EC4004 Lecture 18
Markets & The Macroeconomy

         Dr Stephen Kinsella
Today
Households

Recap

Constructing the BC
SULIS Test:
Opens Friday 2pm
Closes Friday 2pm
SULIS Test:
Opens Friday 2pm
Closes Friday 2pm
       Exam:
Friday 12 Dec 4pm
  PE HALL/GYM
SULIS Test:
Opens Friday 2pm
Closes Friday 2pm
       Exam:
Friday 12 Dec 4pm
  PE HALL/GYM
Extra Lecture Wk 13
   Thursda...
086 399 83 06
Labour: L (w)
Households
             Capital: K (r)
Products
  Profit=
PY-(wL+rK)
Products
             Bonds
  Profit=
               iB
PY-(wL+rK)
Products
             Bonds
  Profit=
               iB
PY-(wL+rK)




             Labour
             w/P*Ls
Products
             Bonds
  Profit=
               iB
PY-(wL+rK)




  Capital    Labour
  r/P - δ    w/P*Ls
Constructing the Budget Constraint
Constructing the Budget Constraint

Quantities and prices determined on four
markets will determine household income.
Constructing the Budget Constraint

Quantities and prices determined on four
markets will determine household income.
Constructing the Budget Constraint

Quantities and prices determined on four
markets will determine household income.

Tot...
Constructing the Budget Constraint

Quantities and prices determined on four
markets will determine household income.

Tot...
Constructing the Budget Constraint

Quantities and prices determined on four
markets will determine household income.

Tot...
Income
Constructing the Budget Constraint




                              12
Constructing the Budget Constraint
Income




                              12
Constructing the Budget Constraint
Income
Profits




                               12
Constructing the Budget Constraint
Income
Profits
Households earn profit—an excess of revenue over costs—
from their busines...
Constructing the Budget Constraint
Income
Profits
Households earn profit—an excess of revenue over costs—
from their busines...
Constructing the Budget Constraint
Income
Profits
Households earn profit—an excess of revenue over costs—
from their busines...
Constructing the Budget Constraint
Income
Profits
Households earn profit—an excess of revenue over costs—
from their busines...
Constructing the Budget Constraint




                              13
Constructing the Budget Constraint
Income




                              13
Constructing the Budget Constraint
Income
Wage income




                               13
Constructing the Budget Constraint
Income
Wage income
If households supply the quantity of labour Ls to the labour
market,...
Constructing the Budget Constraint
Income
Wage income
If households supply the quantity of labour Ls to the labour
market,...
Constructing the Budget Constraint




                              14
Constructing the Budget Constraint
Income




                              14
Constructing the Budget Constraint
Income
Rental income




                               14
Constructing the Budget Constraint
Income
Rental income
If households supply the quantity of capital Ks to the rental
mark...
Constructing the Budget Constraint
Income
Rental income
If households supply the quantity of capital Ks to the rental
mark...
Constructing the Budget Constraint




                              15
Constructing the Budget Constraint
Income




                              15
Constructing the Budget Constraint
Income
Rental income




                               15
Constructing the Budget Constraint
Income
Rental income
The quantity δK of capital disappears each year.




             ...
Constructing the Budget Constraint
Income
Rental income
The quantity δK of capital disappears each year.
The euro value of...
Constructing the Budget Constraint
Income
Rental income
The quantity δK of capital disappears each year.
The euro value of...
Constructing the Budget Constraint
Income
Rental income
The quantity δK of capital disappears each year.
The euro value of...
Constructing the Budget Constraint
Income
Rental income
The quantity δK of capital disappears each year.
The euro value of...
Constructing the Budget Constraint
Income
Rental income
The quantity δK of capital disappears each year.
The euro value of...
Constructing the Budget Constraint




                              16
Constructing the Budget Constraint
Income




                              16
Constructing the Budget Constraint
Income
Rental income




                               16
Constructing the Budget Constraint
Income
Rental income
   • rate of return on owning capital= R/ P − δ




              ...
Constructing the Budget Constraint




                              17
Constructing the Budget Constraint
Income




                              17
Constructing the Budget Constraint
Income
Interest Income




                               17
Constructing the Budget Constraint
Income
Interest Income
If a household’s nominal bond holdings are B, the flow of
nominal...
Constructing the Budget Constraint
Income
Interest Income
If a household’s nominal bond holdings are B, the flow of
nominal...
Constructing the Budget Constraint




