II. General equilibrium approaches—theory

Slides:



Advertisements
Similar presentations
Economics: Notes for Teachers
Advertisements

The Goods Market in an Open Economy
A closed economy, market-clearing model
Demand for goods & services
Consumption & Saving Over Two Periods Consumption and Saving Effects of Changes in Income Effects of Interest Rates.
Intermediate Macroeconomics Chapter 5 The Keynesian Model.
Macroeconomics fifth edition N. Gregory Mankiw PowerPoint ® Slides by Ron Cronovich macro © 2002 Worth Publishers, all rights reserved CHAPTER THREE National.
1 Circular Flow Model : : Lets Simplify It. 2 Private Sector Circular Flow.
Macroeconomics fifth edition N. Gregory Mankiw PowerPoint ® Slides by Ron Cronovich CHAPTER TEN Aggregate Demand I macro © 2002 Worth Publishers, all rights.
In this chapter, you will learn:
Motivation The Great Depression caused a rethinking of the Classical Theory of the macroeconomy. It could not explain: Drop in output by 30% from 1929.
Copyright © 2010 Pearson Education. All rights reserved. Chapter 20 The ISLM Model.
Introduction In the last lecture we defined and measured some key macroeconomic variables. Now we start building theories about what determines these key.
Big Concepts in this lecture…
In this chapter, you will learn:
EC 936 ECONOMIC POLICY MODELLING
MACROECONOMICS © 2013 Worth Publishers, all rights reserved PowerPoint ® Slides by Ron Cronovich N. Gregory Mankiw Aggregate Demand I: Building the IS.
Unit Two Macroeconomic Tools. Circular Flow See the chart on the board A little more detail.
Econ 208 Marek Kapicka Lecture 1 Introduction. What is this course about? Analysis of macroeconomic policies Government Spending Taxation and government.
Eva Hromadkova PowerPoint ® Slides by Ron Cronovich CHAPTER TEN Aggregate Demand I macro © 2002 Worth Publishers, all rights reserved Topic 10: Aggregate.
Alomar_1111 Chapter 7: Measuring Domestic Output, National Income, and Price Level.
Slide 0 CHAPTER 3 National Income Outline of model A closed economy, market-clearing model Supply side  factor markets (supply, demand, price)  determination.
In this chapter, you will learn…
Government intervention and fiscal policy Adding a government to the goods market equilibirum.
Environment-growth interactions: theory & evidence 1.The Environmental Kuznets CurveThe Environmental Kuznets Curve 2.Standard model of resource.
Review of the previous lecture 1. Total output is determined by  how much capital and labor the economy has  the level of technology 2. Competitive firms.
Learning Objectives: Aggregate Expenditures LO4: See how government’s budget balance and the balance of trade both relate to national income LO5: Understand.
Circular Flow of Income
II-B 1 II. General equilibrium approaches—theory.
Topic 3: Fiscal Policy Circular Flow Investment Taxes and Government Spending 1.
MACROECONOMICS © 2013 Worth Publishers, all rights reserved PowerPoint ® Slides by Ron Cronovich N. Gregory Mankiw National Income: Where It Comes From.
Role of Government. Fiscal Policy  Government uses its powers of expenditure, taxation, and borrowing to alter the size of the circular flow of income.
Investment and Saving Prof Mike Kennedy. Investment There is a trade-off between the present and the future. A firm commits its resources to increasing.
© 2008 Pearson Education Canada22.1 Chapter 22 The ISLM Model.
Slide 0 CHAPTER 10 Aggregate Demand I In Chapter 10, you will learn…  the IS curve, and its relation to  the Keynesian cross  the loanable funds model.
IB Economics SL Syllabus Content Review Section 3: Macroeconomics.
You will learn the IS curve, and its relation to
Lecture 3: Simple Keynesian Model
Econ 102 SY Lecture 9 General equilibrium and economic efficiency October 2, 2008.
Lecture 1: Intertemporal Trade in a Two-Period Model Tomáš Holub International Macroeconomics FSV UK, 16 February 2016.
Introduction to Macroeconomics Chapter 13
The Keynesian Model of Income Determination in a Four Sector Economy
MACRO ECONOMICS Meaning Scope Importance Limitations Features
Loanable Funds.
The Classical Long-Run Model
II. General equilibrium approaches—theory
MODULE 20 (56) Savings, Investment Spending, and the Financial System
Product Markets and National Output
Correcting market failure
Consumer Choice and Demand
Chapter 9 A Two-Period Model: The Consumption-Savings Decision and Credit Markets Macroeconomics 6th Edition Stephen D. Williamson Copyright © 2018, 2015,
Microeconomics VS Macroeconomics
Overview of Macroeconomics
Economics 2.3 Growth Assignment 2
Open-Economy Macroeconomics
II-C.
Income = Expenditures (on domestic production)
The Market System Choices Made by Households and Firms
Lecture 3: Simple Keynesian Model
Fiscal Policy Chapter 11 McGraw-Hill/Irwin
Consumer Choice and Demand
Summary Notes Economics 230 Part II.
Saving and Investment in the National Income Accounts
Multipliers & Fiscal Policy
Chapter3 The macro-economic environment
Role of the state.
Aggregate demand and aggregate supply
National Income: Where it Comes From and Where it Goes
The Two-sector Model of the Economy (Households and Firms)
Presentation transcript:

II. General equilibrium approaches—theory II-A II. General equilibrium approaches—theory

A. Analytical tools Producer’s problem Consumer’s problem II-A A. Analytical tools Producer’s problem Consumer’s problem Aggregate income and expenditure Markets and trade Distortions and non-traded goods

II-A Producer’s problem

II-A

II-A Consumer’s problem

II-A

Aggregate budget constraint II-A Aggregate budget constraint

Equilibrium: Walras’ law II-A Equilibrium: Walras’ law

Equilibrium of a two-sector economy II-A Equilibrium of a two-sector economy y2 p = p2/p1 y = (y1, y2) m2 c = (c1, c2) u y1 m1

II-A

Trade policy distortions II-A Trade policy distortions E.g. trade policy. Define tariff-distorted prices p* = p(1 + t). TEF is now: e(p*, u) = r(p*, v) + t•m

Externalities E.g. env. externality in production II-A Externalities E.g. env. externality in production TEF is now: e(p, u) = r(p, v) - z'y where z is qty of pollution per unit of y produced. Env. externality in consumption: u = u(c, z) ==> e(p, z, u) NB assumption of separability.

II-A Non-traded goods Goods may be non-traded (or effectively so) for intrinsic and policy reasons. If one good is non-traded, for this, mn = 0. Equilibrium now requires additional equation: e(p, u) = r(p, v) en(p, u) = rn(p, v) and solves for pn as well as agg. welfare. With endog. prices, preferences play a role.

II-A Salter-Swann diagram T RER = pN/pT (yT, yN) = (cT, cN) N

II-A Effects of growth T N

Equilibrium: macro view II-A Equilibrium: macro view (A) Base model Y = C + I + G + (X - M) let C + I + G = E be agg. dom. spending; so Y - E = X - M in equilibrium. Internal balance <==> external balance (B) With taxes and int’l capital flows Y + R - T = C + I + G - T + (X + R - M) let Y + R - T - C = S be agg. dom. savings; so X + R - M = (S - I) + (T - G) in eq’m. Curr. acc. surplus is equal to excess of savings over investment plus gov’t budget surplus.

II-A Summary Basic tools reflect our assumptions about technology, preferences and behavior Representative agent models Focus of trade as determinant of price formation Aggregate budget constraints impose internal consistency Many forms of complication are possible.

II-A Q & A: basic tools