Markets, Prices, Supply & Demand 1 EC4004 Lecture 17 Dr S. Kinsella
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Markets, Prices, Supply & Demand 1EC4004 Lecture 17Dr S. Kinsella
National Income AccountingY=C+I+G+X-M
Solowk* = k*[ s, A, n, δ, L(0) ]
(+) (+) (−) (−)(0)
National Income AccountingY=C+I+G+X-M
Solowk* = k*[ s, A, n, δ, L(0) ]
(+) (+) (−) (−)(0)
National Income AccountingY=C+I+G+X-M
Barro Model
The Macroeconomy is the sum of Supply
and Demand in Individual Markets
Today
1. Recap
2. Equilibrium in the Markets
1. Goods
2. Rental
3. Bonds
4. Money
3. Consumption, Saving, and Investment
Household Behaviour
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MarketsintheMacroeconomy
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MarketsintheMacroeconomy
Assumingthathouseholdsperformallofthefunc7onsintheeconomy.
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MarketsintheMacroeconomy
Assumingthathouseholdsperformallofthefunc7onsintheeconomy.
Eachhouseholdrunsafamilybusinessanduseslabour,L,andcapital,K,toproducegoods,Y,throughtheproduc7onfunc7on.
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MarketsintheMacroeconomy
Assumingthathouseholdsperformallofthefunc7onsintheeconomy.
Eachhouseholdrunsafamilybusinessanduseslabour,L,andcapital,K,toproducegoods,Y,throughtheproduc7onfunc7on.
7
MarketsintheMacroeconomy
Assumingthathouseholdsperformallofthefunc7onsintheeconomy.
Eachhouseholdrunsafamilybusinessanduseslabour,L,andcapital,K,toproducegoods,Y,throughtheproduc7onfunc7on.
Y=A· F(K,L)
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MarketsintheMacroeconomy
8
MarketsintheMacroeconomy
TheGoodsMarket
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MarketsintheMacroeconomy
TheGoodsMarketHouseholdssellallthegoodstheyproduceonagoods market.Thenhouseholdsbuybackfromthismarketthegoodsthattheywant.
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MarketsintheMacroeconomy
TheGoodsMarketHouseholdssellallthegoodstheyproduceonagoods market.Thenhouseholdsbuybackfromthismarketthegoodsthattheywant.
Householdbuysgoodsfor
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MarketsintheMacroeconomy
TheGoodsMarketHouseholdssellallthegoodstheyproduceonagoods market.Thenhouseholdsbuybackfromthismarketthegoodsthattheywant.
Householdbuysgoodsfor• consumption.
8
MarketsintheMacroeconomy
TheGoodsMarketHouseholdssellallthegoodstheyproduceonagoods market.Thenhouseholdsbuybackfromthismarketthegoodsthattheywant.
Householdbuysgoodsfor• consumption.
toincreasethestockofgoodsintheformofcapitalusedforproduc7on,calledinvestment.
Consumption
10
MarketsintheMacroeconomy
10
MarketsintheMacroeconomy
LabourMarket
10
MarketsintheMacroeconomy
LabourMarket
Householdssupplylabouronalabour market.
10
MarketsintheMacroeconomy
LabourMarket
Householdssupplylabouronalabour market.Assumequan7tysupplied,Ls,isaconstant,L.
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MarketsintheMacroeconomy
11
MarketsintheMacroeconomyTheRentalMarket
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MarketsintheMacroeconomyTheRentalMarketEachhouseholdrentsoutallofthecapitalitownsonarental market.
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MarketsintheMacroeconomyTheRentalMarketEachhouseholdrentsoutallofthecapitalitownsonarental market.Capitalofferedontherentalmarketisthesupplyofcapitalservices,Ks.
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MarketsintheMacroeconomyTheRentalMarketEachhouseholdrentsoutallofthecapitalitownsonarental market.Capitalofferedontherentalmarketisthesupplyofcapitalservices,Ks.
AssumehaveKs =K.
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MarketsintheMacroeconomy
12
MarketsintheMacroeconomyTheBondMarket
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MarketsintheMacroeconomyTheBondMarketAborrowinghouseholdreceivesaloanfromanotherhousehold.Alendinghouseholdprovidesaloantoanotherhousehold.