                              18
Constructing the Budget Constraint
• Total income




                                18
Constructing the Budget Constraint
• Total income
 –Household nominal income= nominal profit +
  nominal wage income + nom...
Constructing the Budget Constraint
• Total income
 –Household nominal income= nominal profit +
  nominal wage income + nom...
Constructing the Budget Constraint




                              19
Constructing the Budget Constraint
Consumption




                              19
Constructing the Budget Constraint
Consumption
Households consume goods in the quantity C per year at
price= P




       ...
Constructing the Budget Constraint
Consumption
Households consume goods in the quantity C per year at
price= P
 –Household...
Constructing the Budget Constraint




                              20
Constructing the Budget Constraint
Assets




                               20
Constructing the Budget Constraint
Assets
Households hold assets in three forms:




                                     ...
Constructing the Budget Constraint
Assets
Households hold assets in three forms:
money, M;




                           ...
Constructing the Budget Constraint
Assets
Households hold assets in three forms:
money, M;
bonds, B;




                 ...
Constructing the Budget Constraint
Assets
Households hold assets in three forms:
money, M;
bonds, B;
ownership of capital,...
Constructing the Budget Constraint




                              21
Constructing the Budget Constraint
Assets




                               21
Constructing the Budget Constraint
Assets
Assume households hold a fixed amount of money in
euro terms.




               ...
Constructing the Budget Constraint
Assets
Assume households hold a fixed amount of money in
euro terms.
We assume that the ...
Constructing the Budget Constraint
Assets
Assume households hold a fixed amount of money in
euro terms.
We assume that the ...
Constructing the Budget Constraint




                              22
Constructing the Budget Constraint
Assets




                               22
Constructing the Budget Constraint
Assets
In considering whether to hold assets as bonds or
capital, households would comp...
Constructing the Budget Constraint
Assets
In considering whether to hold assets as bonds or
capital, households would comp...
Constructing the Budget Constraint
Assets
In considering whether to hold assets as bonds or
capital, households would comp...
Constructing the Budget Constraint




                              23
Constructing the Budget Constraint
• Household nominal income=




                                23
Constructing the Budget Constraint
• Household nominal income=
            π + wL + i · ( B+ P K )




                   ...
Constructing the Budget Constraint




                              24
Constructing the Budget Constraint
Household Budget Constraint




                               24
Constructing the Budget Constraint
Household Budget Constraint
–nominal value of assets= M+ B+ P K




                   ...
Constructing the Budget Constraint
Household Budget Constraint
–nominal value of assets= M+ B+ P K
–nominal saving to be t...
Constructing the Budget Constraint
Household Budget Constraint
–nominal value of assets= M+ B+ P K
–nominal saving to be t...
Constructing the Budget Constraint
Household Budget Constraint
–nominal value of assets= M+ B+ P K
–nominal saving to be t...
Constructing the Budget Constraint




                              25
Constructing the Budget Constraint
Household Budget Constraint




                               25
Constructing the Budget Constraint
Household Budget Constraint
–nominal saving= nominal income− nominal
 consumption




 ...
Constructing the Budget Constraint
Household Budget Constraint
–nominal saving= nominal income− nominal
  consumption
– no...
Constructing the Budget Constraint
Household Budget Constraint
–nominal saving= nominal income− nominal
  consumption
– no...
Constructing the Budget Constraint




                              26
Constructing the Budget Constraint
Household Budget Constraint in Nominal Terms




                                      ...
Constructing the Budget Constraint
Household Budget Constraint in Nominal Terms
– PC + ∆B + P·∆K = π + wL + i·( B+ P K )

...
Constructing the Budget Constraint
Household Budget Constraint in Nominal Terms
 – PC + ∆B + P·∆K = π + wL + i·( B+ P K )
...
Constructing the Budget Constraint




                              27
Constructing the Budget Constraint
Household Budget Constraint real terms




                                         27
Constructing the Budget Constraint
Household Budget Constraint real terms
– C + ( 1/ P)·∆B+ ∆K = π/ P + ( w/P)·L + i·(B/P+...
Constructing the Budget Constraint
Household Budget Constraint real terms
 – C + ( 1/ P)·∆B+ ∆K = π/ P + ( w/P)·L + i·(B/P...
Constructing the Budget Constraint




