Chapter 1: Simple Frameworks of Macroeconomics. Kornkarun Kungpanidchakul, Ph.D. Macroeconomics MS Finance Chulalongkorn University, Spring 2008. Reading lists. Any undergraduate macroeconomic textbooks. National Income Account. Gross Domestic Product (GDP)
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Kornkarun Kungpanidchakul, Ph.D.
Chulalongkorn University, Spring 2008
The total value of the current production of final goods and service within the national territory during a given period of time.
GDP = C + I + G + X – M
The total value of income that domestic residents receive in a given of time.
GNP = GDP – NFD
where NFD is net factor income (payments) received from abroad.
Denote Pct as a weighted average of all prices of the consumption goods at time t.
wi as athe weights of each good
Pct = w1 (P1t/p10)+…+ wN (PNt/pN0)
Pct is called the consumer price index (CPI) or the consumption price deflator.
Given P = GDP price deflator
Q = real GDP
GDP = P.Q
The total amount of output that firms and household choose to provide given wages and prices
The demand for labor
Suppose that the capital stock is fixed, the production function can be written as:
Q = F(L,K)
We consider the nicely convex technology in which:
1. MPL >0 and MPK > 0
3. CRS technology
Profit maximization problem:
Max pf(K,L) – wL
FOC : MPL = w/p
Therefore, MPL is the demand for labor.
LD = LD(w/p,K)
The supply of labor
Suppose that C = set of consumption goods
R = 1-Ls = leisure
Household’s maximization problem is:
Max U(C, 1-Ls)
s.t. C = (w/p) Ls
FOC : MRS = w/p
We can decompose the price effect into:
AS is always the vertical line at the full employment level.
QfThe static AD-AS model
The nominal wages and prices do not adjust quickly.
ASThe static AD-AS model
Qs = Qs(w/p, K)
When MPL is constant and the nominal wage is fixed, AS is horizontal.
QThe static AD-AS model
QD =C + I + G