Está en la página 1de 27

PRINCIPLES OF

MACROECONOMICS
TENTH EDITION

PART IV Further Macroeconomics Issues

CASE FAIR OSTER


Prepared by: Fernando Quijano & Shelly Tefft 1 of 27

2012 Pearson Education, Inc. Publishing as Prentice Hall

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

2 of 27

Household and Firm Behavior in the Macroeconomy: A Further Look*

16
CHAPTER OUTLINE Households: Consumption and Labor Supply Decisions
The Life-Cycle Theory of Consumption The Labor Supply Decision Interest Rate Effects on Consumption Government Effects on Consumption and Labor Supply: Taxes and Transfers A Possible Employment Constraint on Households A Summary of Household Behavior The Household Sector Since 1970

PART IV Further Macroeconomics Issues

Firms: Investment and Employment Decisions


Expectations and Animal Spirits Excess Labor and Excess Capital Effects Inventory Investment A Summary of Firm Behavior The Firm Sector Since 1970

* This chapter is somewhat more advanced, but it contains a lot of interesting information!

Productivity and the Business Cycle The Short-Run Relationship Between Output and Unemployment The Size of the Multiplier
3 of 27

2012 Pearson Education, Inc. Publishing as Prentice Hall

Households: Consumption and Labor Supply Decisions


The Life-Cycle Theory of Consumption life-cycle theory of consumption A theory of household consumption: Households make lifetime consumption decisions based on their expectations of lifetime income. permanent income The average level of a persons expected future income stream.

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

4 of 27

Households: Consumption and Labor Supply Decisions


The Life-Cycle Theory of Consumption
FIGURE 16.1 Life-Cycle Theory of Consumption

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

In their early working years, people consume more than they earn. This is also true in the retirement years. In between, people save (consume less than they earn) to pay off debts from borrowing and to accumulate savings for retirement.
5 of 27

Households: Consumption and Labor Supply Decisions


The Labor Supply Decision Demographics and both legal and illegal immigration play a role in determining the size of the labor force. Behavior also plays a role. Consumption cannot be considered separately from labor supply because it is precisely by selling your labor that you earn income to pay for your consumption.

The Wage Rate


PART IV Further Macroeconomics Issues

A higher wage would lead to a larger quantity of labor supplieda larger workforce. This is called the substitution effect of a wage rate increase. If we assume that leisure is a normal good, people with higher income will spend some of it on leisure by working less. This is the income effect of a wage rate increase.
6 of 27

2012 Pearson Education, Inc. Publishing as Prentice Hall

Households: Consumption and Labor Supply Decisions


The Labor Supply Decision Prices

nominal wage rate The wage rate in current dollars.


real wage rate The amount the nominal wage rate can buy in terms of goods and services.
PART IV Further Macroeconomics Issues

Households look at expected future real wage rates as well as the current real wage rate in making their current consumption and labor supply decisions.

2012 Pearson Education, Inc. Publishing as Prentice Hall

7 of 27

Households: Consumption and Labor Supply Decisions


The Labor Supply Decision Wealth and Nonlabor Income

Holding everything else constant (including the stage in the life cycle), the more wealth a household has, the more it will consume both now and in the future.
nonlabor, or nonwage, income Any income received from sources other than workinginheritances, interest, dividends, transfer payments, and so on. An unexpected increase in nonlabor income will have a positive effect on a households consumption. An unexpected increase in wealth or nonlabor income leads to a decrease in labor supply.

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

8 of 27

Households: Consumption and Labor Supply Decisions


Interest Rate Effects on Consumption A rise in the interest rate leads you to consume less today and save more. This effect is called the substitution effect. There is also an income effect of an interest rate change on consumption. If a household has positive wealth and is earning interest on that wealth, a fall in the interest rate leads to a fall in interest income. Government Effects on Consumption and Labor Supply: Taxes and Transfers
PART IV Further Macroeconomics Issues

TABLE 16.1 The Effects of Government on Household Consumption and Labor Supply Income Tax Rates Increase Effect on consumption Effect on labor supply Negative Negative* Decrease Positive Positive* Transfer Payments Increase Positive Negative Decrease Negative Positive

*If the substitution effect dominates. Note: The effects are larger if they are expected to be permanent instead of temporary.