                              28
Clearing of the Markets for Labour and
            Capital Services




                                 29
Clearing of the Markets for Labour and
            Capital Services
Profit Maximization




                               ...
Clearing of the Markets for Labour and
            Capital Services
Profit Maximization
Real Profit




                    ...
Clearing of the Markets for Labour and
            Capital Services
Profit Maximization
Real Profit
π/P = A·F(Kd,Ld) − (w/P)...
Clearing of the Markets for Labour and
            Capital Services
Profit Maximization
Real Profit
π/P = A·F(Kd,Ld) − (w/P)...
Clearing of the Markets for Labour and
            Capital Services
Profit Maximization
Real Profit
π/P = A·F(Kd,Ld) − (w/P)...
Clearing of the Markets for Labour and
            Capital Services




                                 30
Clearing of the Markets for Labour and
            Capital Services




                                 31
Clearing of the Markets for Labour and
            Capital Services
The Labour Market




                                ...
Clearing of the Markets for Labour and
            Capital Services
The Labour Market
Demand for labour




              ...
Clearing of the Markets for Labour and
            Capital Services
The Labour Market
Demand for labour
∆(π/P) = ∆[ A·F( K...
Clearing of the Markets for Labour and
            Capital Services
The Labour Market
Demand for labour
∆(π/P) = ∆[ A·F( K...
Clearing of the Markets for Labour and
            Capital Services
The Labour Market
Demand for labour
∆(π/P) = ∆[ A·F( K...
Clearing of the Markets for Labour and
            Capital Services




                                 32
Clearing of the Markets for Labour and
            Capital Services




                                 33
Clearing of the Markets for Labour and
            Capital Services
Supply of labour




                                 ...
Clearing of the Markets for Labour and
            Capital Services
Supply of labour
We are assuming that each household s...
Clearing of the Markets for Labour and
            Capital Services
Supply of labour
We are assuming that each household s...
Clearing of the Markets for Labour and
            Capital Services




                                 34
Clearing of the Markets for Labour and
            Capital Services
Clearing of the labour market




                    ...
Clearing of the Markets for Labour and
            Capital Services
Clearing of the labour market
 –w/P is determined to e...
Clearing of the Markets for Labour and
            Capital Services
Clearing of the labour market
 –w/P is determined to e...
Clearing of the Markets for Labour and
            Capital Services
Clearing of the labour market
 –w/P is determined to e...
Clearing of the Markets for Labour and
            Capital Services




                                 35
Clearing of the Markets for Labour and
            Capital Services




                                 36
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services




                  ...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Demand for capital ser...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Demand for capital ser...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Demand for capital ser...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Demand for capital ser...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Demand for capital ser...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Demand for capital ser...
Clearing of the Markets for Labour and
            Capital Services




                                 37
Clearing of the Markets for Labour and
            Capital Services




                                 38
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services




                  ...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Supply of capital serv...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Supply of capital serv...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Supply of capital serv...
Clearing of the Markets for Labour and
            Capital Services




                                 39
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services




                  ...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Clearing of the market...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Clearing of the market...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
Clearing of the market...
Clearing of the Markets for Labour and
            Capital Services




                                 40
Clearing of the Markets for Labour and
            Capital Services




                                 41
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services




                  ...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
The interest rate




...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
The interest rate
   •...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
The interest rate
   •...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
The interest rate
   •...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
The interest rate
   •...
Clearing of the Markets for Labour and
            Capital Services
The Market for Capital Services
The interest rate
   •...
Clearing of the Markets for Labour and
            Capital Services




                                 42
Clearing of the Markets for Labour and
            Capital Services
Profit in Equilibrium




                             ...
Clearing of the Markets for Labour and
            Capital Services
Profit in Equilibrium
π/P = A· F(K,L) − (w/P)·L − ( R/P...
Clearing of the Markets for Labour and
            Capital Services
Profit in Equilibrium
π/P = A· F(K,L) − (w/P)·L − ( R/P...
Clearing of the Markets for Labour and
            Capital Services
Profit in Equilibrium
π/P = A· F(K,L) − (w/P)·L − ( R/P...
Clearing of the Markets for Labour and
            Capital Services
Profit in Equilibrium
π/P = A· F(K,L) − (w/P)·L − ( R/P...
Next Time: Business
Cycles


