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ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
expenditures (demand side) Regarding the supply side, they assume that there is unemployment: production responds fast to increases in aggregate demand because capital and labor is unemployed.
Aggregate Demand, AD
AD = C + I + G + X-M C, Consumption expenditures I, Investment expenditures G, Government expenditures X-M, Foreigners Expenditures
Aggregate Supply
AS < ASfe Aggregate Supply, at full employment
Macroeconomic Equilibrium
AS = AD Or S=I
A Keynesian Model
A Keynesian growth model takes a long run
perspective.
Aggregate demand (or savings=investment) still is important, but It also includes the aggregate supply
Investment has two impacts:
On expenditures (in the short run) On capital stock (in the long run)
Real GDP
Years
Main Propositions
Economic growth can be accelerated by
changing the saving rate improving technology.
d D
Ig
s C GDP
In
Capital
Production function
s
+
Saving rate
g
_
a d
Capital productivity
Capital depreciation
Explained variable
Explanatory Variables
Arithmetic specification
Without Depreciation
If we know output Y, and we know s, which is the saving rate, then we know total savings S. If we know the initial capital stock K; and we know a, (how much output increases when capital increases 1 unit) then we know what will total output Y be.
lf a tI o w n k e w o n k e ,v S s g i a n a c e w h u m o w e n i ) I ( t s v ) K d ( l a t i p c
S=Y.s
s=dS/dY
dK
a=dY/dK
Numerical specification
Without Depreciation
If we know output Y=1 and we know the saving rate s=.10, then we know total savings S=.10
lf a tI o w n k e e w 0 1 .v = S s g n i a n a c e w t h o k w e n i 0 1 . = I t s v ) 0 1 .t = K d ( l a i p c
Since Y=1
If we know the initial capital stock K=5; and we know its productivity a=.20 then we know total output Y=1
a=.20
dK=.10 K=5
g = s.a d
that is, if s=10% and a=0.20 and d =1%, then g=0.10*0.20 - 0.01 = 0.02 -0.01 = 0.01 = 1% What happens if the rate of saving (s) increases to 20% ? What happens if the productivity of capital (a) increases to 0.40? What happens if the depreciation (d) rate is 2% ?
In this model national GDP increases because the autonomous demand (I) increases. It is assumed that aggregate supply responds as to produce what is demanded. But, what will happen if the economy was at full employment? The only way for production to increase will be an increase in the capital stock. With more capital (and labor) the economy will produce more GDP.
K = Ia
We are assuming that capital doesnt ware out, i.e. there is not depreciation. Returning to the equilibrium condition (S=I) we solve the model again for the long run case
s.Y = Ia = K, but we know that K = Y/a, then s.Y = Y/a s.a = Y/Y Calling Y/Y = g : rate of GNP growth
Notice that in this model the rate of growth (g) is constant. Why?
Harrods way: K = v.Y where v = 1/a g = s/v And with depreciation g = s/v - d
To growth model
Production function
K GDP2> GDP1 GDP1 GDP GDP Production function
Productivity rate
To growth model
Assumptions
Productivity rate
S
Saving rate
Saving function
Income = GDP
Non-existence of equilibrium
Y,S,D,I
S
In D
D K
Review
You should now be familiar with the following terms:
Technology or
ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.