2012 Pearson Education, Inc. Publishing as Prentice Hall

9 of 27

Households: Consumption and Labor Supply Decisions


A Possible Employment Constraint on Households How does a household respond when it is constrained from working as much as it would like? It consumes less. unconstrained supply of labor The amount a household would like to work within a given period at the current wage rate if it could find the work.
PART IV Further Macroeconomics Issues

constrained supply of labor The amount a household actually works in a given period at the current wage rate.

2012 Pearson Education, Inc. Publishing as Prentice Hall

10 of 27

Households: Consumption and Labor Supply Decisions


A Possible Employment Constraint on Households Keynesian Theory Revisited

Recall the Keynesian theory that current income determines current consumption.
Although consumption and labor supply decisions depend on the real wage rate, if there is unemployment, income depends on the employment decisions made by firms and not on household decisions. Developed during a period of unemployment, Keynesian theory is considered to pertain to those periods.

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

11 of 27

Households: Consumption and Labor Supply Decisions


A Summary of Household Behavior The following factors affect household consumption and labor supply decisions: Current and expected future real wage rates Initial value of wealth Current and expected future nonlabor income
PART IV Further Macroeconomics Issues

Interest rates Current and expected future tax rates and transfer payments

2012 Pearson Education, Inc. Publishing as Prentice Hall

12 of 27

Households: Consumption and Labor Supply Decisions


The Household Sector Since 1970 Consumption

FIGURE 16.2 Consumption Expenditures, 1970 I2010 I

Over time, expenditures on services and nondurable goods are smoother than expenditures on durable goods.

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

13 of 27

EC ON OMIC S IN PRACTICE

Household Reactions to Winning the Lottery


The more nuanced theory of consumption that we have explored in this chapter makes some predictions about what households will do if they have a sudden increase in wealth. Of course, such increases are uncommon, but winning the lottery is one such example.
PART IV Further Macroeconomics Issues

A study by three economists, Guido Imbens, Donald Rubin, and Bruce Sacerdote, of a large sample of lottery winners found that winning reduced work hours by 11 percent and that of the first half of lottery winnings received, 16 percent on average was saved. Smith Prepares to Leave Office after Winning Lottery The Baltimore Sun
14 of 27

2012 Pearson Education, Inc. Publishing as Prentice Hall

Households: Consumption and Labor Supply Decisions


FIGURE 16.3 Housing Investment of the Household Sector, 1970 I2010 I

The Household Sector Since 1970 Housing Investment

Housing investment fell during the five recessionary periods since 1970. Like expenditures for durable goods, expenditures for housing investment are postponable.

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

15 of 27

Households: Consumption and Labor Supply Decisions


FIGURE 16.4 Labor Force Participation Rates for Men 25 to 54, Women 25 to 54, and All Others 16 and Over, 1970 I2010 I

The Household Sector Since 1970 Labor Supply

Since 1970, the labor force participation rate for prime-age men has been decreasing slightly. The rate for prime-age women has been increasing dramatically. The rate for all others 16 and over has been declining since 1979 and shows a tendency to fall during recessions (the discouraged-worker effect).

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

16 of 27

Firms: Investment and Employment Decisions


Expectations and Animal Spirits animal spirits of entrepreneurs A term coined by Keynes to describe investors feelings.

The Accelerator Effect

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

accelerator effect The tendency for investment to increase when aggregate output increases and to decrease when aggregate output decreases, accelerating the growth or decline of output.

17 of 27

Firms: Investment and Employment Decisions


Excess Labor and Excess Capital Effects excess labor, excess capital Labor and capital that are not needed to produce the firms current level of output. adjustment costs The costs that a firm incurs when it changes its production levelfor example, the administration costs of laying off employees or the training costs of hiring new workers.
PART IV Further Macroeconomics Issues 2012 Pearson Education, Inc. Publishing as Prentice Hall

18 of 27

Firms: Investment and Employment Decisions


Inventory Investment inventory investment The change in the stock of inventories. The Role of Inventories Stock of inventories (end of period) = Stock of inventories (beginning of period) + Production Sales
PART IV Further Macroeconomics Issues

