1、Markets in the Macroeconomy Assuming that households perform all of the functions in the economy. Each household runs a family business and uses labor, L, and capital, K, to produce goods, Y, through the production function.Y= A F( K, L)Macroeconomics Chapter 6 1Markets in the MacroeconomyMacroecono
2、mics Chapter 6 2Goods marketLabor marketRental marketBond marketHouseholds Households(Firms) The Goods Market Households sell all the goods they produce on a goods market. Then households buy back from this market the goods that they want. Household buys goods for consumption. to increase the stock
3、of goods in the form of capital used for production, called investment.Macroeconomics Chapter 6 3The Goods Market and Prices The price in this goods market, denoted by P, expresses the number of dollars that exchange for one unit of goods. We call P the price level.Macroeconomics Chapter 6 4The good
4、s Market and Prices Y= A F( K, L) Since all of these goods are sold on the goods market, the variable Y will also represent the Quantity of goods per year sold and bought on the goods market. The quantity PY is the dollar value per year of the goods bought and sold on the goods market.Macroeconomics
5、 Chapter 6 5The goods Market and Prices The expression 1/P is the value of $1 in terms of the goods that it buys. M dollars exchange for (M) (1/ P) = M/P An expression like M/P is in real terms, in units of goods, whereas a quantity like M is in dollar or nominal terms.Macroeconomics Chapter 6 6Labo
6、r Market in the Macroeconomy Households supply labor on a labor market. Assume that the quantity supplied, Ls, is a constant, L. Households buy and sell labor in the labor market at the dollar or nominal wage rate, w. The real wage rate is w/P.Macroeconomics Chapter 6 7Rental Markets in the Macroeco
7、nomy Each household rents out all of the capital that it owns on a rental market. We think of the capital offered on the rental market as the supply of capital services, Ks. Since we have assumed that each household rents out all of its capital, we have Ks = K.Macroeconomics Chapter 6 8Rental Market
8、s and Prices Households rent out capital, K, for dollars at the dollar or nominal rental price, R A household that rents the amount of capital Kd pays the nominal amount RKd per year and then gets to use the capital as an input to production. The real rental price is R/P.Macroeconomics Chapter 6 9Th
9、e Bond Market in the Macroeconomy A borrowing household receives a loan from another household, whereas a lending household provides a loan to another household. A household that makes a loan receives a piece of paper called a bond, and we call the market on which households borrow or lend the bond
10、market. The holder of a bond, the lender, has a claim to the amount owed by the borrower.Macroeconomics Chapter 6 10The bond Market and Prices Each unit of bonds commits the borrower to repay $1 to the holder of the bond. This $1 is the principal of each bond. The principal is the initial amount adv
11、anced on a loan.Macroeconomics Chapter 6 11The Bond Markets and Prices Each unit of bonds commits the borrower to pay the holder a flow of interest payments of $i per year. The variable i is the interest rate, which is the ratio of the interest payment, $i, to the principal $1. The interest rate, i,
12、 can vary over time.Macroeconomics Chapter 6 12Money as a Medium of Exchange We assume that the exchanges on each of these markets use a single form of medium of exchange. A medium of exchange is an object held, not for its own sake, but rather to trade fairly soon for something else, such as goods
13、and services. We call the medium of exchange in our model money.Macroeconomics Chapter 6 13Money as a Medium of Exchange Assume that money is just a piece of paper, analogous to a paper currency issued by a government. Money is denominated in an arbitrary unit, such as a “dollar.” Dollar amounts are
14、 in nominal terms. Paper money earns no interest.Macroeconomics Chapter 6 14Money as a Medium of Exchange The sum of the individual holdings of money equals the aggregate quantity of money in the economy. Assume, for now, that this aggregate quantity of money is a given constant. The total money hel
15、d by all households must end up equaling this constant.Macroeconomics Chapter 6 15Constructing the Budget Constraint The quantities and prices determined on the four markets will determine household income. Flows of income are sources of funds Purchases of goods and assets are uses of funds The tota
16、l sources of funds must equal the total uses of funds. This equality is called the household budget constraint.Macroeconomics Chapter 6 16Constructing the Budget Constraint Income Profits Households may earn profitan excess of revenue over costsfrom their business activities. Y= A F( Kd, Ld ) = PY (
17、wLd+ RKd) = P A F( Kd, Ld ) ( wLd+ RKd)Macroeconomics Chapter 6 17Constructing the Budget Constraint Income Wage income If households supply the quantity of labor Ls to the labor market, they receive the nominal wage income of wLs per year. Quantity of labor supplied is the fixed amount L, so nomina
18、l wage income is wL.Macroeconomics Chapter 6 18Constructing 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
19、 market, so that Ks = K, the nominal rental income is RK.Macroeconomics Chapter 6 19Constructing the Budget Constraint Rental income The quantity K of capital disappears each year. The dollar value of this lost capital is PK. net nominal rental income= nominal rental income value of depreciation net
