slide 1

Marginal product of labor (Marginal product of labor (MPLMPL))

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)

slide 2

Exercise: Exercise: compute & graph MPLcompute & 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

L Y MPL0 0 n.a.1 10 ?2 19 ?3 27 84 34 ?5 40 ?6 45 ?7 49 ?8 52 ?9 54 ?

10 55 ?

slide 3

answers:answers:

Production function

0

10

20

30

40

50

60

0 1 2 3 4 5 6 7 8 9 10

Labor (L)

Out

put

(Y)

Marginal Product of Labor

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8 9 10

Labor (L)M

PL

(u

nit

s o

f o

utp

ut)

slide 4

Youtput

The MPL and the production The MPL and the production functionfunction

Llabor

F K L( , )

1

MPL

1

MPL

1MPL As more labor

is added, MPL

Slope of the production function equals MPL

slide 5

Consumption (Consumption (CC))

• durable goods last a long time ex: cars, home appliances

• non-durable goodslast a short time ex: food, clothing

• serviceswork done for consumers ex: dry cleaning, air travel.

def: the value of all goods and services bought by households. Includes:

slide 6

U.S. Consumption, 2001U.S. Consumption, 2001

$ billions

% of GDP

Consumption $7,064.5 69.2%

Durables 858.3 8.4

Nondurables 2,055.1 20.1

Services 4,151.1 40.7

$ billions

% of GDP

Consumption $7,064.5 69.2%

Durables 858.3 8.4

Nondurables 2,055.1 20.1

Services 4,151.1 40.7

slide 7

Investment (Investment (II))

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 investmentspending on housing units by consumers and landlords

inventory investmentthe change in the value of all firms’ inventories

slide 8

U.S. Investment, 2001U.S. Investment, 2001

$ billions

% of GDP

Investment $1,633.9 16.0%

Business fixed 1,246.0 12.2

Residential fixed 446.3 4.4

Inventory -58.4 -0.6

$ billions

% of GDP

Investment $1,633.9 16.0%

Business fixed 1,246.0 12.2

Residential fixed 446.3 4.4

Inventory -58.4 -0.6

slide 9

slide 10

Government spending (Government spending (GG))

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.

slide 11

Government spending,Government spending, 2001 2001

$ billions

% of GDP

Gov spending $1,839.5 18.0%

Federal 615.7 6.0

Non-defense 216.6 2.1

Defense 399.0 3.9

State & local 1,223.8 12.0

$ billions

% of GDP

Gov spending $1,839.5 18.0%

Federal 615.7 6.0

Non-defense 216.6 2.1

Defense 399.0 3.9

State & local 1,223.8 12.0

slide 12

Net exports (Net exports (NX = EX - IMNX = EX - IM))

def: the value of total exports (EX) minus the value of total imports (IM)

U.S. Net Exports, 1960-2000

-400

-350

-300

-250

-200

-150

-100

-50

0

50

1960 1965 1970 1975 1980 1985 1990 1995 2000

$ b

illio

ns

U.S. Net Exports, 1960-2000

-400

-350

-300

-250

-200

-150

-100

-50

0

50

1960 1965 1970 1975 1980 1985 1990 1995 2000

$ b

illio

ns

slide 13

CASE STUDYCASE STUDY

The Reagan DeficitsThe 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:

( )S Y C Y T G

G S T C S

slide 14

1. The Reagan deficits1. The Reagan deficits, cont., cont.

r

S, I

1S

I (r )

r1

I1

r22. …which causes

the real interest rate to rise…

I2

3. …which reduces the level of investment.

1. The increase in the deficit reduces saving…

2S

slide 15

Are the data consistent with these results?Are the data consistent with these results?

variable 1970s 1980s

T – G –2.2 –3.9

S 19.6 17.4

r 1.1 6.3

I 19.9 19.4

variable 1970s 1980s

T – G –2.2 –3.9

S 19.6 17.4

r 1.1 6.3

I 19.9 19.4

T–G, S, and I are expressed as a percent of GDP

All figures are averages over the decade shown.