Why is there positive interest? Why is the interest rate > zero?

Time preference The general tendency of most people most of the time to prefer goods at the present time to goods in the future. Interest is the payment made to shift purchases from the future to the present day.

Time Shifting w/o Interest Another way to shift a purchase to the present day is with a partner. The partner is a co-owner, and receives a rental. Time preference still exists, since the alternative is to wait and save.

real and nominal interest The real interest rate is the nominal rate minus the inflation rate. Economists keep it real by adjusting for inflation.

Taxes on Nominal Interest Income taxes are imposed on nominal interest. That reduces net interest after inflation and taxes.

What is savings? The economic definition?

Savings and Investment Savings: Income minus Consumption. Economic Investment: an increase in the stock of capital goods and of human capital. The role of the interest rate is to equilibrate savings and economic investment.

Supply and Demand Loanable funds: savings available to loan out. Supply from savings. Demand from borrowers. More savings: lower interest rate. More borrowing: higher interest rate.

Savings and Money Supply An increase in the money supply (e.g. by Fed) acts like more savings. Taxes reduce net savings and increase debt service. Taxed bonds pay more. Interest is aside from a risk premium. Natural rate not the transaction rate.

Interest not doing its job? The transaction rate of interest is affected by inflation, taxation, and central-bank manipulations of the money supply. The interest rate is less able to do its economic job.

Capital goods Capital goods are goods which have been produced but not yet consumed.

The Time Structure of C.G. Capital goods vary in duration. Circulating capital: quick turnover. E.g. inventory. Long Duration: slow turnover. E.g. real estate.

Effect of the Interest Rate 1-year trees versus 50-year trees. Return on capital goods competes with bonds. Suppose 2% tree growth. Low interest: more slow capital goods. High interest: more quick capital goods.

Effect of Low Interest If low interest rates are due to an expansion of money. More long-duration capital goods. But can be bad investments when interest rates rise back up. Malinvestments.

Land Natural resources. Can one improve land? Can one invest in land?

Land and Rent Supply of spatial land is fixed. Land rent is economic rent. Price = Rent / (interest + tax [rates]) Higher interest or tax lowers price. Rent is not affected.

Marginal product The marginal product of a factor is the extra output obtained from one more unit of the factor, keeping all else constant.

Marginal productivity The demand for a factor is based on its marginal productivity. Factors are hired or rented up to the quantity for which the marginal product equals the rental.

Wages = MP of Labor Factor prices tend to equal their marginal products.

What is unemployment? The unemployed are those able and willing to work at prevailing wages, but cannot get a job, or those who have been hired but have not yet started to work. Part-time workers are considered employed even though they prefer a full-time job.

Why unemployment?...

Why unemployment? Barriers between labor and other resources. Taxes Restrictions - the minimum wage. Credit constraints. Like horses jumping over a barrier.

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Unions Do labor unions raise the wage level of the economy?

Effect of Unions Unions split the labor force into a union and non-union sector. Wages are pushed higher in the union sector. The greater supply of non-union labor reduces wages in that sector. Overall wages are not raised.