Read Barro, Cht 8
EC4004 Lecture 18
Markets & The Macroeconomy

         Dr Stephen Kinsella
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
Ec4004 Lecture18 Markets and the Macroeconomy
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Ec4004 Lecture18 Markets and the Macroeconomy

  1. 1. EC4004 Lecture 18 Markets & The Macroeconomy Dr Stephen Kinsella
  2. 2. Today Households Recap Constructing the BC
  3. 3. SULIS Test: Opens Friday 2pm Closes Friday 2pm
  4. 4. SULIS Test: Opens Friday 2pm Closes Friday 2pm Exam: Friday 12 Dec 4pm PE HALL/GYM
  5. 5. 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
  6. 6. 086 399 83 06
  7. 7. Labour: L (w) Households Capital: K (r)
  8. 8. Products Profit= PY-(wL+rK)
  9. 9. Products Bonds Profit= iB PY-(wL+rK)
  10. 10. Products Bonds Profit= iB PY-(wL+rK) Labour w/P*Ls
  11. 11. Products Bonds Profit= iB PY-(wL+rK) Capital Labour r/P - δ w/P*Ls
  12. 12. Constructing the Budget Constraint
  13. 13. Constructing the Budget Constraint Quantities and prices determined on four markets will determine household income.
  14. 14. Constructing the Budget Constraint Quantities and prices determined on four markets will determine household income.
  15. 15. Constructing the Budget Constraint Quantities and prices determined on four markets will determine household income. Total sources of funds must equal the total uses of funds.
  16. 16. Constructing the Budget Constraint Quantities and prices determined on four markets will determine household income. Total sources of funds must equal the total uses of funds.
  17. 17. Constructing the Budget Constraint 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.
  18. 18. Income
  19. 19. Constructing the Budget Constraint 12
  20. 20. Constructing the Budget Constraint Income 12
  21. 21. Constructing the Budget Constraint Income Profits 12
  22. 22. Constructing the Budget Constraint Income Profits Households earn profit—an excess of revenue over costs— from their business activities. 12
  23. 23. Constructing the Budget Constraint Income Profits Households earn profit—an excess of revenue over costs— from their business activities. • Y= A· F( Kd, Ld ) 12
  24. 24. Constructing the Budget Constraint Income Profits Households earn profit—an excess of revenue over costs— from their business activities. • Y= A· F( Kd, Ld ) π = PY − (wLd+ RKd) 12
  25. 25. Constructing the Budget Constraint Income Profits Households earn profit—an excess of revenue over costs— from their business activities. • Y= A· F( Kd, Ld ) π = PY − (wLd+ RKd) π = P A· F( Kd, Ld ) − ( wLd+ RKd) 12
  26. 26. Constructing the Budget Constraint 13
  27. 27. Constructing the Budget Constraint Income 13
  28. 28. Constructing the Budget Constraint Income Wage income 13
  29. 29. Constructing the Budget Constraint Income Wage income If households supply the quantity of labour Ls to the labour market, they receive the nominal wage income of wLs per year. 13
  30. 30. Constructing the Budget Constraint Income Wage income If households supply the quantity of labour Ls to the labour market, they receive the nominal wage income of wLs per year. Quantity of labour supplied is the fixed amount L, so nominal wage income is wL. 13
  31. 31. Constructing the Budget Constraint 14
  32. 32. Constructing the Budget Constraint Income 14
  33. 33. Constructing the Budget Constraint Income Rental income 14
  34. 34. Constructing the Budget Constraint Income Rental income If households supply the quantity of capital Ks to the rental market they receive the nominal rental income of RKs per year. 14
  35. 35. Constructing the Budget Constraint Income Rental income If households supply the quantity of capital Ks to the rental market they receive the nominal rental income of RKs per year. Since households supply all of their available capital, K, to the rental market, so that Ks = K, the nominal rental income is RK. 14
  36. 36. Constructing the Budget Constraint 15
  37. 37. Constructing the Budget Constraint Income 15
  38. 38. Constructing the Budget Constraint Income Rental income 15
  39. 39. Constructing the Budget Constraint Income Rental income The quantity δK of capital disappears each year. 15
  40. 40. Constructing the Budget Constraint Income Rental income The quantity δK of capital disappears each year. The euro value of this lost capital is P· δK. 15
  41. 41. Constructing the Budget Constraint Income 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 15
