Today. Households. Recap. Constructing the BC. EC4004 Lecture 18 Markets & The Macroeconomy. Dr Stephen Kinsella

Transcription

1 EC4004 Lecture 18 Markets & The Macroeconomy Dr Stephen Kinsella Households Today Recap Constructing the BC SULIS Test: Opens Friday 2pm Closes Friday 2pm Exam: Friday 12 Dec 4pm PE HALL/GYM Extra Lecture Wk 13 Thursday 12-1 Concert Hall

2 Households Labour: L (w) Capital: K (r) Products Profit= PY-(wL+rK) Bonds ib Capital r/p - δ Labour w/p*ls

3 Quantities and prices determined on four markets will determine household income. Total sources of funds must equal the total uses of funds. This equality is the household budget constraint. Profits Households earn profit an excess of revenue over costs from their business activities. Y= A F( K d, L d ) π = PY (wl d + RK d ) π = P A F( K d, L d ) ( wl d + RK d ) 12

4 13 Wage income If households supply the quantity of labour Ls to the labour market, they receive the nominal wage income of wl s per year. Quantity of labour supplied is the fixed amount L, so nominal wage income is wl. Rental income If households supply the quantity of capital K s to the rental market they receive the nominal rental income of RK s per year. Since households supply all of their available capital, K, to the rental market, so that K s = K, the nominal rental income is RK. 14 Rental income The quantity δk of capital disappears each year. The euro value of this lost capital is P δk. net nominal rental income= nominal rental income value of depreciation net nominal rental income = RK δ P K net nominal rental income = (R/ P) P K δ P K net nominal rental income= ( R/ P δ) P K 15 Rental income rate of return on owning capital= R/ P δ 16

5 17 Interest If a household s nominal bond holdings are B, the flow of nominal interest income received is ib per year. Since B equals zero for the whole economy, we have that the total of interest income equals zero. Total income Household nominal income= nominal profit + nominal wage income + nominal net rental income + nominal interest income Household nominal income = π + wl + (R/P δ) PK + ib 18 Consumption Households consume goods in the quantity C per year at price= P Household nominal consumption= P C 19 Assets Households hold assets in three forms: money, M; bonds, B; ownership of capital, K. 20

6 21 Assets Assume households hold a fixed amount of money in euro terms. We assume that the change over time of a household s nominal money holdings is zero M=0 Assets In considering whether to hold assets as bonds or capital, households would compare the rate of return on bonds, the interest rate, I, with the rate of return on ownership of capital, R/P δ. Rate of return on bonds= rate of return on ownership i = R/ P δ 22 Household nominal income= π + wl + i ( B+ P K ) 23 Household Budget Constraint nominal value of assets= M+ B+ P K nominal saving to be the change over time in the nominal value of assets. nominal saving= ( nominal assets) = M + B + P K 24

7 25 Household Budget Constraint nominal saving= nominal income nominal consumption nominal saving= π + wl + i ( B+ P K ) P C B + P K = π + wl + i ( B+ PK ) P C Household Budget Constraint in Nominal Terms PC + B + P K = π + wl + i ( B+ P K ) nominal consumption + nominal saving = nominal income 26 Household Budget Constraint real terms C + ( 1/ P) B+ K = π/ P + ( w/p) L + i (B/P+K) consumption + real saving = real income 27 28

8 29 Profit Maximization Real Profit π/p = A F(K d,l d ) (w/p) L d (R/P) K d real profit= output real wage payments real rental payments 30 The Labour Market Demand for labour (π/p) = [ A F( K d, L d ) ] w/ P = MPL w/p change in real profit= marginal product of labour real wage rate 31 32

9 33 Supply of labour We are assuming that each household supplies a fixed quantity of labour to the labour market. Therefore, the aggregate or market supply of labour, Ls, is the given amount L. Clearing of the labour market w/p is determined to equate the aggregate quantity of labour demanded, L d, to the aggregate quantity supplied, L. ( w/ P)* = MPL ( evaluated at L) The Market for Demand for capital services (π/p) = [ A F(K d, L d ) ] R/P = MPK R/P change in real profit= marginal product of capital real rental price 36

10 37 The Market for Supply of capital services For the economy as a whole, the aggregate quantity of capital, K, is given from past flows of investment. In the short run, the aggregate or market quantity of capital services supplied, K s, equals K. 38 The Market for Clearing of the market for capital services R/P will be determined to clear the market that is, so that the aggregate quantity of capital services supplied, K, equals the aggregate quantity demanded, K d (R/P)* = MPK( evaluated at K) 39 40

11 41 The Market for The interest rate i = R/P δ rate of return on bonds= rate of return on ownership of capital i = MPK ( evaluated at K) δ Profit in Equilibrium π/p = A F(K,L) (w/p) L ( R/P) K w/p = MPL R/P = MPK π/p = A F(K, L) MPL L MPK K 42 Next Time: Business Cycles Read Barro, Cht 8 EC4004 Lecture 18 Markets & The Macroeconomy Dr Stephen Kinsella