 13 2. Real Business Cycle Theory (June 25, 2013) Introduction Simplistic RBC Model Simple stochastic growth model Baseline RBC model Introduction

More information

Chapter 4 Technological Progress and Economic Growth

Chapter 4 Technological Progress and Economic Growth Chapter 4 Technological Progress and Economic Growth 4.1 Introduction Technical progress is defined as new, and better ways of doing things, and new techniques for using scarce resources more productively.

More information