  42. 42. Constructing the Budget Constraint Income 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 15
  43. 43. Constructing the Budget Constraint Income 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 15
  44. 44. Constructing the Budget Constraint Income 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
  45. 45. Constructing the Budget Constraint 16
  46. 46. Constructing the Budget Constraint Income 16
  47. 47. Constructing the Budget Constraint Income Rental income 16
  48. 48. Constructing the Budget Constraint Income Rental income • rate of return on owning capital= R/ P − δ 16
  49. 49. Constructing the Budget Constraint 17
  50. 50. Constructing the Budget Constraint Income 17
  51. 51. Constructing the Budget Constraint Income Interest Income 17
  52. 52. Constructing the Budget Constraint Income Interest Income If a household’s nominal bond holdings are B, the flow of nominal interest income received is iB per year. 17
  53. 53. Constructing the Budget Constraint Income Interest Income 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. 17
  54. 54. Constructing the Budget Constraint 18
  55. 55. Constructing the Budget Constraint • Total income 18
  56. 56. Constructing the Budget Constraint • Total income –Household nominal income= nominal profit + nominal wage income + nominal net rental income + nominal interest income 18
  57. 57. Constructing the Budget Constraint • 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
  58. 58. Constructing the Budget Constraint 19
  59. 59. Constructing the Budget Constraint Consumption 19
  60. 60. Constructing the Budget Constraint Consumption Households consume goods in the quantity C per year at price= P 19
  61. 61. Constructing the Budget Constraint Consumption Households consume goods in the quantity C per year at price= P –Household nominal consumption= P C 19
  62. 62. Constructing the Budget Constraint 20
  63. 63. Constructing the Budget Constraint Assets 20
  64. 64. Constructing the Budget Constraint Assets Households hold assets in three forms: 20
  65. 65. Constructing the Budget Constraint Assets Households hold assets in three forms: money, M; 20
  66. 66. Constructing the Budget Constraint Assets Households hold assets in three forms: money, M; bonds, B; 20
  67. 67. Constructing the Budget Constraint Assets Households hold assets in three forms: money, M; bonds, B; ownership of capital, K. 20
  68. 68. Constructing the Budget Constraint 21
  69. 69. Constructing the Budget Constraint Assets 21
  70. 70. Constructing the Budget Constraint Assets Assume households hold a fixed amount of money in euro terms. 21
  71. 71. Constructing the Budget Constraint 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 21
  72. 72. Constructing the Budget Constraint 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 21
  73. 73. Constructing the Budget Constraint 22
  74. 74. Constructing the Budget Constraint Assets 22
  75. 75. Constructing the Budget Constraint 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. 22
  76. 76. Constructing the Budget Constraint 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 22
  77. 77. Constructing the Budget Constraint 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
  78. 78. Constructing the Budget Constraint 23
  79. 79. Constructing the Budget Constraint • Household nominal income= 23
  80. 80. Constructing the Budget Constraint • Household nominal income= π + wL + i · ( B+ P K ) 23
  81. 81. Constructing the Budget Constraint 24
  82. 82. Constructing the Budget Constraint Household Budget Constraint 24
  83. 83. Constructing the Budget Constraint Household Budget Constraint –nominal value of assets= M+ B+ P K 24
  84. 84. Constructing the Budget Constraint 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. 24
  85. 85. Constructing the Budget Constraint 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) 24
  86. 86. Constructing the Budget Constraint 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
  87. 87. Constructing the Budget Constraint 25
  88. 88. Constructing the Budget Constraint Household Budget Constraint 25
  89. 89. Constructing the Budget Constraint Household Budget Constraint –nominal saving= nominal income− nominal consumption 25
  90. 90. Constructing the Budget Constraint Household Budget Constraint –nominal saving= nominal income− nominal consumption – nominal saving= π + wL + i · ( B+ P K ) − P C 25
