Worth: Mankiw Economics 5e User JoENA: Job EFFo1419: 6264_ ch03: Pg 40: 23909 #/ eps at 1004 ml ed,Feb13,20028:554M
User JOEWA:Job EFF01419:6264_ch03:Pg 40:23909#/eps at 100% *23909* Wed, Feb 13, 2002 8:55 AM
Worth: Mankiw Economics 5e ort l Classical Theory: The Economy in the Long Run User JOENA: Job EFF01419: 6264_ch03: Pg 41: 24836#/eps at 1009 Il Wea,Feb13,20028:55
User JOEWA:Job EFF01419:6264_ch03:Pg 41:24836#/eps at 100% *24836* Wed, Feb 13, 2002 8:55 AM part II Classical Theory: The Economy in the Long Run
Worth: Mankiw Economics 5e CHAPTER THREE National Income: Where t comes From and where丨 t Goes A large income is the best recipe for happiness I ever heard of. Jane Austen The most important macroeconomic variable is gross domestic product(GDP) As we have seen, GDP measures both a nations total output of goods and ser- vices and its total income. To appreciate the significance of GDP, one need only take a quick look at international data: compared with their poorer counterparts, nations with a high level of gDP per person have everything from better child- hood nutrition to more televisions per household. A large GDP does not ensure that all of a nations citizens are happy, but it may be the best recipe for happiness hat macroeconomists have to offer This chapter addresses four groups of questions about the sources and uses of a nation s gdp. How much do the firms in the economy produce? What determines a na- tion,'s total income? Who gets the income from production? How much goes to compensate workers, and how much goes to compensate owners of capital? for investment, and how much does the government buy for pubic o a Who buys the output of the economy? How much do households pr hase for consumption, how much do households and firms purchas What equilibrates the demand for and supply of goods and services? What ensures that desired spending on consumption, investment, and gover ment purchases equals the level of production? To answer these questions, we must examine how the various parts of the econ- omy interact. a good place to start is the circular flow diagram. In Chapter 2 we traced the circular flow of dollars in a hypothetical economy that produced one product, bread, from labor services. Figure 3-1 more accurately reflects how real economies function. It shows the linkages among the economic actors--households, firms, User JOENA: Job EFF01419: 6264_ch03: Pg 42: 24837 #/eps at 1009 I ed,Feb13,20028:554M
User JOEWA:Job EFF01419:6264_ch03:Pg 42:24837#/eps at 100% *24837* Wed, Feb 13, 2002 8:55 AM The most important macroeconomic variable is gross domestic product (GDP). As we have seen, GDP measures both a nation’s total output of goods and services and its total income.To appreciate the significance of GDP, one need only take a quick look at international data: compared with their poorer counterparts, nations with a high level of GDP per person have everything from better childhood nutrition to more televisions per household.A large GDP does not ensure that all of a nation’s citizens are happy, but it may be the best recipe for happiness that macroeconomists have to offer. This chapter addresses four groups of questions about the sources and uses of a nation’s GDP: ➤ How much do the firms in the economy produce? What determines a nation’s total income? ➤ Who gets the income from production? How much goes to compensate workers, and how much goes to compensate owners of capital? ➤ Who buys the output of the economy? How much do households purchase for consumption, how much do households and firms purchase for investment, and how much does the government buy for public purposes? ➤ What equilibrates the demand for and supply of goods and services? What ensures that desired spending on consumption, investment, and government purchases equals the level of production? To answer these questions, we must examine how the various parts of the economy interact. A good place to start is the circular flow diagram. In Chapter 2 we traced the circular flow of dollars in a hypothetical economy that produced one product, bread,from labor services.Figure 3-1 more accurately reflects how real economies function. It shows the linkages among the economic actors—households, firms, National Income: Where It Comes From and Where It Goes 3CHAPTER A large income is the best recipe for happiness I ever heard of. — Jane Austen THREE 42 |
Worth: Mankiw Economics 5e CHAPTER 3 National Income: Where It Comes From and Where It Goes 43 figure 3-1 ncome Markets for Factors Facto of Production Private saving Markets Public aving Taxes Government Firms Government Consumpti Markets Firm revenue Goods and Services The Circular Flow of Dollars Through the Economy This figure is a more realistic version of the circular flow diagram found in Chapter 2. Each yellow box represents an economic actor-households, firms, and the government. Each blue box represents a type of market-the markets for goods and services, the markets for the factors of production, and financial markets. The green arrows show the flow of dollars among the economic actors through the three types of markets. and the government-and how dollars fow among them through the various markets in the economy. Let's look at the flow of dollars from the viewpoints of these economic ac- tors Households receive income and use it to pay taxes to the government, to consume goods and services, and to save through the financial markets Firms receive revenue from the sale of goods and services and use it to pay for the factors of production. Both households and firms borrow in financial markets to buy investment goods, such as houses and factories. The govern ment receives revenue from taxes and uses it to pay for government pur- chases. Any excess of tax revenue over government spending is called public aving, which can be either positive (a budget surplus) or negative(a budget deficit) In this chapter we develop a basic classical model to explain the economic interactions depicted in Figure 3-1. We begin with firms and look at what User JoENA: Job EFFo1419: 6264_ch03: Pg 43: 24979 #/eps at 1004 ml ed,Feb13,20028:554M