The Optimal Inventory Policy desired, or optimal, level of inventories The level of inventory at which the extra cost (in lost sales) from lowering inventories by a small amount is just equal to the extra gain (in interest revenue and decreased storage costs).
19 of 27

2012 Pearson Education, Inc. Publishing as Prentice Hall

Firms: Investment and Employment Decisions


A Summary of Firm Behavior The following factors affect firms investment and employment decisions: Firms expectations of future output Wage rate and cost of capital (the interest rate is an important component of the cost of capital) Amount of excess labor and excess capital on hand
PART IV Further Macroeconomics Issues

The most important points to remember about the relationship among production, sales, and inventory investment are Inventory investmentthat is, the change in the stock of inventoriesequals production minus sales. An unexpected increase in the stock of inventories has a negative effect on future production. Current production depends on expected future sales.
20 of 27

2012 Pearson Education, Inc. Publishing as Prentice Hall

Firms: Investment and Employment Decisions


The Firm Sector Since 1970 Plant-and-Equipment Investment
FIGURE 16.5 Plant-and-Equipment Investment of the Firm Sector, 1970 I2010 I

Overall, plant-and-equipment investment declined in the five recessionary periods since 1970.

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

21 of 27

Firms: Investment and Employment Decisions


FIGURE 16.6 Employment in the Firm Sector, 1970 I2010 I

The Firm Sector Since 1970 Employment

Growth in employment was generally negative in the five recessions the U.S. economy has experienced since 1970.

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

22 of 27

Firms: Investment and Employment Decisions


The Firm Sector Since 1970 Inventory Investment
FIGURE 16.7 Inventory Investment of the Firm Sector and the Inventory/Sales Ratio, 1970 I2010 I

The inventory/sales ratio is the ratio of the firm sectors stock of inventories to the level of sales. Inventory investment is very volatile.

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

23 of 27

Productivity and the Business Cycle


productivity, or labor productivity Output per worker hour.
FIGURE 16.8 Employment and Output over the Business Cycle

2012 Pearson Education, Inc. Publishing as Prentice Hall

PART IV Further Macroeconomics Issues

In general, employment does not fluctuate as much as output over the business cycle. As a result, measured productivity (the output-tolabor ratio) tends to rise during expansionary periods and decline during contractionary periods.
24 of 27

The Short-Run Relationship Between Output and Unemployment


Okuns Law The theory, put forth by Arthur Okun, that in the short run the unemployment rate decreases about 1 percentage point for every 3 percent increase in real GDP. Later research and data have shown that the relationship between output and unemployment is not as stable as Okuns Law predicts. Let E denote the number of people employed, let L denote the number of people in the labor force, and let u denote the unemployment rate.

In these terms, the unemployment rate is


PART IV Further Macroeconomics Issues

u = 1 E/L The unemployment rate is 1 minus the employment rate, E/L. discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find work grow discouraged and stop looking, dropping out of the ranks of the unemployed and the labor force.
25 of 27

2012 Pearson Education, Inc. Publishing as Prentice Hall

The Size of the Multiplier


We can finally bring together the material in this chapter and in previous chapters to consider the size of the multiplier. Earlier we mentioned that much of the analysis we would do after deriving the simple multiplier would have the effect of decreasing the size of the multiplier. We can now summarize why: 1. There are automatic stabilizers. 2. There is the interest rate. 3. There is the response of the price level. 4. There are excess capital and excess labor.
PART IV Further Macroeconomics Issues

5. There are inventories. 6. There are peoples expectations about the future. The Size of the Multiplier in Practice In practice, the multiplier probably has a value of around 2.0. Its size also depends on how long ago the spending increase began.
26 of 27

2012 Pearson Education, Inc. Publishing as Prentice Hall

REVIEW TERMS AND CONCEPTS

accelerator effect adjustment costs animal spirits of entrepreneurs constrained supply of labor desired, or optimal, level of inventories discouraged-worker effect
PART IV Further Macroeconomics Issues

life-cycle theory of consumption nominal wage rate nonlabor, or nonwage, income Okuns Law permanent income productivity, or labor productivity real wage rate unconstrained supply of labor

excess capital excess labor inventory investment

2012 Pearson Education, Inc. Publishing as Prentice Hall

27 of 27