20、 nominal rental income = RKPK net nominal rental income = (R/P)PKPK net nominal rental income= (R/P)PKRate of return on owning capital= R/PMacroeconomics Chapter 6 20Constructing the Budget Constraint Interest Income If a households nominal bond holdings are B, the flow of nominal interest income re
21、ceived is iB per year. Since B equals zero for the whole economy, we have that the total of interest income equals zero.Macroeconomics Chapter 6 21Constructing the Budget Constraint Total income Household nominal income= nominal profit + nominal wage income + nominal net rental income+ nominal inter
22、est income Household nominal income =+wL+(R/P)PK+iBMacroeconomics Chapter 6 22Constructing the Budget Constraint Consumption Households consume goods in the quantity C per year at price P Household nominal consumption= P CMacroeconomics Chapter 6 23Constructing the Budget Constraint Assets Household
23、s hold assets in three forms: money, M; bonds, B; ownership of capital, K.Macroeconomics Chapter 6 24Constructing the Budget Constraint Assets We assume that households hold a fixed amount of money in dollar terms; that is, we assume that the change over time of a households nominal money holdings i
24、s zero M=0Macroeconomics Chapter 6 25Constructing 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 . Rate of return on bonds= rate o
25、f return on ownership i = R/P Macroeconomics Chapter 6 26Constructing the Budget Constraint Household nominal income = + wL + i ( B+ PK )Macroeconomics Chapter 6 27Constructing the Budget Constraint Household Budget Constraint nominal value of assets= M+ B+ P K nominal saving to be the change over t
26、ime in the nominal value of assets. nominal saving= (nominal assets) = M + B + PKMacroeconomics Chapter 6 28Constructing the Budget Constraint Household Budget Constraint nominal saving= nominal income nominal consumption nominal saving= + wL + i ( B+ P K ) P C B + P K = + wL + i( B+ PK)PCMacroecono
27、mics Chapter 6 29Constructing the Budget Constraint Household Budget Constraint in Nominal Terms PC + B + PK = + wL + i( B+ PK ) nominal consumption + nominal saving = nominal incomeMacroeconomics Chapter 6 30Constructing the Budget Constraint Household Budget Constraint real terms C + (1/P)B+ K = /
28、P + (w/P)L + i(B/P+K) consumption + real saving = real incomeMacroeconomics Chapter 6 31Constructing the Budget ConstraintMacroeconomics Chapter 6 32Clearing of the Markets for Labor and Capital Services Profit Maximization Real Profit /P = AF(Kd,Ld) (w/P) Ld (R/P) Kd real profit= output real wage p
29、ayments real rental paymentsMacroeconomics Chapter 6 33Clearing of the Markets for Labor and Capital ServicesMacroeconomics Chapter 6 34Clearing of the Markets for Labor and Capital Services The Labor Market Demand for labor (/P) = AF( Kd, Ld) w/P = MPL w/P change in real profit= marginal product of
30、 labor real wage rateMacroeconomics Chapter 6 35Clearing of the Markets for Labor and Capital ServicesMacroeconomics Chapter 6 36Clearing of the Markets for Labor and Capital Services Supply of labor We are assuming that each household supplies a fixed quantity of labor to the labor market. Therefor
31、e, the aggregate or market supply of labor, Ls, is the given amount L.Macroeconomics Chapter 6 37Clearing of the Markets for Labor and Capital Services Clearing of the labor market w/P is determined to equate the aggregate quantity of labor demanded, Ld, to the aggregate quantity supplied, L. (w/P)*
32、 = MPL ( evaluated at L)Macroeconomics Chapter 6 38Clearing of the Markets for Labor and Capital ServicesMacroeconomics Chapter 6 39Clearing of the Markets for Labor and Capital Services The Market for Capital Services Demand for capital services (/P) = AF(Kd, Ld) R/P = MPK R/P change in real profit
33、= marginal product of capital real rental priceMacroeconomics Chapter 6 40Clearing of the Markets for Labor and Capital ServicesMacroeconomics Chapter 6 41Clearing of the Markets for Labor and Capital Services The Market for Capital Services Supply of capital services For the economy as a whole, the
34、 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.Macroeconomics Chapter 6 42Clearing of the Markets for Labor and Capital Services The Market for Capital Services Clearing of the m
35、arket for capital services R/P will be determined to clear the marketthat is, so that the aggregate quantity of capital services supplied, K, equals the aggregate quantity demanded, Kd (R/P)* = MPK( evaluated at K)Macroeconomics Chapter 6 43Clearing of the Markets for Labor and Capital ServicesMacro
36、economics Chapter 6 44Clearing of the Markets for Labor and Capital Services The Market for Capital Services The interest rate i = R/P rate of return on bonds= rate of return on ownership of capital i = MPK ( evaluated at K) Macroeconomics Chapter 6 45Clearing of the Markets for Labor and Capital Se
37、rvices Profit in Equilibrium /P = A F(K,L) (w/P)L ( R/P) K w/P = MPL R/P = MPK /P = A F(K, L) MPL L MPK KMacroeconomics Chapter 6 46Clearing of the Markets for Labor and Capital Services Zero Profit in EquilibriumKMPKLMPLLKALFYKAFLKALFLMPLLKAFLKAFMPLLKALFLKAFMPLAFMPKLKALFYLKAFLYLKAFY*) 1 ,/() 1 ,/(*/) 1 ,/()/() 1 ,/() 1 ,/() 1 ,/(/),(11211Macroeconomics Chapter 6 47Clearing of the Markets for Labor and Capital Services Zero Profit in Equilibrium0/*),(PPRMPKPwMPLKMPKLMPLLKAFYMacroeconomics Chapter 6 48
