Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-24
Figure 5.8 Increase in Total Factor Productivity
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-20
Figure 5.6 Equilibrium Effects of an Increase in Government Spending
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-21
World War II Increase in G
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-11
Figure 5.2B The Production Function and the Production Possibilities Frontier
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-30
Equation 5.7: Production function without capital
• Labor is the only input, but there is still constant returns to scale (linear production function).
5-19
Effects of an Increase in G
• Essentially a pure income effect • C decreases, l decreases, Y increases, w falls
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-23
Effects of an Increase in z (or an increase in K)
• PPF shifts out, and becomes steeper – income and substitution effects are involved. • C increases, l may increase or decrease, Y increases, w increases
• Very large increase in G • Y increases, C decreases by a small amount
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-22
Figure 5.7 GDP, Consumption, and Government Expenditures
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-18
Figure 5.5 Using the Second Welfare Theorem to Determine a Competitive Equilibrium
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-15
Figure 5.4 Pareto Optimality
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-16
Equation 5.6: Key Properties of a Pareto Optimum
• In this model, the competitive equilibrium and the Pareto optimum are identical, as
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-8
Equation 5.4: The Production Function
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-29
A Simplified Model with a Proportional Income Tax
• Use the model to study the incentive effects of the income tax, and to derive the “Laffer curve.”
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-5
Income-Expenditure Identity
In a competitive equilibrium, the incomeexpenditure identity is satisfied.
5-9
Equation 5.5
• In equilibrium, N = h – l, so
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-10
Figure 5.2A The Production Function and the Production Possibilities Frontier
5-4
Competitive Equilibrium
• Representative consumer optimizes given market prices. • Representative firm optimizes given market prices. • The labor market clears. • The government budget constraint is satisfied, or G = T.
5-26
Figure 5.10 Income and Substitution Effects of an Increase in Total Factor Productivity
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
Chapter 5
A ClosedEconomy One-Period Macroeconomic Model
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
Chapter 5 Topics
• Introduce the government. • Construct closed-economy one-period macroeconomic model, which has: (i) representative consumer; (ii) representative firm; (iii) government. • Economic efficiency and Pareto optimality. • Experiments: Increases in government spending and total factor productivity.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-17
First and Second Welfare Theorems
• These theorems apply to any macroeconomic model • First Welfare Theorem: Under certain conditions, a competitive equilibrium is Pareto optimal. • Second Welfare Theorem: Under certain conditions, a Pareto optimum is a competitive equilibrium.
5-27
Figure 5.11 Deviations from Trend in Real GDP and the Solow Residual
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-28
Figure 5.12 The Relative Price of Energy
5-12
Figure 5.2C The Production Function and the Production Possibilities Frontier
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
5-13
Figure 5.3 Competitive EquFra biblioteklibrium