User JOEWA:Job EFF01419:6264_ch03:Pg 43:24979#/eps at 100% *24979* Wed, Feb 13, 2002 8:55 AM and the government—and how dollars flow among them through the various markets in the economy. Let’s look at the flow of dollars from the viewpoints of these economic actors. Households receive income and use it to pay taxes to the government, to consume goods and services, and to save through the financial markets. Firms receive revenue from the sale of goods and services and use it to pay for the factors of production. Both households and firms borrow in financial markets to buy investment goods, such as houses and factories.The government receives revenue from taxes and uses it to pay for government purchases. Any excess of tax revenue over government spending is called public saving, which can be either positive (a budget surplus) or negative (a budget deficit). In this chapter we develop a basic classical model to explain the economic interactions depicted in Figure 3-1. We begin with firms and look at what CHAPTER 3 National Income: Where It Comes From and Where It Goes | 43 figure 3-1 Income Private saving Taxes Consumption Firm revenue Investment Public saving Government purchases Factor payments Markets for Factors of Production Markets for Goods and Services Financial Markets Households Government Firms The Circular Flow of Dollars Through the Economy This figure is a more realistic version of the circular flow diagram found in Chapter 2. Each yellow box represents an economic actor—households, firms, and the government. Each blue box represents a type of market—the markets for goods and services, the markets for the factors of production, and financial markets. The green arrows show the flow of dollars among the economic actors through the three types of markets
Worth: Mankiw Economics 5e 44 PART 11 Classical Theory: The Economy in the Long Run determines their level of production(and, thus, the level of national income) Then we examine how the markets for the factors of production distribute this income to households. Next. we consider how much of this income households consume and how much they save. In addition to discussing the demand for goods and services arising from the consumption of households, we discuss the demand arising from investment and government purchases Finally, we come full circle and examine how the demand for goods and ser- vices(the sum of consumption, investment, and government purchases)and the supply of goods and services(the level of production)are brought into balance 3-1 What Determines the Total Production of Goods and services? An economys output of goods and services--its GDP-depends on(1)its tity of inputs, called the factors of production, and(2) its ability to turn nto output, as represented by the production function. We discuss each of In tur The Factors of production Factors of production are the inputs used to produce goods and services.The mportant factors of production are capital and labor. Capital is the set of tools that workers use. the construction worker's crane the accountant's calcu- lator, and this author's personal computer. Labor is the time people spend work ing. We use the symbol K to denote the amount of capital and the symbol Lto In this chapter we take the economy's factors of production as given. In other words, we assume that the economy has a fixed amount of capital and a fixed amount of labor. We write L The overbar means that each variable is fixed at some level. In Chapter 7 we ex amine what happens when the factors of production change over time, as they do in the real world. For now, to keep our analysis simple, we assume fixed amounts of capital and labor. We also assume here that the factors of production are fully utilized-that is, that no resources are wasted. Again, in the real world, part of the labor force is unemployed, and some capital lies idle. In Chapter 6 we examine the rea- sons for unemployment, but for now we assume that capital and labor are fully em User JOENA: Job EFF01419: 6264_ch03: Pg 44: 24980#/eps at 1009 IllI ed,Feb13,20028:554M
User JOEWA:Job EFF01419:6264_ch03:Pg 44:24980#/eps at 100% *24980* Wed, Feb 13, 2002 8:55 AM determines their level of production (and, thus, the level of national income). Then we examine how the markets for the factors of production distribute this income to households. Next, we consider how much of this income households consume and how much they save. In addition to discussing the demand for goods and services arising from the consumption of households, we discuss the demand arising from investment and government purchases. Finally, we come full circle and examine how the demand for goods and services (the sum of consumption, investment, and government purchases) and the supply of goods and services (the level of production) are brought into balance. 3-1 What Determines the Total Production of Goods and Services? An economy’s output of goods and services—its GDP—depends on (1) its quantity of inputs, called the factors of production, and (2) its ability to turn inputs into output, as represented by the production function.We discuss each of these in turn. The Factors of Production Factors of production are the inputs used to produce goods and services.The two most important factors of production are capital and labor. Capital is the set of tools that workers use: the construction worker’s crane, the accountant’s calculator, and this author’s personal computer. Labor is the time people spend working.We use the symbol K to denote the amount of capital and the symbol L to denote the amount of labor. In this chapter we take the economy’s factors of production as given. In other words, we assume that the economy has a fixed amount of capital and a fixed amount of labor.We write K = K _ . L = L _ . The overbar means that each variable is fixed at some level. In Chapter 7 we examine what happens when the factors of production change over time, as they do in the real world. For now, to keep our analysis simple, we assume fixed amounts of capital and labor. We also assume here that the factors of production are fully utilized—that is, that no resources are wasted.Again, in the real world, part of the labor force is unemployed, and some capital lies idle. In Chapter 6 we examine the reasons for unemployment, but for now we assume that capital and labor are fully employed. 44 | PART II Classical Theory: The Economy in the Long Run