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MarketsintheMacroeconomyTheBondMarketAborrowinghouseholdreceivesaloanfromanotherhousehold.Alendinghouseholdprovidesaloantoanotherhousehold.
Ahouseholdmakingloangetsapieceofpapercalledabond.
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MarketsintheMacroeconomyTheBondMarketAborrowinghouseholdreceivesaloanfromanotherhousehold.Alendinghouseholdprovidesaloantoanotherhousehold.
Ahouseholdmakingloangetsapieceofpapercalledabond.Callthemarketonwhichhouseholdsborroworlendthebond market.
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MarketsintheMacroeconomyTheBondMarketAborrowinghouseholdreceivesaloanfromanotherhousehold.Alendinghouseholdprovidesaloantoanotherhousehold.
Ahouseholdmakingloangetsapieceofpapercalledabond.Callthemarketonwhichhouseholdsborroworlendthebond market.
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MarketsintheMacroeconomyTheBondMarketAborrowinghouseholdreceivesaloanfromanotherhousehold.Alendinghouseholdprovidesaloantoanotherhousehold.
Ahouseholdmakingloangetsapieceofpapercalledabond.Callthemarketonwhichhouseholdsborroworlendthebond market.
Theholderofabond,thelender,hasaclaimtotheamountowedbytheborrower.
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MoneyasaMediumofExchange
13
MoneyasaMediumofExchangeAssumeexchangesinmarketsuseasinglemedium of exchange.
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MoneyasaMediumofExchangeAssumeexchangesinmarketsuseasinglemedium of exchange.
MONEY
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MoneyasaMediumofExchangeAssumeexchangesinmarketsuseasinglemedium of exchange.
MONEY
14
MarketsintheMacroeconomy
14
MarketsintheMacroeconomy
Sumofindividualholdingsofmoneyequalstheaggregatequan7tyofmoneyintheeconomy.
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MarketsintheMacroeconomy
Sumofindividualholdingsofmoneyequalstheaggregatequan7tyofmoneyintheeconomy.
14
MarketsintheMacroeconomy
Sumofindividualholdingsofmoneyequalstheaggregatequan7tyofmoneyintheeconomy.
Thetotalmoneyheldbyallhouseholdsmustendupequalingthisconstant.
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MarketsandPrices
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MarketsandPricesTheGoodsMarket
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MarketsandPricesTheGoodsMarketThepriceinthismarket,denotedbyP,expressesthenumberofeurosthatexchangeforoneunitofgoods.WecallP theprice level.
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MarketsandPrices
16
MarketsandPrices
TheGoodsMarket
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MarketsandPrices
TheGoodsMarket–Y=A· F(K,L)
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MarketsandPrices
TheGoodsMarket–Y=A· F(K,L)
Sinceallofthesegoodsaresoldonthegoodsmarket,thevariableY willalsorepresentthe
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MarketsandPrices
TheGoodsMarket–Y=A· F(K,L)
Sinceallofthesegoodsaresoldonthegoodsmarket,thevariableY willalsorepresenttheQuan7tyofgoodsperyearsoldandboughtonthegoodsmarket.
16
MarketsandPrices
TheGoodsMarket–Y=A· F(K,L)
Sinceallofthesegoodsaresoldonthegoodsmarket,thevariableY willalsorepresenttheQuan7tyofgoodsperyearsoldandboughtonthegoodsmarket.
Thequan7tyPY istheeurovalueperyearofthegoodsboughtandsoldonthegoodsmarket.
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MarketsandPrices
17
MarketsandPrices
TheGoodsMarket
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MarketsandPrices
TheGoodsMarketForsellersofgoods,thepricelevel,P,isthenumberofeurosobtainedforeachunitofgoodssold.
17
MarketsandPrices
TheGoodsMarketForsellersofgoods,thepricelevel,P,isthenumberofeurosobtainedforeachunitofgoodssold.
Forbuyers,P isthenumberofeurospaidperunitofgoods.
17
MarketsandPrices
TheGoodsMarketForsellersofgoods,thepricelevel,P,isthenumberofeurosobtainedforeachunitofgoodssold.
Forbuyers,P isthenumberofeurospaidperunitofgoods.