  91. 91. Constructing the Budget Constraint 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 25
  92. 92. Constructing the Budget Constraint 26
  93. 93. Constructing the Budget Constraint Household Budget Constraint in Nominal Terms 26
  94. 94. Constructing the Budget Constraint Household Budget Constraint in Nominal Terms – PC + ∆B + P·∆K = π + wL + i·( B+ P K ) 26
  95. 95. Constructing the Budget Constraint Household Budget Constraint in Nominal Terms – PC + ∆B + P·∆K = π + wL + i·( B+ P K ) nominal consumption + nominal saving = nominal income 26
  96. 96. Constructing the Budget Constraint 27
  97. 97. Constructing the Budget Constraint Household Budget Constraint real terms 27
  98. 98. Constructing the Budget Constraint Household Budget Constraint real terms – C + ( 1/ P)·∆B+ ∆K = π/ P + ( w/P)·L + i·(B/P+K) 27
  99. 99. Constructing the Budget Constraint 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
  100. 100. Constructing the Budget Constraint 28
  101. 101. Clearing of the Markets for Labour and Capital Services 29
  102. 102. Clearing of the Markets for Labour and Capital Services Profit Maximization 29
  103. 103. Clearing of the Markets for Labour and Capital Services Profit Maximization Real Profit 29
  104. 104. Clearing of the Markets for Labour and Capital Services Profit Maximization Real Profit π/P = A·F(Kd,Ld) − (w/P) · Ld − (R/P) · Kd 29
  105. 105. Clearing of the Markets for Labour and Capital Services Profit Maximization Real Profit π/P = A·F(Kd,Ld) − (w/P) · Ld − (R/P) · Kd • real profit= output 29
  106. 106. Clearing of the Markets for Labour and Capital Services Profit Maximization Real Profit π/P = A·F(Kd,Ld) − (w/P) · Ld − (R/P) · Kd • real profit= output −real wage payments−real rental payments 29
  107. 107. Clearing of the Markets for Labour and Capital Services 30
  108. 108. Clearing of the Markets for Labour and Capital Services 31
  109. 109. Clearing of the Markets for Labour and Capital Services The Labour Market 31
  110. 110. Clearing of the Markets for Labour and Capital Services The Labour Market Demand for labour 31
  111. 111. Clearing of the Markets for Labour and Capital Services The Labour Market Demand for labour ∆(π/P) = ∆[ A·F( Kd, Ld) ] − w/ P 31
  112. 112. Clearing of the Markets for Labour and Capital Services The Labour Market Demand for labour ∆(π/P) = ∆[ A·F( Kd, Ld) ] − w/ P = MPL − w/P 31
  113. 113. Clearing of the Markets for Labour and Capital Services The Labour Market Demand for labour ∆(π/P) = ∆[ A·F( Kd, Ld) ] − w/ P = MPL − w/P • change in real profit= marginal product of labour− real wage rate 31
  114. 114. Clearing of the Markets for Labour and Capital Services 32
  115. 115. Clearing of the Markets for Labour and Capital Services 33
  116. 116. Clearing of the Markets for Labour and Capital Services Supply of labour 33
  117. 117. Clearing of the Markets for Labour and Capital Services Supply of labour We are assuming that each household supplies a fixed quantity of labour to the labour market. 33
  118. 118. Clearing of the Markets for Labour and Capital Services 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. 33
  119. 119. Clearing of the Markets for Labour and Capital Services 34
  120. 120. Clearing of the Markets for Labour and Capital Services Clearing of the labour market 34
  121. 121. Clearing of the Markets for Labour and Capital Services Clearing of the labour market –w/P is determined to equate the aggregate quantity of labour demanded, Ld, to the aggregate quantity supplied, L. 34
  122. 122. Clearing of the Markets for Labour and Capital Services Clearing of the labour market –w/P is determined to equate the aggregate quantity of labour demanded, Ld, to the aggregate quantity supplied, L. 34
  123. 123. Clearing of the Markets for Labour and Capital Services Clearing of the labour market –w/P is determined to equate the aggregate quantity of labour demanded, Ld, to the aggregate quantity supplied, L. ( w/ P)* = MPL ( evaluated at L) 34
  124. 124. Clearing of the Markets for Labour and Capital Services 35
  125. 125. Clearing of the Markets for Labour and Capital Services 36
  126. 126. Clearing of the Markets for Labour and Capital Services The Market for Capital Services 36
  127. 127. Clearing of the Markets for Labour and Capital Services The Market for Capital Services Demand for capital services 36
  128. 128. Clearing of the Markets for Labour and Capital Services The Market for Capital Services Demand for capital services ∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P 36
