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Characteristics of utility function
- 1. more prefered to less
- 2. consumers like diverstiy
- 3. consumption and leisure are normal goods
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Macroeconomics
branch of econ that deals with the performance/structure/behaviour of economy as a whole.
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Model
system of equations that shows dynamics of economy
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Players of economy
- households(want to max utility)
- firms(max profits)
- governement (exogenous and taken as given)
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GDP
- Gross domestic product
- quatity of all goods and services produced at a given time within our borders
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GDP calculating approuaches
- 1. Product (add value of all production-avoid double count)
- 2. Expenditure (measure spending on final goods within nation)
- 3. Income (sum total of incomes of individuals during 1 year)
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Y=C+I+G
GDP=consumption+investment+govnmt.spending
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Us borrowing from ROW bacause:
Y^d=y+NFP+TR+INT-T
domestic income=gdp+income outside US+transfer payments+interest rates-taxes
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S^p=y^d-C
private savings= domestic income-consumption
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S^g=T-TR-INT-G
govnt savings=taxes-transfer payents-intersts on debt-govnt spending
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Government deficit
D=-S^g
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Total national savings
S=S^g+S^p=Y+NFP-C-G
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Current acount
CA=S-I=NX+NFP
- S<I CA debt
- S>I CA surplus
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Normative economics
looks at outcomes of econ behaviour and asks if they are good or bad and if outcomes could be better
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Positive economics
an attempt to understand behaviour of econ systems without judging if outcomes are good or bad
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Happiness = Utility
U(C,L)
consumption and leisure determines hapiness, the more of both, the happier
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Characteristics of utility function
- 1.more prefered to less
- 2.consumers like diversity
- 3.conumption and leisure are normal goods
- income up=consumption up, leisure up
- U(C,L)=lnC+lnL
- Same U if L up and C down
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Slope of indiference curve means?
marginal rate of substitution between C and L
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Consumption?
- C=W*N^s+Pi-T
- consmpt=wage income+nonwage income-taxes
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Firm production function
- Y=zF(K,N^d)
- output=productivity*(capital,labor demand)
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Cobb Douglass
y=zK^(L)*N^(1-L)
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Wage goes down, what happens to wealth, leisure and consumption?
W down = WE down = L down, C down
- leisure is cheaper
- prefering more leisure for work
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Laffer Curve
- When you have high taxes and lower them, then tax revenue may be higher than old one with high taxes.
- Revenue go up when taxes are low and you increase them.
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Tax rebates
People may want to work less because they get more money.
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future value of 1000$
1000(1+r)
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present value of 1000
x=1000/(1+r)
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Today Vs Tomorrow consumption
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Wealth up? C and C'?
up and up
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Tax rebate affect on taxes
T down, T' up
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What direct r?
Tax policy
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Ricardian equvalence theorem
- timing of taxes not impact consumption
- exacpt when borrowing constrained
- distorcianary taxes
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No taxes for short period on income and sales
Everybody would want to work more
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If R up, then cost of consumption up and people consumer less
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N^s up tai Y up ir savings up
N^s(+W,-WE,+R)
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Consume today vs tomorrow
U(C,C')=U(C)+BettaU(C') 0<Betta<1
Betta=impatience factore, the bigger, the more important future Saviours have high B
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Income savings and borrowing relationships
- C=Y+B ka gaunu+ka pasiskolinau
- Y'=C'-b(1+r) ka gaunu-grazinu skola
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K'=
I=
K=
8=
- K'=dersired capital stock
- I=gross investment
- K=existing capital stock
- 8=depreciation of capital (avg 10-12% per year)
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LAW OF MOTION OF CAPITAL
K'=I+K(1-8)
firm chooses K'
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Firms profit
- Profit=revenue-cots
- Profit=zF(K,N)-WN-I
- Future profit=Z'F(K'N')-W'N'-I'
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Econ Crisis
G/Y= goes UP
- Government spending is higher than income
- Productivity down nes banks stop lending and firms cannot have normal business...
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C=consumption
d=depreciation rate
l=leisure
r=interest rate
s=savings rate
- w=wage
- y=income
- z=productivity
- CA=current account surplus
- D=deficit
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INT=interest paid to the government
NFP=net factor payments
NX=net exports
S^p=private savings
S^g=government savings
Y^d=disposable income
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