SinceP eurosbuy1unitofgoods,€1buys1/P unitsofgoods.
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MarketsandPrices
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MarketsandPrices
TheGoodsMarket
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MarketsandPrices
TheGoodsMarketTheexpression1/P isthevalueof€1intermsofthegoodsthatitbuys.
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MarketsandPrices
TheGoodsMarketTheexpression1/P isthevalueof€1intermsofthegoodsthatitbuys.
–M eurosexchangefor
18
MarketsandPrices
TheGoodsMarketTheexpression1/P isthevalueof€1intermsofthegoodsthatitbuys.
–M eurosexchangefor(M)· (1/P)=M/P
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MarketsandPrices
TheGoodsMarketTheexpression1/P isthevalueof€1intermsofthegoodsthatitbuys.
–M eurosexchangefor(M)· (1/P)=M/P
AnexpressionlikeM/P isinreal terms,inunitsofgoods,whereasaquan7tylikeM isineuroornominalterms.
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MarketsandPrices
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MarketsandPrices
TheLabourMarket
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MarketsandPrices
TheLabourMarketHouseholdsbuyandselllabourinthelabourmarketattheeuroornominal wage rate,w.
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MarketsandPrices
TheLabourMarketHouseholdsbuyandselllabourinthelabourmarketattheeuroornominal wage rate,w.
Thereal wage rate isw/P.
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MarketsandPrices
20
MarketsandPrices
TheRentalMarket
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MarketsandPrices
TheRentalMarketHouseholdsrentoutcapital,K,foreurosattheeuroornominal rental price,R
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MarketsandPrices
TheRentalMarketHouseholdsrentoutcapital,K,foreurosattheeuroornominal rental price,RAhouseholdthatrentstheamountofcapitalKd paysthenominalamountRKd peryearandthengetstousethecapitalasaninputtoproduc7on.
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MarketsandPrices
TheRentalMarketHouseholdsrentoutcapital,K,foreurosattheeuroornominal rental price,RAhouseholdthatrentstheamountofcapitalKd paysthenominalamountRKd peryearandthengetstousethecapitalasaninputtoproduc7on.
Thereal rental price isR/P.
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MarketsandPrices
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MarketsandPrices
TheLabourMarket
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MarketsandPrices
TheLabourMarketHouseholdsbuyandselllabourinthelabourmarketattheeuroornominal wage rate,w.
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MarketsandPrices
TheLabourMarketHouseholdsbuyandselllabourinthelabourmarketattheeuroornominal wage rate,w.
Thereal wage rate isw/P.
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MarketsandPrices
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MarketsandPricesTheBondMarket
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MarketsandPricesTheBondMarketEachunitofbondscommitstheborrowertorepay€1totheholderofthebond.This€1istheprincipal ofeachbond.
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MarketsandPricesTheBondMarketEachunitofbondscommitstheborrowertorepay€1totheholderofthebond.This€1istheprincipal ofeachbond.
Theprincipalistheini7alamountadvancedonaloan.
22
MarketsandPricesTheBondMarketEachunitofbondscommitstheborrowertorepay€1totheholderofthebond.This€1istheprincipal ofeachbond.
Theprincipalistheini7alamountadvancedonaloan.
Allbondshaveveryshortmaturity,
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MarketsandPrices
23
MarketsandPrices
TheBondMarket
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MarketsandPrices
TheBondMarketEachunitofbondscommitstheborrowertopaytheholderaflowofinterestpaymentsof€i peryear.
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MarketsandPrices
TheBondMarketEachunitofbondscommitstheborrowertopaytheholderaflowofinterestpaymentsof€i peryear.Thevariablei is the interest rate,whichisthera7ooftheinterestpayment,€i,totheprincipal€1.
23
MarketsandPrices
TheBondMarketEachunitofbondscommitstheborrowertopaytheholderaflowofinterestpaymentsof€i peryear.Thevariablei is the interest rate,whichisthera7ooftheinterestpayment,€i,totheprincipal€1.Theinterestrate,i,canvaryover7me.
NextTime
NextTime
Construc7ngtheBudgetConstraint
NextTime
Construc7ngtheBudgetConstraint
Inter‐temporalConsump7on
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