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© The McGraw-Hill Companies, 2002 Factor markets and income distribution
© The McGraw-Hill Companies, Capital and land Physical capital –the stock of produced goods which contributes to the production of goods and services. Land –the factor of production which nature supplies. Together capital and land make up the tangible wealth of a country.
© The McGraw-Hill Companies, Investment Capital depreciates over time –becoming less productive and less valuable. Gross investment –the production of new capital goods and the improvement of existing capital goods. Net investment –gross investment minus the depreciation of the existing capital stock.
© The McGraw-Hill Companies, Stocks and flows A stock –the quantity of an asset at a point in time –the asset price is the sum for which the stock can be bought outright. A flow –the stream of services that an asset provides during a period –the rental rate is the cost of using capital services.
© The McGraw-Hill Companies, Interest and present value The present value of £1 at some future date is the sum that, if lent out today, would accumulate to £1 by that future date. –It depends upon how far into the future the sum accumulates –and on the rate of interest. The price of a capital asset should be related to the stream of future payments that will be earned from the services it provides –discounted back to give the present value.
© The McGraw-Hill Companies, Real and nominal interest rates The nominal interest rate –tells us how many actual pounds will be earned in interest by lending £1 for one year. The real rate of interest –measures the return on a loan as the increase in goods that can be purchased rather than as the increase in the nominal value of the loan fund. The real rate of interest is the nominal rate minus the inflation rate.
© The McGraw-Hill Companies, The equilibrium real interest rate Current consumption Future consumption A A' AA' shows the production possibility frontier between current and future consumption: by devoting resources to investment, future consumption can be increased. The slope of the frontier has magnitude –(1 + i) where i is the rate of return on investment.
© The McGraw-Hill Companies, The equilibrium real interest rate Current consumption Future consumption A A' The slope of the red line represents –(1 + r), where r is the real interest rate that balances the productivity of investment and the thriftiness of consumers. U U Given society's preferences between present and future consumption, the optimal position is at E, where the indifference curve UU is at a tangent to the PPF. E
© The McGraw-Hill Companies, The markets for capital and land The derived demand curve for capital (and for land) services closely parallels the earlier analysis of labour demand. But land is in fixed supply to the economy as a whole. Rental rates tend to become equalised across alternative uses.
© The McGraw-Hill Companies, Changes in capital intensity Over time, the UK economy is becoming more capital-intensive –the wage-rental ratio has increased, leading industries to substitute capital for labour –in the long run the supply of labour is less elastic than the supply of capital –new capital embodies latest technology.
© The McGraw-Hill Companies, The functional distribution of income in the UK The distribution of income between the factors of production changed little between and 1998.
Time and the Discount Rate Project flows of costs and benefits are not even over time.
© © The McGraw-Hill Companies, Aggregate output in the short run Potential output –the output the economy would produce if all factors of production.
DEMAND AND SUPPLY IN FACTOR MARKETS 17 CHAPTER. Objectives After studying this chapter, you will able to Explain how firms choose the quantities of labor,
At Full Employment: The Classical Model CHAPTER 23.
© 2010 Pearson Addison-Wesley. To study the economics of financial institutions and markets we distinguish between Finance and money Physical capital.
© The McGraw-Hill Companies, Some important questions Why does a top professional footballer earn so much more than a professor? Why does an unskilled.
© 2010 Pearson Addison-Wesley. Currencies and Exchange Rates To buy goods and services produced in another country we need money of that country. Foreign.
Money and Inflation An introduction. Introduction In this section we will discuss the quantity theory of money, discuss inflation and interest rates,
THE ECONOMY AT FULL EMPLOYMENT: THE CLASSICAL MODEL 24 CHAPTER.
Aggregate Expenditure and Equilibrium Output. The Core of Macroeconomic Theory.
Investment, Saving, and the Real Interest Rate CHAPTER 10.
Copyright 2004 – Biz/ed Aggregate Demand and Supply.
© 2010 Pearson Addison-Wesley. Quantity Supplied and Supply The quantity of real GDP supplied is the total quantity that firms plan to produce during.
AP macroeconomics Unit 4: Long Run Economic growth and loanable funds.
Slides prepared by Thomas Bishop Chapter 7 International Factor Movements.
Aggregate Demand and Aggregate Supply Chapter Objectives Aggregate Demand and the Factors That Cause it to Change Aggregate Demand and the Factors That.
Aggregate Supply and Aggregate Demand CHAPTER 27.
AD and AS. AGGREGATE DEMAND (AD): The quantity of real GDP demanded (total quantity of G&S that all buyers in an economy want to buy) at different price.
Lesson 7-1 The Marketplace Consumers influence the price of goods in a market economy. -A market represents actions between buyers and sellers.
1 NBS-OECD Workshop on National Accounts 6-10 November 2006 Measuring Capital and Capital Services: An Overview Paul Schreyer OECD.
Chapter 12 The analysis of factor markets: labour David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point.
AGGREGATE DEMAND (AD): The quantity of real GDP demanded at different price levels. -The price level is measured using the GDP deflator. -The quantity.
Chapter 6 From Demand to Welfare McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.
MACROECONOMICS What is the purpose of macroeconomics? to explain how the economy as a whole works to understand why macro variables behave in the way they.
Measuring GDP and Economic Growth CHAPTER 21. After studying this chapter you will be able to Define GDP and use the circular flow model to explain why.
You need: ◦ Pencils ◦ Pen (blue or black only) ◦ Personal ID You can not have: ◦ Phones ◦ Calculators.
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 9 Growth.
Forecasting Interest Rates Structural Models. Structural models are an attempt to determine causal relationships between various economic variables: Structural.
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