  129. 129. Clearing of the Markets for Labour and Capital Services The Market for Capital Services Demand for capital services ∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P = MPK − R/P 36
  130. 130. Clearing of the Markets for Labour and Capital Services The Market for Capital Services Demand for capital services ∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P = MPK − R/P 36
  131. 131. Clearing of the Markets for Labour and Capital Services The Market for Capital Services Demand for capital services ∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P = MPK − R/P • change in real profit= 36
  132. 132. Clearing of the Markets for Labour and Capital Services The Market for Capital Services Demand for capital services ∆(π/P) = ∆[ A·F(Kd, Ld) ] − R/P = MPK − R/P • change in real profit= marginal product of capital− real rental price 36
  133. 133. Clearing of the Markets for Labour and Capital Services 37
  134. 134. Clearing of the Markets for Labour and Capital Services 38
  135. 135. Clearing of the Markets for Labour and Capital Services The Market for Capital Services 38
  136. 136. Clearing of the Markets for Labour and Capital Services The Market for Capital Services Supply of capital services 38
  137. 137. Clearing of the Markets for Labour and Capital Services The Market for Capital Services Supply of capital services For the economy as a whole, the aggregate quantity of capital, K, is given from past flows of investment. 38
  138. 138. Clearing of the Markets for Labour and Capital Services The Market for Capital Services 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, Ks, equals K. 38
  139. 139. Clearing of the Markets for Labour and Capital Services 39
  140. 140. Clearing of the Markets for Labour and Capital Services The Market for Capital Services 39
  141. 141. Clearing of the Markets for Labour and Capital Services The Market for Capital Services Clearing of the market for capital services 39
  142. 142. Clearing of the Markets for Labour and Capital Services The Market for Capital Services 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, Kd 39
  143. 143. Clearing of the Markets for Labour and Capital Services The Market for Capital Services 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, Kd (R/P)* = MPK( evaluated at K) 39
  144. 144. Clearing of the Markets for Labour and Capital Services 40
  145. 145. Clearing of the Markets for Labour and Capital Services 41
  146. 146. Clearing of the Markets for Labour and Capital Services The Market for Capital Services 41
  147. 147. Clearing of the Markets for Labour and Capital Services The Market for Capital Services The interest rate 41
  148. 148. Clearing of the Markets for Labour and Capital Services The Market for Capital Services The interest rate • i = R/P − δ 41
  149. 149. Clearing of the Markets for Labour and Capital Services The Market for Capital Services The interest rate • i = R/P − δ • rate of return on bonds= 41
  150. 150. Clearing of the Markets for Labour and Capital Services The Market for Capital Services The interest rate • i = R/P − δ • rate of return on bonds= rate of return on ownership of capital 41
  151. 151. Clearing of the Markets for Labour and Capital Services The Market for Capital Services The interest rate • i = R/P − δ • rate of return on bonds= rate of return on ownership of capital 41
  152. 152. Clearing of the Markets for Labour and Capital Services The Market for Capital Services 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 41
  153. 153. Clearing of the Markets for Labour and Capital Services 42
  154. 154. Clearing of the Markets for Labour and Capital Services Profit in Equilibrium 42
  155. 155. Clearing of the Markets for Labour and Capital Services Profit in Equilibrium π/P = A· F(K,L) − (w/P)·L − ( R/P)· K 42
  156. 156. Clearing of the Markets for Labour and Capital Services Profit in Equilibrium π/P = A· F(K,L) − (w/P)·L − ( R/P)· K • w/P = MPL 42
  157. 157. Clearing of the Markets for Labour and Capital Services Profit in Equilibrium π/P = A· F(K,L) − (w/P)·L − ( R/P)· K • w/P = MPL • R/P = MPK 42
  158. 158. Clearing of the Markets for Labour and Capital Services 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
  159. 159. Next Time: Business Cycles Read Barro, Cht 8
  160. 160. EC4004 Lecture 18 Markets & The Macroeconomy Dr Stephen Kinsella

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