ch6.ppt

Macroeconomics Chapter 6 Markets in the Macroeconomy Assuming that households perform all of the functions in the economy. Each household runs a family business and uses labor, L, and capital, K, to produce goods, Y, through the production function. Y= A· F( K, L) Markets in the Macroeconomy The Goods Market Households sell all the goods they produce on a goods market. Then households buy back from this market the goods that they want. Household buys goods for consumption. to increase the stock of goods in the form of capital used for production, called investment. The Goods Market and Prices The price in this goods market, denoted by P, expresses the number of dollars that exchange for one unit of goods. We call P the price level. The goods Market and Prices Y= A· F( K, L) Since all of these goods are sold on the goods market, the variable Y will also represent the Quantity of goods per year sold and bought on the goods market. The quantity PY is the dollar value per year of the goods bought and sold on the goods market. The goods Market and Prices The expression 1/P is the value of $1 in terms of the goods that it buys. M dollars exchange for (M) · (1/ P) = M/P An expression like M/P is in real terms, in units of goods, whereas a quantity like M is in dollar or nominal terms. Labor Market in the Macroeconomy Households supply labor on a labor market. Assume that the quantity supplied, Ls, is a constant, L. Households buy and sell labor in the labor market at the dollar or nominal wage rate, w. The real wage rate is w/P. Rental Markets in the Macroeconomy Each household rents out all of the capital that it owns on a rental market. We think of the capital offered on the rental market as the supply of capital services, Ks. Since we have assumed that each household rents out all of its capital, we have Ks = K. Rental Markets and Prices Households rent out capital, K, for dollars at the dollar or nominal rental price, R A household