1. slide 0 Marginal product of labor (MPL) def: The extra output the firm can produce using an additional unit of labor (holding other inputs fixed): MPL = F (K, L +1) – F (K, L)

2. slide 1 Exercise: compute & graph MPL a. Determine MPL at each value of L b. Graph the production function c. Graph the MPL curve with MPL on the vertical axis and L on the horizontal axis LYMPL 00n.a. 110? 219? 3278 434? 540? 645? 749? 852? 954? 1055?

3. slide 2 answers:

4. slide 3 Y output The MPL and the production function L labor 1 MPL 1 1 As more labor is added, MPL  Slope of the production function equals MPL

5. slide 4 Consumption ( C ) durable goods last a long time ex: cars, home appliances non-durable goods last a short time ex: food, clothing services work done for consumers ex: dry cleaning, air travel. def: the value of all goods and services bought by households. Includes:

6. slide 5 U.S. Consumption, 2001

7. slide 6 Investment ( I ) def1: spending on [the factor of production] capital. def2: spending on goods bought for future use. Includes:  business fixed investment spending on plant and equipment that firms will use to produce other goods & services  residential fixed investment spending on housing units by consumers and landlords  inventory investment the change in the value of all firms’ inventories

8. slide 7 U.S. Investment, 2001

9. slide 8

10. slide 9 Government spending ( G )  G includes all government spending on goods and services.  G excludes transfer payments (e.g. unemployment insurance payments), because they do not represent spending on goods and services.

11. slide 10 Government spending, 2001

12. slide 11 Net exports ( NX = EX - IM ) def: the value of total exports (EX) minus the value of total imports (IM)

13. slide 12 CASE STUDY The Reagan Deficits  Reagan policies during early 1980s:  increases in defense spending:  G > 0  big tax cuts:  T < 0  According to our model, both policies reduce national saving:

14. slide 13 1. The Reagan deficits, cont. r S, I I (r )I (r ) r1r1 I1I1 r2r2 2.…which causes the real interest rate to rise… I2I2 3.…which reduces the level of investment. 1.The increase in the deficit reduces saving…

15. slide 14 Are the data consistent with these results? variable1970s1980s T – G–2.2–3.9 S19.617.4 r1.16.3 I19.919.4 variable1970s1980s T – G–2.2–3.9 S19.617.4 r1.16.3 I19.919.4 T–G, S, and I are expressed as a percent of GDP All figures are averages over the decade shown.